The Asian financial crisis began in July 1997 in Thailand and spread to other Asian countries, causing stock market declines of 30% and recessions. It was caused by overvalued currencies from large capital inflows and an overreliance on short-term foreign borrowing, which led to currency depreciation and debt defaults when capital fled. While growth slowed, countries recovered through currency devaluations and reforms to financial regulation and oversight. China and other countries in East Asia have since maintained rapid growth through competitive export-led economies and investment in education.

1. ASIAN CRISIS AND
RECENT
DEVELOPMENTS

2. • Beginning July 1997 – period of financial
crisis
• Started in Thailand, followed in Malaysia,
Indonesia and Philippines
• Subsequently spread to Australia, Korea,
Hong Kong
• Stock Market fell by about 30%
Introduction

3. Why did it happen?
• The Bubble Economy
• External Sector Difficulties
• Contagion, Globalization, and Financial
Integration

4. The Bubble Economy
– all the countries in Southeast Asia grew very
rapidly during 1994 and 1995
– huge inflow of foreign capital was channeled to
both fixed investment and equity portfolios
– current account deficits widened and stock
markets boomed

5. The Bubble Economy
• Inadequate fund management system
• Ineffective sterilization of capital inflows
• Restrictions on foreign banks entry
• Nonperforming loans
• High costs of financial services
• Balance Sheets

6. Nonperforming Loans as Percent of Total Loans
1980s 1994 1995 1996
Asian Economies
Trigger economies:
Indonesia n.a 12.0% 10.4% 8.8%
Malaysia 30.5 8.1 5.5 3.9
Thailand 15.0 7.5 7.7 n.a
Other Asian
economies:
Hong Kong n.a 3.4 2.8 2.7
Korea 6.7 1.0 0.9 0.8
Taiwan 5.5 2.0 3.1 3.8
Industrialized
Countries
Japan n.a 3.3 3.3 3,4
United States 4.1 1.9 1.3 1.1

7. External Sector Difficulties
– said to have been behind the outbreak of
the financial crisis. They include the
following:
• Rapid growth in current-account deficits
• Overvalued exchange rates
• The collapse in exports

8. Exchange-Rate Depreciation, Current-Account Balance, and
Merchandise Export Growth in Selected Asian Countries (Percent)
Exchange-Rate
Overvaluation
Current-Account
Balance (of GDP)
Merchandise
Exports (of
Growth)
June 1997 1995 1996 1995 1996
Trigger Economies:
Indonesia 4.2% -3.3% -3.3% 13.4% 9.7%
Malaysia 9.3 -10.0 -4.9 20.3 6.5
Philippines 11.9 -4.4 -4.7 28.7 18.7
Thailand 6.7 -7.9 -7.9 23.1 0.5
Other Asian economies:
Hong Kong 22.0 -3.9 -1.3 14.8 4.0
Korea -7.6 -2.0 -4.9 30.3 3.7
Singapore 13.5 16.8 15.7 13.7 5.3
Taiwan -5.5 2.1 4.0 20.0 3.8

9. Contagion, Globalization, and
Financial Integration
– enormous reversal of net private capital flows to
the five crisis economies (Indonesia, Malaysia,
Korea, Philippines, Thailand)
– slowdown in growth in Europe and currency
appreciation when the US dollar strengthened
– globalization linked the East Asian markets for
goods and assets which resulted from
liberalization of trade in goods and capital

10. Contagion, Globalization, and
Financial Integration
• Role of institutional investors
– control over vast amounts of financial resources
which can introduce to volatility into the developing
economies
– fund managers tend to act together to pull out
individual markets

11. • How strong was this contagion effect?
– investors bailed out of all countries without
discrimination which put pressure on the
exchange rate and subsequently on the
external balance and interest rates
– led to bankruptcies in the vulnerable banking
and corporate sectors
– severe economic slow down

12. Post-Crisis Experience
• The world economy
• Economic growth
• Economic recovery
• Emerging development divide in Asia
• Social impact of the Economic Crisis

13. The World Economy
– world output in 1998 fall, this was primarily the
result of a slowdown in the growth of the US
economy
– Asia grew rapidly, registered growth of
between 1% and 2%
– US economy suffered a short and shallow
recession , this reduced the demand for US
imports and probably also slowed the growth
of Asian economies

14. Economic Growth
– overall growth in the Asian economies did
not immediately reflect events in the
financial sector and in foreign exchange
markets
• Exchange Rates
• Equity Prices
• Restructuring

15. Growth Rates of GDP in Asia, 1997-2007
1997 1998 19
99
200
0
200
1
200
2
200
3
2004 2005 2006 2007
China 8.8
%
7.8% 7.1
%
8.0
%
8.3
%
9.1
%
10.0
%
10.1
%
10.4
%
11.7
%
11.9
%
Hong
Kong
5.1 -5.0 3.4 10.2 0.6 1.8 3.2 8.6 7.1 7.0 6.4
Indonesia 4.7 -13.1 0.8 4.8 3.8 4.3 5.0 4.9 5.7 5.5 6.3
Korea 5.0 -6.7 10.
9
9.3 3.8 7.0 3.1 4.6 4.2 5.1 5.0
Malaysia 7.3 -7.4 6.1 8.3 0.3 4.4 5.4 7.1 5.3 5.8 6.3
Philippine
s
5.2 -0.6 3.4 4.4 1.8 4.4 4.5 6.0 5.0 5.4 7.2
Singapore 8.5 -0.1 6.4 9.4 -2.3 4.0 2.9 8.7 7.3 8.2 7.7
Taiwan 6.7 4.6 5.4 5.9 -2.2 4.2 3.4 6.1 4.2 4.9 5.7
Thailand -1.4 -10.5 4.4 4.6 2.2 5.3 7.0 6.2 4.5 5.1 4.8

16. Stock Market Recovery
Dec 1998-Dec 1999 Dec 1999-Dec 2000 Dec 2000-Dec 2001
Local
Currency
U.S.
Dollars
Local
Currency
U.S.
Dollars
Local
Currency
U.S.
Dollars
China 21.7 21.6 49.4 49.4 19.9 19.9
Hong Kong 61.7 61.2 10.5 -10.8 -23.9 -23.9
Indonesia 65.0 84.9 -38.1 -52.9 -10.0 -14.3
Korea 70.5 80.7 -48.4 -51.6 27.6 25.4
Malaysia 35.0 35.0 -12.5 -12.5 -2.3 -2.3
Philippines 3.4 -.08 -34.0 -47.0 -24.8 -27.0
Singapore 69.6 67.6 -20.9 -24.1 -17.8 -22.4
Taiwan 23.6 26.0 -40.3 -43.4 12.3 7.2
Thailand 25.0 19.7 -43.7 -50.8 8.8 7.7

17. Stock Market Indices, Beginning of 2008 and
November 21, 2008
Stock Market Average
January 2008 November 2008 Percentage
Decline
China 5,500 1,969 64%
Hong Kong 27,00 12.659 53
India 20,000 8,915 55
Indonesia 2,700 1,146 57
Korea 1,900 1,003 47
Malaysia 1,500 866 42
Singapore 3,500 1,662 52
Taiwan 8,200 4,171 49

18. Economic Recovery
– revival of domestic demand supported by
exports and a restoration of investor
confidence
– softer budget deficits and lower interest
rates
– sustained growth

19. Current-Account Balance for Asia Economies as
Percent of GDP, 1997-2007
1997 1998 1999 2000 2001 2002 2005 2006 2007
China 4.1% 3.1% 1.6% 1.5% 1,2% 1.9% 7.2% 9.4% 11.3%
Hong
Kong
-3.1 2.7 7.5 5.5 7.5 10.7 11.4 12.1 13.5
Indonesi
a
0.7 -0.3 -1.7 -4.6 -5.0 4.1 0.1 2.9 2.4
Korea -1.7 12.7 6.0 2.4 1.9 1.3 1.9 0.6 0.6
Malaysi
a
-5.9 3.1 15.9 8.8 5.5 7.6 14.5 16.3 15.5
Philippin
es
-5.3 2.4 9.4 11.5 8.0 1.6 2.0 4.5 4.4
Singapo
re
19.0 24.8 25.9 23.6 24.0 21.5 18.6 21.8 24.3
Taiwan 2.4 1.8 2.9 2.4 2.5 9.2 4.9 7.2 8.6
Thailand 2.1 12.7 10.2 8.2 6.5 6.0 -4.3 1.1 6.1

20. Emerging Development in Asia
– putting China together with Taiwan,
Korea, and Hong Kong as East Asia
– grouping the five major Southeast Asian
countries together (excluding the Mekong
countries)

21. Social Impact of the Economic Crisis
– put extreme pressure on many sectors of the
economies of the five crisis countries
– credit crunch made banks reluctant to lend and
firms were starved of working capital
– currency depreciation made it difficult for firms
to service external debt
– inflation accelerated
– purchasing power fell as the price of import s
increased
– government revenues came under strain when
the tax base contracted and incomes fell

22. Lessons and Prospects
For the Future
An Agenda for reform
– the reform agenda prescribed by international
banks and aid agencies after the crisis. They
include the following:
• Debt restructuring
• Private-sector credit lines
• Reform exchange-rate regime
• Capital Account reform
• International Portfolio Controls

23. • Establish minimum international standards of
financial crisis
• Information and transparency
• Global Surveillance
• Reform of financial Markets
• Greater Competition
• Consolidation
• Supervision and regulation
• Accounting and disclosure
• Stock markets
• Trade policies
• Foreign direct investment

24. • Human Capital
• Better understanding of the crisis process
• New data
• New analysis

25. Some Policy Implications
• they could have cut back on growth
• they could have loosened the attachment of
their currency to the US dollar
• they could have put a tax on short-term
capital inflows if there was a reluctance to
loosen the exchange-rate peg

26. Summary and Developments in the
New Millennium
2 reasons for the possible slow growth of the
countries that already recovered
1. More difficult to maintain rapid growth as
incomes continue to approach the levels of
the OECD countries
2. The rapid growth of the early 1990s
reflected overheating to some extent.

27. Indonesia
• Have taken longer to recover but are now
on a stronger trajectory
• Has averaged GDP growth of more than
5% since 2002
Hong Kong and China
• Suffering from a reduction in export
competitiveness vis-à-vis the result of Asia
because of exchange-rate realignment

28. • Growth in China has remained strong,
partly as a result of a very strong
expansionary fiscal and monetary policy in
the last part of 1998 and in 1999.
• Hong Kong suffered a loss due to:
– its currency is still pegged to the U.S. dollar.
– China’s export sector has begun to feel the
pinch of relative currency appreciation
• China adopted a more flexible exchange-
rate regime in 2007; continues to grow
rapidly

29. Reasons for East Asian region to grow rapidly:
• embraces macroeconomic policies
• promotes competition
• predisposed to invest in its people
• welcome the technology and ideas
embodied in new goods and equipment