Crisis of Indonesia on the wake of Asian Financial Crisis 97-98

1. 1997 ASIAN FINANCIAL CRISIS
ABDUL HALEEM ABBASI
MOHSIN ALI
INDONESIA

2. Causes of the Crisis
• Earlier financed by hot money flows (on capital account). Hot
money flows were accumulated because of higher interest rates
in the East.
• In the late 1990s, the US increased interest rates to reduce
inflationary pressures. Higher interest rates in the US, made the
East less attractive as a place to move hot money flows. As hot
money flows into the east dried up, currencies started to fall.
• Financial deregulation encouraged more loans and helped to
create asset bubbles.
• Booming economy and booming property markets encouraged
expansive borrowing by firms.
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3. Causes of the Crisis
• The IMF insisted on fiscal restraint – lower spending, higher
taxes and privatization. This contractionary fiscal policy
caused the economic downturn to exacerbate and the
economy plunged into recession. Bankruptcies increased
and there was a flight of capital.
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4. Affected Countries
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5. •Transmission channels 1997
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 Export Effect of Currency Depreciation.
 Import Effect of Currency Depreciation.

6. 1. Change in Imports and Exports volume -> Poverty.
2. Increase burden of Foreign Debt -> Foreign Debt Cost Effect
of a national currency depreciation.
3. Changes in Employment/ Income.
4. Inflation
5. Import Substitution New Order (1966-98);
price depreciation -> closing of manufacturing industries ->
fail to compete one - one hand with other markets.
6. The capital flight caused the currency to drop dramatically,
causing businesses with foreign loans to have to payback
more money.
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•Causes of 1997/98 Crisis

7. • Increase in Poverty.
• Increase in Interest rate -> National Banking sector was
collapsed.
• Before crisis 1USD cost 2600 rupiah but during crisis it
reached historic low of 11000 rupiah for 1USD.
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• Effects of 1997/98 Crisis

8. • Decrease in GDP growth rate.
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• Effects of 1997/98 Crisis

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• Effects of 1997/98 Crisis
• Decrease in Indonesian Income per capita.

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• Effects of 1997/98 Crisis
• Increase in Poverty rate.

11. Some Effects of the crises
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12. Key learnings from the Data
• How international political economies affects the
regional countries.
• Many Monetary reasons were at the fore front of it
• How IMF, World Bank and other international
institutions play their role.
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• As noted in the chart, it varies from 70 percent to
120 percent, and most provinces are in the 80–100
percent range.

14. If a poor person has rice as his staple than he is in
trouble
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15. Product Heterogeneity
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16. Microfinance Success Amidst Macroeconomic
Failure!!!!
Any guesses???????????????
Any inferences?????????????
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17. Experience of Bank Rakyat Indonesia (BRI)
The monetary crises of the BRI had three reasons
1. Onset
• Rice crop was totally lost created a sever drought.
• ‘HOT’ short-term money, forced bank of Indonesia to
let market set the exchange rate.
• Largest Indonesian conglomerate had borrowed
dollars abroad more than twice the total foreign
exchange debt of the government.
2. Effects on Interest Rates
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18. Experience of Bank Rakyat Indonesia (BRI)
3. Bank Liquidity and Solvency
• Bank Indonesia gave unlimited guarantee of all
deposits in all banks.
• Hence there were runs on several private banks:
• 2 of them taken by (IBRA)
• From Nov 1997 to March 1999, 61 banks were closed
• Another 11 banks were nationalized
• 4 of 7 state banks were being merged
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19. Timeline of the EAC crises 1997
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