Pradeep A S Hebri

1. SOUTH EAST ASIAN CRISIS
COLLAPSE OF ASIAN TIGERS
1997 JULY TO 1998 JAN

2. Economic Collapse in south ASIAN countries
The Story of How TIGERS BECOME Meouuuuu…

3. CRISIS HIT...
• Most affected
nations:
• Thailand
• Indonesia
• South Korea
• Hong Kong
• Malaysia
• Lao
• Philippines
• Less affected
nations:
• China
• India
• Taiwan
• Singapore
• Vietnam
• Japan

4. EXCHANGE RATE DROPPED........ FROM
1997 TO 1998
• Thai baht: 24.5 to 41
• Indonesian rupiah: 2,380 to 14,150
• Philippine peso: 26.3 to 42
• Malaysian ringgit: 2.5 to 4.1
• South Korean won: 850 to 1,290

6. Overview
The Asian Miracle
Pre-crisis scenario
What happened in Thailand, Indonesia,
South Korea, Philippines, Malaysia, Japan,
 Causes and Consequences
 Role of IMF (International Monetary fund)
Crisis and India
LEARNING LESSONS TO THE WORLD

7. The Asian Miracle
• Maintained very high growth rates : 1980s –
1990s: Thailand, South Korea, HongKong,
Singapore, Taiwan, Indonesia (8-12%)
• It is Primarily due to: Maintained High Interest
rates to attract foreign Investments
• Rapid industrialization - Industrial Policies
supporting exports
• Below market interest rates for exporting
industries- promote export

8. Pre-crisis scenario
• Foreign Capital Inflows : US was in recession -> Low
interest rates
• Asian Tigers - 50% of capital inflows in Asia
• Dramatic run-up in Asset prices – excessive
Investment in real estate
• Pegged Currencies
A pegged system is one in which the exchange rate is set and
artificially maintained by the government.
• Encouraged external borrowing – HIGH DEBTS
• High exports – driving rapid economic growth
• Export to GDP ratio grew from 35% to 55% on an avg
• Excessive exposure to forex movements

9. The Bubble
• Thailand’s economy – bubble fuelled by ‘Hot
money’
• Debt-GDP Ratios went upto 180%
• As the bubble grew Development money went in
a largely uncontrolled manner to certain people
only, those closest to the centres of power.
• Real estate speculation
• Countries became excessively dependent upon
exports for their economy
• Very high leverage & exposure to forex risk

10. The Tipping point :
• U.S. economy recovered from a recession in the
early 1990s, Began to raise U.S. interest rates to
head off inflation.
• This made the U.S. a more attractive
investment
• destination relative to Southeast Asia, which
had been attracting hot money flows through
high short-term interest rates, and raised the
value of the U.S. dollar.
• At the same time, Southeast Asia's export
growth slowed dramatically in 1996

11. • The down turn..
Asset prices began to collapse : Causing individuals
& companies to default
• Panic among lenders – led to withdrawal of funds -
Credit crunch & bankruptcies
• Depreciative pressures on exchange rates
• Government action:
• Raised interest rates tremendously to prevent
capital flight
• Buying up excess domestic currency at fixed rate to
attaining the peg
• Not sustainable in the long run (due to limited
supply of forex reserves)

12. Cont......
• Capital fleeing could not be stopped Central
bank allowed currencies to float
• Drastic Depreciation
• Further increasing the debt obligations
• worsening the crisis

13. Paul Krugman’s view
East Asia's economic growth had historically been
the result of increasing capital investment.
However, total factor productivity had increased
only marginally or not at all. Only growth in
total factor productivity, and not capital
investment, could lead to long-term prosperity

14. What happened in south Asian
countries?

15. THAILAND
Prominent economy of South-east Asia
Export growth was very high.
Real Estate sector was booming.
During 1985-96 was growing at highest
rate of 9%.
 High interest rate attracted investments
from US and west.

16. THAILAND
Events and Reason for failure
 Thailand Baht was pegged at 25 to US $.
 At the same time US had increased interest rate to curb
inflation this made US investors to take their money from
Thailand and invest in US.
 This resulted in outflow of $,resulted in loss of baht
exchange value and it reached its lowest point of 56 units
per $.
 This made foreign loan costlier by three times. It resulted in
collapsed of various company- property developer
somprasong Land Ltd and biggest financial corporation
“Finance One”
 There was fear among foreign investors about their money
so they started pulling money from this markets.

17.  Speculative attack on THAI BHAT
 Government tried to protect the pegged THAI BHAT - Sold 5
billion dollar FOREX
 Government increased interest rates from 10% to 12.5%
 On 30 June 1997, Prime Minister Chavalit Yongchaiyudh said
that he would not devalue the baht.
 2 July 1997 - Govt failed, and converted pegged thai bhat in
to free float currency (immediately lost 18%, 1 dollar = Bt55 –
more than 50% fall in exchange rate )- this made debt serving
critical
 Stock market fell from 787 point to 337 point
 This deepens crisis, due to this many people lost their jobs -
600,000 foreign workers being sent back to their home
countries.
 Led to Political instability.

18. IMF RESCUE …..
July 28th 1997 – Thai Government bowed down
to IMF – 17.2 billion conditional loan loan(11
august 1997)- 56 FI’s closed- laying off of 16000
people
 IMF approved on 20 August 1997, another
bailout package of $2.9 billion.
 By 2001, Thailand's economy had recovered. The
increasing tax revenues allowed the country to
balance its budget and repay its debts to the IMF
in 2003, four years ahead of schedule.

19. INDONESIA-
• BEFORE THE CRISIS HIT
INDONESIA had…
Low inflation,
Trade surplus of more than $900 million,
Huge foreign exchange reserves of more than $20
billion,
Good banking sector.

20. INDONESIA
Events and Reason for failure
• crony capitalism – Network of 300+ businesses
(owned by family and friends )- Mr. Hutomos
car
• Large number of Indonesian corporations had
been borrowing in U.S. dollars- Heavy
borrowings at cheap rates
• The borrowings at cheap rates worked initially
well as effective levels of debt and financing
costs had decreased as the local currency's value
rose

21. CONT….
BUT …..
• On 2 July 1997, when Thailand floated the baht The
rupiah suddenly came under severe attack in August.
• On 14 August 1997, the managed floating exchange
regime was replaced by a free-floating exchange rate
arrangement. The rupiah dropped further.
• On oct 31st The IMF came forward with a rescue package
of $37 billion, but the rupiah was sinking further amid
fears over corporate debts, massive selling of rupiah, and
strong demand for dollars.
• The rupiah and the Jakarta Stock Exchange touched a
historic low in September.
• In December Moody's eventually downgraded Indonesia's
Credit rating to "junk bond“ Category – high risky

22. • Companies that had borrowed in dollars had to face the
higher costs imposed upon them by the rupiah's decline,
and many reacted by buying dollars through selling rupiah,
It resulted in further fall
• In February 1998, President Suharto sacked Bank Indonesia
Governor J. Soedradjad Djiwandono, but this proved
insufficient.
• Before the crisis, the exchange rate between the rupiah and
the dollar was roughly 2,400 rupiah to 1 U.S. dollar. On 31
December 1998, the rate was almost exactly 8,000 to 1 U.S.
dollar. Indonesia lost 13.5% of its GDP that year.
• 20nd January 1998 : Suharto’s announced as president for
7th term . Immediately rupiah depreciated against dollar
and 1 U.S. dollar on with spot rates over 14,000 during.
• The crisis also brought independence to East Timor

23. SOUTH KOREA
What happened ?
• The banking sector was burdened with
nonperforming loans as its large corporations were
funding aggressive expansions. there was a haste to
build great conglomerates to compete on the world
stage.
• The chaebol, South Korean conglomerates, simply
absorbed more and more capital investment.
• Korean “chaebol” – Diversified conglomerates-
semiconductor factories- temporary global shortage
of DRAM chips – price fell by 90%- led to debt
default
• Eventually, excess debt led to major failures and
takeovers.

24. • 1/5th of counties big business filed for bankruptcy (30
chaebols)
• on 7 November 1997 the Seoul stock exchange fell by 4%
• On 8 November, it plunged by 7%, its biggest one day drop
to that date.
• 13th November – Korean government said no need of help
from IMF – Expected bilateral loan from US and JAPAN –
but failed
• 21ST November- bow down to IMF- $20 billion loan
• And on 24 November, stocks fell a further 7.2% on fears
that the IMF would demand tough reforms.
• The South Korean won, meanwhile, weakened to more than
1,700 per U.S. dollar from around 800.
• Its national debt-to-GDP ratio more than doubled

25. IMF RESCUE FOR SOUTH KOREA
• DEC 3rd – $55 billion
• Dec 18th - President changed– Kim young to Kim
Dae-jung
• Doors of ECONOMY OPENED
• In 1998, Hyundai Motors took over Kia Motors.
Samsung Motors' $5 billion venture was dissolved
due to the crisis, and eventually Daewoo Motors
was sold to the American company General
Motors (GM).

27. CAUSES FOR CRISIS

28. 1.EXCESSIVE DEPENDENCY ON
EXPORTS
• Automobiles, Semiconductors, Consumer
electronics
• Import of capital goods – from USA,EU,Japan
companies- led to Current Account deficit

29. 2.HEAVY UNSOUND INVESTMENTS
• On Residential property-365000 unoccupied
apartments in Bangkok- exceeded Next 5 years
demand
• On Industrial assets - Korean “chaebol” –
Diversified conglomerates- semiconductor
factories- temporary global shortage of DRAM
chips
• On infrastructure( 43% of GDP In Malaysia )
• Resulted in Asset bubbles
• Govt encouraged the heavy investments
ALL CREATED REAL ESTATE BUBBLE

30. 3.EXCESSIVE DEPENDENCY ON FOREIGN
FUNDS- FLOW OF HOT MONEY
• Asia attracted almost half of the total
capital(high interest rates )
• During crisis 1 billion outflow of currency per
day in south korea (JAPAN GAVE $25BILLION)
• Led to capital account deficit

31. 4. HEAVY BORROWINGS
• To fund the business
• Foreign banks eager to lend in US dollar –
• Debt is 4 times of equity
• Financial deregulation

32. 5. EXCESS CAPACITY-
• Unrealistic projections of future demand
• Drop in prices- of Automobiles, Semiconductors,
Consumer electronics – excess supply of DRAM
chips – price fell by 90%- led to debt default

33. 5.DEBT BOMB- DEBT CRISIS
• Korean semiconductor industry (chaebol) and
Bangkok property market was started spreading
to other regions
• Currency fall- pegging failed- led to further fall in
currency - made US dollar loan repayment
costlier – led to loan default

34. 6. EXCHANGE RATE PROBLEMS
Currency trading – Heavy short selling

35. 7. POLITICAL AND ADMINISTRATIVE
ISSUES
• Crony capitalism in INDONESIA
• Corruption- Bribes to officials – pressure on
(Hanbo in south Korea) banks to Lend money
to Industries
• Lack of incentives for risk management

36. 8.Large current account deficit

37. 9. Other causes
• Higher US interest rates. Higher interest rates in
the US made the East less attractive as a place
to move hot money flows
• Result of sequential or chain reaction - flight of
investors
• Eg: half of the foreign lending to THAILAND was
by Japanese banks
• Moral hazard

38. ROLE OR REFORMS OF IMF
• IMF created a series of bailouts ("rescue packages") -
for the most-affected economies – to avoid default,
stabilise the currency, banking and financial system
reforms.(more than $110 billion )
• conditional support- "structural adjustment package“
(SAP):
a) Reduce government spending and deficits,
b)Close insolvent banks and financial institutions
c) Aggressively raise interest rates.
d) Reduce restrictions on foreign ownership.

39. IMF: CRITICIZM
IMF for encouraging the developing economies of
Asia down the path of "fast-track capitalism“:
liberalization of the financial sector (elimination of
restrictions on capital flows)
Maintenance of high domestic interest
rates(attract external funds)
Pegging of the national currency to the dollar( to
reassure foreign investors against currency risk.)
Encourages Moral hazard

41. CONSEQUENCES

42. CONSEQUENCES IN ASIA
• significant macroeconomic-level effects including
sharp reductions in values of currencies, stock
markets, and other asset prices of several Asian
countries.
• The nominal U.S. dollar GDP of ASEAN fell by $9.2
billion in 1997 and $218.2 billion (31.7%) in 1998. In
South Korea, the $170.9 billion fall in 1998 was equal
to 33.1% of the 1997 GDP.
• Many businesses collapsed, and as a consequence,
millions of people fell below the poverty line in 1997–
1998. Indonesia, South Korea and Thailand were the
countries most affected by the crisis.

43. CONSEQUNCES OUTSIDE ASIA
• After the Asian crisis, international investors were
reluctant to lend to developing countries, leading
to economic slowdowns in developing countries
in many parts of the world.
• The powerful negative shock also sharply reduced
the price of oil, which reached a low of about $11
per barrel towards the end of 1998, causing a
financial pinch in OPEC nations and other oil
exporters.
• some major mergers and acquisitions between
1998 and 2002 – often in an effort to improve
economies of scale

44. • The reduction in oil revenue also contributed to
the1998 Russian financial crisis, which in turn
caused Long- Term Capital Management in the
United States to collapse after losing $4.6 billion
in 4 months.
• A wider collapse in the financial markets was
avoided when Alan Greenspan and the Federal
Reserve Bank of New York organized a $3.625
billion bailout.
• Major emerging economies Brazil and Argentina
also fell into crisis.

45. • Many nations learned from this, and quickly
built up foreign exchange reserves as a hedge
against attacks, including Japan, China, South
Korea.

46. INDIA AND SEA CRISIS
• Not much affected because
• Weak trade linkages with SEA countries
• Control on capital flows – Capital account
convertibility restrictions , FEMA rules
• Tight monetary policies
• Active intervention by RBI

47. LEARNING LESSONS TO THE WORLD
• Don’t trust the ‘hot money’
• Beware of Asset Bubbles
• Only sustainable route has the long
term potentiality
• Economic confidence is core element
• Good governance - Good government
• Exchange rate management