The document discusses the Asian Financial Crisis of 1997-1998. It provides background on the currency devaluations in Southeast Asian countries and analyzes various factors that contributed to the crisis, including declining export earnings, excessive investment, large current account deficits, and overvalued currencies. The crisis led to collapsed stock markets, calls for IMF rescue plans, and economic reforms across affected countries. The document examines responses and implications for countries like China, as well as hedging strategies corporations could adopt.

1. The Asian Financial Crisis
Hung-Gay Fung
University of Missouri-St. Louis

2. Presentation Outline
Discuss briefly the behavior of the
Foreign Exchange (FX) of Southeast
Asian Countries.
Assess different factors that lead to
the currency crisis.
Opportunities and Implications for
U.S. companies

3. Foreign Exchange Rates
Since June 1997, FX rates in many
Southeast Asian countries have experienced
a substantial decline.
These countries include the Philippines,
Malaysia, Thailand, Indonesia, and Korea.
Many of these countries linked their
exchange rates to the U.S. dollar before the
currency crisis.

4. Change in FX rates
(6/30/1998)
FX:1 $US FX: 1 $US %
6/30/98 6/30/97 change
Chinese yuan 8.281 8.289 +0.09
HK dollar 7.745 7.747 +0.03
Indonesia rupiah 14568.89 1760 -87.92
Japanese yen 138.31 114.61 -17.58
Malaysian ringgit 4.1 1.827 -55.44
Korean won 1370 641.4 -53.18
Philippine peso 41.5 19.08 -54.02
Thai baht 42.16 17.9 -57.54

5. Immediate Results of Crisis
In addition to currency devaluation:
Collapse of their Stock Markets
(all Southeast countries);
Call for an IMF rescue plan in the
Philippines, Thailand, Indonesia and
Korea;
Bankruptcy and financial reforms
(all Southeast countries).

6. What Happens to Capital
Flows?
1994 1995 1996 1997*
Private flows, net 40.5 77.4 93.0 -12.1
Equity Investment 12.2 15.5 19.1 -4.5
Private Creditors 28.2 61.8 74.0 -7.6
Source: Institute of International Finance, Inc., “Capital Flows to
Emerging Economies,” January 1998.

7. Reasons for the Currency
Crisis
Decline in Export Earnings
Excessive and Risky Investment
Current Account Deficit
Overvalued Currency
Underdevelopment of credit market
Property market bubble

8. Regional Annual Growth Rate of Exports (%)
Country 1990 1991 1992 1993 1994 1995 1996
China 18.2 15.8 18.1 7.1 33.1 22.9 1.6
Indonesia 15.9 13.5 16.6 8.4 8.8 13.4 9.7
Korea 4.2 10.5 6.6 7.3 16.8 30.3 3.7
Malaysia 17.4 16.8 18.5 15.7 24.7 24.7 26.0
Philippines 4.0 8.7 11.2 13.7 20.0 31.6 16.7
Thailand 14.9 23.2 14.2 13.3 22.7 25.1 -1.3
Mexico 17.7 0.7 1.4 9.2 14.2 40.3 22.6
Decline in Export Earnings

9. Excessive and Risky Investment
Incremental Capital-Output (ICOR) Ratios
Country 1987-1992 1993-1996
China 3.1 2.9
Hong Kong 3.7 6.1
Indonesia 3.8 4.9
Korea 4.0 4.9
Malaysia 3.7 4.8
Philippines 6.0 5.5
Singapore 3.6 4.0
Taiwan 2.4 3.9
Thailand 3.4 5.1
Source: Corsetti and Pesenti (1998)

10. Current Account Deficit
(% of GDP)
1990-1995 1996
Asian Country: (average)
China 0.9 0.9
Hong Kong 3.3 -1.2
Korea -1.2 -4.8
Singapore 12.7 15.5
Taiwan 4.0 4.0
Indonesia -2.5 -3.7
Malaysia -5.9 -4.9
Philippines -3.8 -4.7
Thailand -6.7 -7.9

11. Current Account (continued)
Latin America 1990-95 1996
Argentina -1.6 -1.4
Brazil -0.6 -3.3
Chile -2.6 -5.4
Colombia -1.7 -5.5
Mexico -5.1 -0.6
Other countries:
Israel -3.9 -7.4
Africa (average) -11.1 -7.8
Hungary -4.0 -3.7
Source: Bank for International Settlements

12. Overvalued Currency
Country 1990 1991 1992 1993 1994 1995 1996
Hong Kong 99.7 103.9 108.5 115.9 114.5 116. 125.5
Indonesia 97.4 99.6 100.8 103.8 101.0 100.5 105.1
Korea 97.1 91.5 87.8 85.2 84.7 87.8 86.8
Malaysia 97.0 96.9 109.7 111.0 107.1 107.0 111.9
Philippines 92.3 103.1 107.1 97.4 111.6 109.5 116.0
Singapore 101.2 105.7 106.0 108.6 111.9 112.7 117.9
Thailand 102.2 99.0 99.7 101.9 98.3 101.7 107.6
Note: The base figure (100) is the average for the year 1990
Source: J.P. Morgan

13. Japanese Model
Limit bond market to support long-term
growth.
Keep savings in a small number of powerful
banks which are not properly regulated .
Loans are made to favored customers and
businesses with national ambitions, such as
textiles, steel, shipbuilding, electronics, and
automobiles (such as Japan, Thailand,
Korea, and Indonesia).

14. Size of Banking sector
1995 % of GDP
Bond Bank
Market Lending
U.S. 110% 54%
Japan 74 152
Malaysian 56 100
Philippine 39 54
Thailand 10 100
Indonesia 6 57

15. Bank Credit to Private Sector
Annual Rate of Expansion % of GDP
Country 1990-1997 1997
China 13 97
Hong Kong 8 157
Indonesia 18 57
Japan 1.5 111
Korea 12 64
Malaysia 16 95
Philippines 18 52
Singapore 12 97
Thailand 18 105
United States 0.5 65

16. June 1996 June 1997
Indonesia 1.724 1.704
Korea 1.623 2.073
Malaysia 0.252 0.612
Philippines 0.405 0.848
Thailand 0.992 1.453
Other countries
Argentina 1.325 1.210
Brazil 0.702 0.792
Mexico 1.721 1.187
Pakistan 0.740 2.440
South Africa 4.050 3.124
Zimbabwe 1.319 1.635
Short-Term Debt to Reserves

17. Non-Performing Loans
(% of Total Loans)
1990 1994 1995 1996
Indonesia 4.5 12.0 10.4 8.8
Korea 2.1 1.0 0.9 0.8
Malaysia 20.4 8.1 5.5 3.9
Thailand 9.7 7.5 7.7 N/A
Mexico 2.3 10.5 14.4 12.5
Argentina 16.0 8.6 12.3 9.4
Source: Bank for International Settlements.

18. Property Market Bubble
Sale Price: Capital Value
Period Bangkok (000B/m. sq.) Jakarta ($/m. sq.)
Q4, ‘90 66.0 3019
Q4, ‘91 67.0 2788
Q4, ‘92 60.0 2482
Q4, ‘93 59.5 2327
Q4, ‘94 60.5 2358
Q4, ‘95 60.5 2179
Q4, ‘96 60.4 2250
Q2, ‘97 43.0 2267
Source: Data Stream and Jones Lang Wootten.

19. Central Business District Office
Vacancy Rates
1997
Bangkok 15.0%
Hong Kong 6.0%
Kakarta 10.0%
Kuala Lumpur 3.0%
Manila 1.0%
Singapore 8.0%
Shanghai 30.0%
Source: JP Morgan “Asian Financial Markets,”
January 1998.

20. What Really Causes A Crisis?
Corruption?
Korea, Indonesia, Thailand -corruption
Italy and India have corruption, but no
crisis
Bank Transparency
inadequate regulatory framework
irrational lenders?

21. Fundamental Factors-GDP growth
(%)
1993 1994 1995 1996
Indonesia 6.5 7.54 8.22 7.98
Korea 5.75 8.58 8.92 7.13
Malaysia 8.41 9.24 9.46 8.20
Philippines 2.12 4.39 4.76 5.67
Thailand 8.27 8.85 8.68 6.66
Source: Corsetti, Pesenti and Roubini (1998).

22. Inflation Rate
1993 1994 1995 1996
Indonesia 9.60 8.53 9.43 8.03
Korea 4.82 6.24 4.49 4.96
Malaysia 3.57 3.71 5.28 3.56
Philippines 7.58 9.06 8.11 8.41
Thailand 3.36 5.19 5.69 5.85
Source: Corsetti, Pesenti and Roubini (1998).

23. Savings Rates (% of GDP)
Country 1990 1991 1992 1993 1994 1995 1996
China 38.1 38.3 37.7 40.6 42.6 41.0 42.9
Hong Kong 35.8 33.8 33.8 34.6 33.1 30.4 30.6
Indonesia 27.9 28.7 27.3 31.4 27.6 28.4 28.1
Japan 33.5 34.2 33.8 32.8 31.4 30.7 31.3
Korea 36.1 35.9 35.1 35.2 34.6 35.1 33.3
Malaysia 29.1 28.4 31.3 33.0 32.7 33.5 36.7
Philippines 18.7 18.0 19.5 18.4 19.4 17.8 19.7
Singapore 44.1 45.4 47.3 44.9 49.8 50.0 50.1
Taiwan 22.4 22.2 23.2 23.7 22.9 22.9 21.0
Thailand 32.6 35.2 34.3 34.9 34.9 34.3 33.1
Source: Statistical Appendix, IMF, 1997.

24. Human Development Indicators
Country Life-Expectancy Literacy Rate Average Income of
(years) (%) Poorest 20%
in ‘85 US$
1970 1995 1970 1995 1970 1995
Indonesia 48 64 54 84 392 908
Korea 60 72 88 98 303 2071
Malaysia 62 72 60 85 431 1070
Philippines 57 66 83 95 218 435
Thailand 58 69 79 94 361 726
Source: Radelet and Sachs (1998).

25. Fixed Exchange Rate System
FX rates more efficient.
Imposes impediments in the FX
system.
Government guarantees investors
potential upside return if FX
devalues.

26. Currency Model of Attack
by Speculators
Due to the “fixed” exchange arrangement in
many Southeast Asian countries, speculators
start with local borrowings (i.e., borrowing
from local banks).
They then sell the local currencies, convert
into US dollars, and sell forward contracts.
They realize a profit if the currencies
devalue, because their US holdings can be
exchanged for more local currencies to pay
off loans.

27. Defenses by Governments
Buy up sales transactions - FX reserves can
be exhausted quickly.
Jack up the interest rate to deter
speculative borrowings, implying high cost
for business that leads to:
 bankruptcies
 discouraging real investment
 collapse of stock markets
Penalize banks who lend money to
speculators.

28. The Impact of Crisis on China
More imports from Korea due to
lowered prices, e.g., products
imported from Korea have increased,
including steel (32.4%), petro-
chemicals (11.8%), and textiles (9%).
China’s exports slow down.
Economic growth slows down.

29. China’s Strategy
Under pressure to devalue its currency.
However, such a decision is political, not
economic.
Could hurt its credibility as an Asian
leader.
Devaluation will hurt Hong Kong, a
place to raise external funds via initial
public offerings (IPO) for its state-
owned enterprises.

30. China’s Strategy (continued)
Ease Export Credits by encouraging
banks to make loans to export-
oriented companies.
Relax export licenses and give tax
rebates:
Ministry of Foreign Trade and
Economic Cooperation issues more
export licenses for base metals.
Exporters will receive full 17% value-
added tax.

31. Implications and Strategies
Lowered currency value implies
products are cheaper to buy --
Merger Activities in Asian countries
International trade implications
Financial reforms (bond market
development and banks)
Corporate Strategies

32. Corporate Hedging Strategies
Increased use of hedging
instruments, given the volatile FX
markets (use of forward, swaps and
other derivative instruments).
As a long-term strategy, U.S. firms
should pay closer attention in
managing their economic exposure,
e.g., Avon’s use of a balance sheet
hedge in 1997.