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The Asian Crisis - Intro, Effects, Implications
- 1. The Asian FinancialCrisis The Asian Financial Crisis Hung-Gay Fung Hung-Gay Fung University of Missouri-St. Louis University of Missouri-St. Louis
- 2. Presentation Outline Presentation Outline Discuss briefly the behavior of the Discuss briefly the behavior of the Foreign Exchange (FX) of Southeast Foreign Exchange (FX) of Southeast Asian Countries. Asian Countries. Assess different factors that lead to Assess different factors that lead to the currency crisis. the currency crisis. Opportunities and Implications for Opportunities and Implications for U.S. companies U.S. companies
- 3. Foreign Exchange Rates ForeignExchange Rates Since June 1997, FX rates in many Since June 1997, FX rates in many Southeast Asian countries have experienced Southeast Asian countries have experienced a substantial decline. a substantial decline. These countries include the Philippines, These countries include the Philippines, Malaysia, Thailand, Indonesia, and Korea. Malaysia, Thailand, Indonesia, and Korea. Many of these countries linked their Many of these countries linked their exchange rates to the U.S. dollar before the exchange rates to the U.S. dollar before the currency crisis. currency crisis.
- 4. Change in FXrates Change in FX rates (6/30/1998) (6/30/1998) FX:1 $US FX:1 $US FX: 1 $US FX: 1 $US % % 6/30/98 6/30/98 6/30/97 6/30/97 change 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 ofCrisis Immediate Results of Crisis In addition to currency devaluation: In addition to currency devaluation: Collapse of their Stock Markets Collapse of their Stock Markets (all Southeast countries); (all Southeast countries); Call for an IMF rescue plan in the Call for an IMF rescue plan in the Philippines, Thailand, Indonesia and Philippines, Thailand, Indonesia and Korea; Korea; Bankruptcy and financial reforms Bankruptcy and financial reforms (all Southeast countries). (all Southeast countries).
- 6. What Happens toCapital What Happens to Capital Flows? Flows? 1994 1994 1995 1995 1996 1996 1997* 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 theCurrency Reasons for the Currency Crisis Crisis Decline in Export Earnings Decline in Export Earnings Excessive and Risky Investment Excessive and Risky Investment Current Account Deficit Current Account Deficit Overvalued Currency Overvalued Currency Underdevelopment of credit market Underdevelopment of credit market Property market bubble Property market bubble
- 8. Regional Annual GrowthRate of Exports (%) Regional Annual Growth Rate of Exports (%) Country Country 1990 1990 1991 1991 1992 1992 1993 1993 1994 1994 1995 1995 1996 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 Decline in Export Earnings
- 9. Excessive and RiskyInvestment Excessive and Risky Investment Incremental Capital-Output (ICOR) Ratios Incremental Capital-Output (ICOR) Ratios Country Country 1987-1992 1987-1992 1993-1996 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 CurrentAccount Deficit (% of GDP) (% of GDP) 1990-1995 1990-1995 1996 1996 Asian Country Asian Country: : (average) (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 Current Account(continued) (continued) Latin America Latin America 1990-95 1990-95 1996 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: 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 Overvalued Currency Country Country1990 1990 1991 1991 1992 1992 1993 1993 1994 1994 1995 1995 1996 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 Japanese Model Limit bond market to support long-term Limit bond market to support long-term growth. growth. Keep Keep savings savings in a small number of powerful in a small number of powerful banks which are banks which are not not properly regulated . properly regulated . Loans are made to Loans are made to favored favored customers and customers and businesses with national ambitions, such as businesses with national ambitions, such as textiles, steel, shipbuilding, electronics, and textiles, steel, shipbuilding, electronics, and automobiles (such as Japan, Thailand, automobiles (such as Japan, Thailand, Korea, and Indonesia). Korea, and Indonesia).
- 14. Size of Bankingsector Size of Banking sector 1995 % of GDP 1995 % of GDP Bond Bond Bank Bank Market Market Lending Lending U.S. 110% 54% Japan 74 152 Malaysian 56 100 Philippine 39 54 Thailand 10 100 Indonesia 6 57
- 15. Bank Credit toPrivate Sector Bank Credit to Private Sector Annual Rate of Expansion Annual Rate of Expansion % of GDP % of GDP Country Country 1990-1997 1990-1997 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 1996June 1997 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 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 Short-Term Debt to Reserves
- 17. Non-Performing Loans Non-Performing Loans (%of Total Loans) (% of Total Loans) 1990 1990 1994 1994 1995 1995 1996 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 PropertyMarket Bubble Sale Price: Sale Price: Capital Value Capital Value Period Period Bangkok (000B/m. sq.) Bangkok (000B/m. sq.) Jakarta ($/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 DistrictOffice Central Business District Office Vacancy Rates Vacancy Rates 1997 1997 Bangkok 15.0% Hong Kong 6.0% Kakarta 10.0% Kuala Lumpur 3.0% Manila 1.0% Singapore 8.0% Shanghai30.0% Source: JP Morgan “Asian Financial Markets,” January 1998.
- 20. What Really CausesA What Really Causes A Crisis? Crisis? Corruption? Corruption? Korea, Indonesia, Thailand -corruption Korea, Indonesia, Thailand -corruption Italy and India have corruption, but no Italy and India have corruption, but no crisis crisis Bank Transparency Bank Transparency inadequate regulatory framework inadequate regulatory framework irrational lenders? irrational lenders?
- 21. Fundamental Factors-GDP growth FundamentalFactors-GDP growth (%) (%) 1993 1993 1994 1994 1995 1995 1996 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 Inflation Rate 1993 19931994 1994 1995 1995 1996 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) Savings Rates (% of GDP) Country Country 1990 1990 1991 1991 1992 1992 1993 1993 1994 1994 1995 1995 1996 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 HumanDevelopment Indicators Country Country Life-Expectancy Life-Expectancy Literacy Rate Literacy Rate Average Income of Average Income of (years) (years) (%) (%) Poorest 20% Poorest 20% in ‘85 US$ in ‘85 US$ 1970 1970 1995 1995 1970 1970 1995 1995 1970 1970 1995 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 RateSystem Fixed Exchange Rate System FX rates more efficient. FX rates more efficient. Imposes impediments in the FX Imposes impediments in the FX system. system. Government guarantees investors Government guarantees investors potential upside return if FX potential upside return if FX devalues. devalues.
- 26. Currency Model ofAttack Currency Model of Attack by Speculators by Speculators Due to the Due to the “ “fixed fixed” ” exchange arrangement in exchange arrangement in many Southeast Asian countries, speculators many Southeast Asian countries, speculators start with start with local borrowings local borrowings (i.e., borrowing (i.e., borrowing from local banks). from local banks). They then sell the local currencies, They then sell the local currencies, convert convert into US dollars, into US dollars, and and sell forward contracts. sell forward contracts. They realize a profit if the They realize a profit if the currencies currencies devalue, devalue, because their US holdings can be because their US holdings can be exchanged for more local currencies to pay exchanged for more local currencies to pay off loans. off loans.
- 27. Defenses by Governments Defensesby Governments Buy up sales transactions - FX reserves can Buy up sales transactions - FX reserves can be exhausted quickly. be exhausted quickly. Jack up the interest rate to deter Jack up the interest rate to deter speculative borrowings, implying high cost speculative borrowings, implying high cost for business that leads to: for business that leads to: bankruptcies bankruptcies discouraging real investment discouraging real investment collapse of stock markets collapse of stock markets Penalize banks who lend money to Penalize banks who lend money to speculators. speculators.
- 28. The Impact ofCrisis on China The Impact of Crisis on China More imports from Korea due to More imports from Korea due to lowered prices, e.g., products lowered prices, e.g., products imported from Korea have increased, imported from Korea have increased, including steel (32.4%), petro- including steel (32.4%), petro- chemicals (11.8%), and textiles (9%). chemicals (11.8%), and textiles (9%). China’s exports slow down. China’s exports slow down. Economic growth slows down. Economic growth slows down.
- 29. China’s Strategy China’s Strategy Under pressure to devalue its currency. Under pressure to devalue its currency. However, such a decision is political, not However, such a decision is political, not economic. economic. Could hurt its credibility as an Asian Could hurt its credibility as an Asian leader. leader. Devaluation will hurt Hong Kong, a Devaluation will hurt Hong Kong, a place to raise external funds via initial place to raise external funds via initial public offerings (IPO) for its state- public offerings (IPO) for its state- owned enterprises. owned enterprises.
- 30. China’s Strategy China’s Strategy(continued) (continued) Ease Ease Export Credits Export Credits by encouraging by encouraging banks to make loans to export- banks to make loans to export- oriented companies. oriented companies. Relax export licenses and give tax Relax export licenses and give tax rebates: rebates: Ministry of Foreign Trade and Ministry of Foreign Trade and Economic Cooperation issues more Economic Cooperation issues more export licenses for base metals. export licenses for base metals. Exporters will receive full 17% value- Exporters will receive full 17% value- added tax. added tax.
- 31. Implications and Strategies Implicationsand Strategies Lowered currency value implies Lowered currency value implies products are cheaper to buy -- products are cheaper to buy -- Merger Activities in Asian countries Merger Activities in Asian countries International trade implications International trade implications Financial reforms (bond market Financial reforms (bond market development and banks) development and banks) Corporate Strategies Corporate Strategies
- 32. Corporate Hedging Strategies CorporateHedging Strategies Increased use of hedging Increased use of hedging instruments, given the volatile FX instruments, given the volatile FX markets ( markets (use of forward, swaps and use of forward, swaps and other derivative instruments other derivative instruments). ). As a long-term strategy, U.S. firms As a long-term strategy, U.S. firms should pay closer attention in should pay closer attention in managing their economic exposure, managing their economic exposure, e.g., Avon’s use of a balance sheet e.g., Avon’s use of a balance sheet hedge in 1997 hedge in 1997. .