1997 Asian nancial crisis

180% during the worst of the crisis. In South Korea,

the ratios rose from 13 to 21% and then as high as 40%,
while the other northern newly industrialized countries
fared much better. Only in Thailand and South Korea
did debt service-to-exports ratios rise.[4]
Although most of the governments of Asia had seemingly
sound scal policies, the International Monetary Fund
(IMF) stepped in to initiate a $40 billion program to stabilize the currencies of South Korea, Thailand, and Indonesia, economies particularly hard hit by the crisis. The
eorts to stem a global economic crisis did little to stabilize the domestic situation in Indonesia, however. After
30 years in power, President Suharto was forced to step
down on 21 May 1998 in the wake of widespread rioting
that followed sharp price increases caused by a drastic devaluation of the rupiah. The eects of the crisis lingered
through 1998. In 1998 the Philippines growth dropped to
virtually zero. Only Singapore and Taiwan proved relatively insulated from the shock, but both suered serious
The countries most aected by the 1997 Asian nancial crisis
hits in passing, the former more so due to its size and geographical location between Malaysia and Indonesia. By
1999, however, analysts saw signs that the economies of
The Asian nancial crisis was a period of nancial crisis Asia were beginning to recover.[5] After the 1997 Asian
that gripped much of East Asia beginning in July 1997 Financial Crisis, economies in the region are working toand raised fears of a worldwide economic meltdown due ward nancial stability on nancial supervision.[6]
to nancial contagion.
Until 1999, Asia attracted almost half of the total capital
The crisis started in Thailand (well known by the Thais as inow into developing countries. The economies of
, literally translated as Tom Yum Goong cri- Southeast Asia in particular maintained high interest rates
sis) with the nancial collapse of the Thai baht after the attractive to foreign investors looking for a high rate of reThai government was forced to oat the baht due to lack turn. As a result the regions economies received a large
of foreign currency to support its xed exchange rate, cut- inow of money and experienced a dramatic run-up in
ting its peg to the U.S. dollar, after exhaustive eorts to asset prices. At the same time, the regional economies
support it in the face of a severe nancial overextension of Thailand, Malaysia, Indonesia, Singapore, and South
that was in part real estate driven. At the time, Thai- Korea experienced high growth rates, 812% GDP, in
land had acquired a burden of foreign debt that made the late 1980s and early 1990s. This achievement was
the country eectively bankrupt even before the collapse widely acclaimed by nancial institutions including IMF
of its currency.[1] As the crisis spread, most of South- and World Bank, and was known as part of the "Asian
east Asia and Japan saw slumping currencies,[2] devalued economic miracle".
stock markets and other asset prices, and a precipitous
rise in private debt.[3]
Indonesia, South Korea and Thailand were the countries
1 Credit bubbles and xed curmost aected by the crisis. Hong Kong, Malaysia, Laos
and the Philippines were also hurt by the slump. China,
rency exchange rates
Taiwan, Singapore, Brunei and Vietnam were less affected, although all suered from a loss of demand and The causes of the debacle are many and disputed. Thaicondence throughout the region.
lands economy developed into an economic bubble fuForeign debt-to-GDP ratios rose from 100% to 167% in eled by hot money. More and more was required as
the four large Association of Southeast Asian Nations the size of the bubble grew. The same type of situa(ASEAN) economies in 199396, then shot up beyond tion happened in Malaysia, and Indonesia, which had the
1

2 PANIC AMONGST LENDERS AND WITHDRAWAL OF CREDIT

added complication of what was called "crony capital- 2 Panic amongst lenders and withism".[7] The short-term capital ow was expensive and
drawal of credit
often highly conditioned for quick prot. Development
money went in a largely uncontrolled manner to certain
people only, not particularly the best suited or most e- The resulting panic among lenders led to a large withcient, but those closest to the centers of power.[8]
drawal of credit from the crisis countries, causing a credit
At the time of the mid-1990s, Thailand, Indonesia and crunch and further bankruptcies. In addition, as forSouth Korea had large private current account decits and eign investors attempted to withdraw their money, the
the maintenance of xed exchange rates encouraged ex- exchange market was ooded with the currencies of the
ternal borrowing and led to excessive exposure to foreign crisis countries, putting depreciative pressure on their
exchange risk in both the nancial and corporate sectors. exchange rates. To prevent currency values collapsing, these countries governments raised domestic interest
In the mid-1990s, a series of external shocks began to
rates to exceedingly high levels (to help diminish ight of
change the economic environment the devaluation of
capital by making lending more attractive to investors)
the Chinese renminbi, and the Japanese yen due to the
and to intervene in the exchange market, buying up any
Plaza Accord of 1985, raising of U.S. interest rates which
excess domestic currency at the xed exchange rate with
led to a strong U.S. dollar, the sharp decline in semiforeign reserves. Neither of these policy responses could
[9]
conductor prices; adversely aected their growth. As
be sustained for long.
the U.S. economy recovered from a recession in the
early 1990s, the U.S. Federal Reserve Bank under Alan Very high interest rates, which can be extremely damagGreenspan began to raise U.S. interest rates to head o ing to an economy that is healthy, wreaked further havoc
on economies in an already fragile state, while the central
ination.
banks were hemorrhaging foreign reserves, of which they
This made the United States a more attractive investment
had nite amounts. When it became clear that the tide of
destination relative to Southeast Asia, which had been atcapital eeing these countries was not to be stopped, the
tracting hot money ows through high short-term interest
authorities ceased defending their xed exchange rates
rates, and raised the value of the U.S. dollar. For the
and allowed their currencies to oat. The resulting deSoutheast Asian nations which had currencies pegged to
preciated value of those currencies meant that foreign
the U.S. dollar, the higher U.S. dollar caused their own
currency-denominated liabilities grew substantially in doexports to become more expensive and less competitive
mestic currency terms, causing more bankruptcies and
in the global markets. At the same time, Southeast Asias
further deepening the crisis.
export growth slowed dramatically in the spring of 1996,
Other economists, including Joseph Stiglitz and Jerey
deteriorating their current account position.
Sachs, have downplayed the role of the real economy in
Some economists have advanced the growing exports of
the crisis compared to the nancial markets. The rapidChina as a contributing factor to ASEAN nations exity with which the crisis happened has prompted Sachs
port growth slowdown, though these economists mainand others to compare it to a classic bank run prompted
tain the main cause of the crises was excessive real estate
by a sudden risk shock. Sachs pointed to strict monespeculation.[10] China had begun to compete eectively
tary and contractory scal policies implemented by the
with other Asian exporters particularly in the 1990s after
governments on the advice of the IMF in the wake of
the implementation of a number of export-oriented rethe crisis, while Frederic Mishkin points to the role of
forms. Other economists dispute Chinas impact, noting
asymmetric information in the nancial markets that led
that both ASEAN and China experienced simultaneous
to
a "herd mentality" among investors that magnied a
rapid export growth in the early 1990s.[11]
small risk in the real economy. The crisis has thus atMany economists believe that the Asian crisis was created tracted interest from behavioral economists interested in
not by market psychology or technology, but by policies market psychology.[13]
that distorted incentives within the lenderborrower reAnother possible cause of the sudden risk shock may also
lationship. The resulting large quantities of credit that
be attributable to the handover of Hong Kong sovereignty
became available generated a highly leveraged economic
on 1 July 1997. During the 1990s, hot money ew into
climate, and pushed up asset prices to an unsustainable
the
Southeast Asia region through nancial hubs, espelevel.[12] These asset prices eventually began to collapse,
cially Hong Kong. The investors were often ignorant of
causing individuals and companies to default on debt oblithe actual fundamentals or risk proles of the respective
gations.
economies, and once the crisis gripped the region, coupled with the political uncertainty regarding the future
of Hong Kong as an Asian nancial centre led some investors to withdraw from Asia altogether. This shrink
in investments only worsened the nancial conditions in
Asia[14] (subsequently leading to the depreciation of the
Thai baht on 2 July 1997).[15]

3.1

Economic reforms

Several case studies on the topic Application of

network analysis of a nancial system; explains the
interconnectivity of nancial markets, and the signicance of the robustness of hubs or the main
nodes.[16][17][18] Any negative externalities in the hubs
creates a ripple eect through the nancial system
and the economy (and, the connected economies) as a
whole.[19][20][21]
The foreign ministers of the 10 ASEAN countries believed that the well co-ordinated manipulation of their
currencies was a deliberate attempt to destabilize the
ASEAN economies. Former Malaysian Prime Minister Mahathir Mohamad accused George Soros of ruining
Malaysias economy with massive currency speculation".
Soros claims to have been a buyer of the ringgit during its
fall, having sold it short in 1997.
At the 30th ASEAN Ministerial Meeting held in Subang
Jaya, Malaysia, the foreign ministers issued a joint declaration on 25 July 1997 expressing serious concern and
called for further intensication of ASEANs cooperation to safeguard and promote ASEANs interest in this
regard.[22] Coincidentally, on that same day, the central
bankers of most of the aected countries were at the
EMEAP (Executive Meeting of East Asia Pacic) meeting in Shanghai, and they failed to make the New Arrangement to Borrow operational. A year earlier, the nance ministers of these same countries had attended the
3rd APEC nance ministers meeting in Kyoto, Japan, on
17 March 1996, and according to that joint declaration,
they had been unable to double the amounts available under the General Agreement to Borrow and the Emergency Finance Mechanism.

3
tions to avoid default, tying the packages to currency,
banking and nancial system reforms.

3.1 Economic reforms

The IMFs support was conditional on a series of economic reforms, the "structural adjustment package
(SAP). The SAPs called on crisis-struck nations to reduce government spending and decits, allow insolvent
banks and nancial institutions to fail, and aggressively
raise interest rates. The reasoning was that these steps
would restore condence in the nations scal solvency,
penalize insolvent companies, and protect currency values. Above all, it was stipulated that IMF-funded capital
had to be administered rationally in the future, with no
favored parties receiving funds by preference. In at least
one of the aected countries the restrictions on foreign
ownership were greatly reduced.[24]
There were to be adequate government controls set up
to supervise all nancial activities, ones that were to be
independent, in theory, of private interest. Insolvent institutions had to be closed, and insolvency itself had to be
clearly dened. In addition, nancial systems were to become transparent, that is, provide the kind of reliable
nancial information used in the West to make sound nancial decisions.[25]
As countries fell into crisis, many local businesses and
governments that had taken out loans in US dollars, which
suddenly became much more expensive relative to the local currency which formed their earned income, found
themselves unable to pay their creditors. The dynamics
of the situation were similar to that of the Latin American debt crisis. The eects of the SAPs were mixed and
their impact controversial. Critics, however, noted the
contractionary nature of these policies, arguing that in a
recession, the traditional Keynesian response was to increase government spending, prop up major companies,
and lower interest rates.

As such, the crisis could be seen as the failure to adequately build capacity in time to prevent currency manipulation. This hypothesis enjoyed little support among
economists, however, who argue that no single investor
could have had enough impact on the market to successfully manipulate the currencies values. In addition, the
level of organization necessary to coordinate a massive
exodus of investors from Southeast Asian currencies in
order to manipulate their values rendered this possibility The reasoning was that by stimulating the economy and
staving o recession, governments could restore conremote.
dence while preventing economic loss. They pointed out
that the U.S. government had pursued expansionary policies, such as lowering interest rates, increasing government spending, and cutting taxes, when the United States
3 IMF role
itself entered a recession in 2001, and arguably the same
Such was the scope and the severity of the collapses in- in the scal and monetary policies during the 20082009
volved that outside intervention, considered by many as Global Financial Crisis.
a new kind of colonialism,[23] became urgently needed.
Since the countries melting down were among not only
the richest in their region, but in the world, and since hundreds of billions of dollars were at stake, any response to
the crisis was likely to be cooperative and international, in
this case through the International Monetary Fund (IMF).
The IMF created a series of bailouts (rescue packages)
for the most-aected economies to enable aected na-

Many commentators in retrospect criticized the IMF for

encouraging the developing economies of Asia down the
path of fast-track capitalism, meaning liberalization of
the nancial sector (elimination of restrictions on capital
ows), maintenance of high domestic interest rates to attract portfolio investment and bank capital, and pegging
of the national currency to the dollar to reassure foreign
investors against currency risk.[26]

3.2

INDONESIA

IMF and high interest rates

From 1985 to 1996, Thailand's economy grew at an average of over 9% per year, the highest economic growth rate
The conventional high-interest-rate economic wisdom is of any country at the time. Ination was kept reasonably
normally employed by monetary authorities to attain the low within a range of 3.45.7%.[27] The baht was pegged
chain objectives of tightened money supply, discouraged at 25 to the U.S. dollar.
currency speculation, stabilized exchange rate, curbed
On 14 May and 15 May 1997, the Thai baht was hit by
currency depreciation, and ultimately contained ination.
massive speculative attacks. On 30 June 1997, Prime
In the Asian meltdown, highest IMF ocials rationalized Minister Chavalit Yongchaiyudh said that he would not
their prescribed high interest rates as follows:
devalue the baht. This was the spark that ignited the
From then IMF First Deputy managing director, Stanley Asian nancial crisis as the Thai government failed to deFischer (Stanley Fischer, The IMF and the Asian Cri- fend the baht, which was pegged to the basket of curren[28]
sis, Forum Funds Lecture at UCLA, Los Angeles on 20 cies in which the U.S. dollar was the main component,
against international speculators.
March 1998):
When their governments approached the
IMF, the reserves of Thailand and South Korea
were perilously low, and the Indonesian Rupiah
was excessively depreciated. Thus, the rst order of business was... to restore condence in
the currency. To achieve this, countries have to
make it more attractive to hold domestic currency, which in turn, requires increasing interest rates temporarily, even if higher interest
costs complicate the situation of weak banks
and corporations...
Why not operate with lower interest rates and
a greater devaluation? This is a relevant tradeo, but there can be no question that the degree of devaluation in the Asian countries is
excessive, both from the viewpoint of the individual countries, and from the viewpoint of
the international system. Looking rst to the
individual country, companies with substantial foreign currency debts, as so many companies in these countries have, stood to suffer far more from currency (depreciation)
than from a temporary rise in domestic interest rates. Thus, on macroeconomics monetary policy has to be kept tight to restore condence in the currency....
From the then IMF managing director Michel Camdessus
(Doctor Knows Best?" Asiaweek, 17 July 1998, p. 46):
To reverse (currency depreciation), countries
have to make it more attractive to hold domestic currency, and that means temporarily
raising interest rates, even if this (hurts) weak
banks and corporations.

Thailand

Further information: Economy of Thailand

Thailands booming economy came to a halt amid massive layos in nance, real estate, and construction that
resulted in huge numbers of workers returning to their
villages in the countryside and 600,000 foreign workers
being sent back to their home countries.[29] The baht devalued swiftly and lost more than half of its value. The
baht reached its lowest point of 56 units to the U.S. dollar
in January 1998. The Thai stock market dropped 75%.
Finance One, the largest Thai nance company until then,
collapsed.[30]
Without foreign reserves to support the U.S.-Baht currency peg, the Thai government was eventually forced to
oat the Baht, on 2 July 1997, allowing the value of the
Baht to be set by the currency market. On 11 August
1997, the IMF unveiled a rescue package for Thailand
with more than $17 billion, subject to conditions such
as passing laws relating to bankruptcy (reorganizing and
restructuring) procedures and establishing strong regulation frameworks for banks and other nancial institutions.
The IMF approved on 20 August 1997, another bailout
package of $3.9 billion.
By 2001, Thailands 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. The Thai baht continued to appreciate
to 29 Baht to the U.S. dollar in October 2010.

5 Indonesia
See also: Fall of Suharto and Economy of Indonesia
In June 1997, Indonesia seemed far from crisis. Unlike
Thailand, Indonesia had low ination, a trade surplus of
more than $900 million, huge foreign exchange reserves
of more than $20 billion, and a good banking sector. But
a large number of Indonesian corporations had been borrowing in U.S. dollars. During the preceding years, as
the rupiah had strengthened respective to the dollar, this
practice had worked well for these corporations; their effective levels of debt and nancing costs had decreased
as the local currencys value rose.
In July 1997, when Thailand oated the baht, Indonesias monetary authorities widened the rupiah currency

6 South Korea
Further information: Economy of South Korea

Fall of Suharto: President Suharto resigns, 21 May 1998.

trading band from 8% to 12%. The rupiah suddenly

came under severe attack in August. On 14 August 1997,
the managed oating exchange regime was replaced by
a free-oating exchange rate arrangement. The rupiah
dropped further. The IMF came forward with a rescue
package of $23 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. Moodys eventually downgraded Indonesias longterm debt to "junk bond".[31]
Although the rupiah crisis began in July and August 1997,
it intensied in November when the eects of that summer devaluation showed up on corporate balance sheets.
Companies that had borrowed in dollars had to face the
higher costs imposed upon them by the rupiahs decline,
and many reacted by buying dollars through selling rupiah, undermining the value of the latter further. In
February 1998, President Suharto sacked Bank Indonesia Governor J. Soedradjad Djiwandono, but this proved
insucient. Suharto resigned under public pressure in
May 1998 and Vice President B. J. Habibie was elevated
in his place. Before the crisis, the exchange rate between
the rupiah and the dollar was roughly 2,600 rupiah to 1
U.S. dollar.[32]

The banking sector was burdened with non-performing

loans as its large corporations were funding aggressive
expansions. During that time, there was a haste to build
great conglomerates to compete on the world stage. Many
businesses ultimately failed to ensure returns and profitability. The chaebol, South Korean conglomerates, simply absorbed more and more capital investment. Eventually, excess debt led to major failures and takeovers.
For example, in July 1997, South Koreas third-largest
car maker, Kia Motors, asked for emergency loans. In
the wake of the Asian market downturn, Moodys lowered the credit rating of South Korea from A1 to A3, on
28 November 1997, and downgraded again to B2 on 11
December. That contributed to a further decline in South
Korean shares since stock markets were already bearish
in November. The Seoul stock exchange fell by 4% on 7
November 1997. On 8 November, it plunged by 7%, its
biggest one-day drop to that date. And on 24 November,
stocks fell a further 7.2% on fears that the IMF would
demand tough reforms. 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).

The South Korean won, meanwhile, weakened to more

than 1,700 per U.S. dollar from around 800. Despite an
initial sharp economic slowdown and numerous corporate bankruptcies, South Korea has managed to triple its
per capita GDP in dollar terms since 1997. Indeed, it resumed its role as the worlds fastest-growing economy
since 1960, per capita GDP has grown from $80 in nominal terms to more than $21,000 as of 2007. However,
like the chaebol, South Koreas government did not escape unscathed. Its national debt-to-GDP ratio more than
doubled (approximately 13% to 30%) as a result of the
The rate plunged to over 11,000 rupiah to 1 U.S. dollar on crisis.
9 January 1998, with spot rates over 14,000 during 2326 In South Korea, the crisis is also commonly referred to as
January and trading again over 14,000 for about six weeks the IMF crisis.
during JuneJuly 1998. On 31 December 1998, the rate
was almost exactly 8,000 to 1 U.S. dollar.[33] Indonesia
lost 13.5% of its GDP that year.
After the crisis, on 2000, the Malaysia's SOE acquired
Indonesia's SOE, the example is the banking sector,
Maybank (Malaysian Banking Berhad, Malaysia stateowned bank) acquired BNI (Bank Negara Indonesia,
Indonesia state-owned bank) on December 29, 1999
January 1, 2000, with the agreement signature by
Abdurrahman Wahid (4th President of Indonesia) and
Salahuddin of Selangor (11th Yang di-Pertuan Agong of
Malaysia). (See also : Bank Negara Indonesia#BNI Maybank)
The crisis also brought independence to East Timor.

7 Philippines

Further information: Economy of the Philippines

The Philippine central bank raised interest rates by 1.75
percentage points in May 1997 and again by 2 points on
19 June. Thailand triggered the crisis on 2 July and on
3 July, the Philippine Central Bank intervened to defend
the peso, raising the overnight rate from 15% to 32% at
the onset of the Asian crisis in mid-July 1997. The peso
dropped from 26 pesos per dollar at the start of the crisis

9 MALAYSIA

to 38 pesos in mid-1999 to 54 pesos as in early August of August, when hostilities ended with the closing of the
2001.
August Hang Seng Index futures contract. In 1999, the
The Philippine GDP contracted by 0.6% during the worst Government started selling those shares by launching the
part of the crisis, but grew by 3% by 2001, despite scan- Tracker Fund of Hong Kong, making a prot of about
dals of the administration of Joseph Estrada in 2001, HK$30 billion (US$4 billion).
most notably the jueteng scandal, causing the PSE
Composite Index, the main index of the Philippine Stock
Exchange, to fall to 1,000 points from a high of 3000 9 Malaysia
points in 1997. The pesos value declined to about 55 pesos to the U.S. dollar. Later that year, Estrada was on the
Further information: Economy of Malaysia
verge of impeachment but his allies in the senate voted
against continuing the proceedings.
Before the crisis, Malaysia had a large current account
This led to popular protests culminating in the "EDSA II
decit of 5% of its GDP. At the time, Malaysia was
Revolution", which eected his resignation and elevated
a popular investment destination, and this was reected
Gloria Macapagal-Arroyo to the presidency. Arroyo lessin KLSE activity which was regularly the most active
ened the crisis in the country. The Philippine peso rose
stock exchange in the world (with turnover exceeding
to about 50 pesos by the years end and traded at around
even markets with far higher capitalization like the New
41 pesos to a dollar in late 2007. The stock market also
York Stock Exchange). Expectations at the time were
reached an all-time high in 2007 and the economy was
that the growth rate would continue, propelling Malaysia
growing by more than 7 percent, its highest in nearly two
to developed status by 2020, a government policy articudecades.
lated in Wawasan 2020. At the start of 1997, the KLSE
Composite index was above 1,200, the ringgit was trading above 2.50 to the dollar, and the overnight rate was
8 Hong Kong
below 7%.
Further information: Economy of Hong Kong

In July 1997, within days of the Thai baht devaluation,

the Malaysian ringgit was attacked by speculators. The
overnight rate jumped from under 8% to over 40%. This
led to rating downgrades and a general sell o on the stock
and currency markets. By end of 1997, ratings had fallen
many notches from investment grade to junk, the KLSE
had lost more than 50% from above 1,200 to under 600,
and the ringgit had lost 50% of its value, falling from
above 2.50 to under 4.57 on (23 January 1998) to the
dollar. The then prime minister, Mahathir Mohammad
imposed strict capital controls and introduced a 3.80 peg
against the U.S. dollar.

In October 1997, the Hong Kong dollar, which had been

pegged at 7.8 to the U.S. dollar since 1983, came under
speculative pressure because Hong Kongs ination rate
had been signicantly higher than the United States for
years. Monetary authorities spent more than $1 billion
to defend the local currency. Since Hong Kong had more
than $80 billion in foreign reserves, which is equivalent to
700% of its M1 money supply and 45% of its M3 money
supply, the Hong Kong Monetary Authority (eectively
the citys central bank) managed to maintain the peg.
Malaysian moves involved xing the local currency to the
Stock markets became more and more volatile; between U.S. dollar, stopping the overseas trade in ringgit cur20 and 23 October the Hang Seng Index dropped 23%. rency and other ringgit assets therefore making oshore
The Hong Kong Monetary Authority then promised to use of the ringgit invalid, restricting the amount of curprotect the currency. On 15 August 1998, it raised rency and investments that residents can take abroad, and
overnight interest rates from 8% to 23%, and at one point imposed for foreign portfolio funds, a minimum one-year
to 500%. The HKMA had recognized that speculators stay period which since has been converted to an exit
were taking advantage of the citys unique currency-board tax. The decision to make ringgit held abroad invalid has
system, in which overnight rates automatically increase in also dried up sources of ringgit held abroad that speculaproportion to large net sales of the local currency. The tors borrow from to manipulate the ringgit, for example
rate hike, however, increased downward pressure on the by "selling short". Those who do, have to purchase back
stock market, allowing speculators to prot by short sell- the limited ringgit at higher prices, making it unattracing shares. The HKMA started buying component shares tive to them.[35] In addition, it also fully suspended the
of the Hang Seng Index in mid-August.
trading of CLOB (Central Limit Order Book) counters,
The HKMA and Donald Tsang, then the Financial Sec- indenitely freezing approximately $4.47 billion worth
aecting 172,000 investors, most of them
retary, declared war on speculators. The Government of shares and [36][37][38]
Singaporeans.
ended up buying approximately HK$120 billion (US$15
billion) worth of shares in various companies,[34] and be- In 1998, the output of the real economy declined plungcame the largest shareholder of some of those companies ing the country into its rst recession for many years.
(e.g., the government owned 10% of HSBC) at the end The construction sector contracted 23.5%, manufactur-

7
ing shrunk 9% and the agriculture sector 5.9%. Over- 11 China
all, the countrys gross domestic product plunged 6.2% in
1998. During that year, the ringgit plunged below 4.7 and Further information: Economy of the Peoples Republic
the KLSE fell below 270 points. In September that year, of China
various defensive measures were announced to overcome
the crisis.
The Chinese currency, the renminbi (RMB), had been
The principal measure taken were to move the ringgit pegged to the U.S. dollar at a ratio of 8.3 RMB to the
from a free oat to a xed exchange rate regime. Bank dollar, in 1994. Having largely kept itself above the fray
Negara xed the ringgit at 3.8 to the dollar. Capital throughout 19971998 there was heavy speculation in the
controls were imposed while aid oered from the IMF Western press that China would soon be forced to devalue
was refused. Various task force agencies were formed. its currency to protect the competitiveness of its exports
The Corporate Debt Restructuring Committee dealt with vis-a-vis those of the ASEAN nations, whose exports becorporate loans. Danaharta discounted and bought bad came cheaper relative to Chinas. However, the RMBs
loans from banks to facilitate orderly asset realization. non-convertibility protected its value from currency specDanamodal recapitalized banks.
ulators, and the decision was made to maintain the peg
Growth then settled at a slower but more sustainable pace. of the currency, thereby improving the countrys standThe massive current account decit became a fairly sub- ing within Asia. The currency peg was partly scrapped in
stantial surplus. Banks were better capitalized and NPLs July 2005 rising 2.3% against the dollar, reecting preswere realised in an orderly way. Small banks were bought sure from the United States.
out by strong ones. A large number of PLCs were unable Unlike investments of many of the Southeast Asian nato regulate their nancial aairs and were delisted. Com- tions, almost all of Chinas foreign investment took the
pared to the 1997 current account, by 2005, Malaysia was form of factories on the ground rather than securities,
estimated to have a $14.06 billion surplus.[39] Asset val- which insulated the country from rapid capital ight.
ues however, have not returned to their pre-crisis highs. While China was unaected by the crisis compared to
In 2005 the last of the crisis measures were removed as Southeast Asia and South Korea, GDP growth slowed
the ringgit was taken o the xed exchange system. But sharply in 1998 and 1999, calling attention to structural
unlike the pre-crisis days, it did not appear to be a free problems within its economy. In particular, the Asian oat, but a managed oat, like the Singapore dollar.
nancial crisis convinced the Chinese government of the
need to resolve the issues of its enormous nancial weaknesses, such as having too many non-performing loans
within its banking system, and relying heavily on trade
with the United States.

10

Singapore
12 United States and Japan

Further information: Economy of Singapore

As the nancial crisis spread the economy of Singapore
dipped into a short recession. The short duration and
milder eect on its economy was credited to the active management by the government. For example, the
Monetary Authority of Singapore allowed for a gradual
20% depreciation of the Singapore dollar to cushion and
guide the economy to a soft landing. The timing of government programs such as the Interim Upgrading Program and other construction related projects were brought
forward.[40]

Further information: Economy of the United States and

Economy of Japan

The Asian u had also put pressure on the United States

and Japan. Their markets did not collapse, but they were
severely hit. On 27 October 1997, the Dow Jones industrial plunged 554 points or 7.2%, amid ongoing worries about the Asian economies. The New York Stock
Exchange briey suspended trading. The crisis led to a
drop in consumer and spending condence (see 27 October 1997 mini-crash). Indirect eects included the dotthe housing bubble and the
Instead of allowing the labor markets to work, the Na- com bubble, and years later
[41]
subprime
mortgage
crisis.
tional Wage Council pre-emptively agreed to Central
Provident Fund cuts to lower labor costs, with limited Japan was aected because its economy is prominent in
impact on disposable income and local demand. Unlike the region. Asian countries usually run a trade decit
in Hong Kong, no attempt was made to directly inter- with Japan because the latters economy was more than
vene in the capital markets and the Straits Times Index twice the size of the rest of Asia together; about 40% of
was allowed to drop 60%. In less than a year, the Sin- Japans exports go to Asia. The Japanese yen fell to 147
gaporean economy fully recovered and continued on its as mass selling began, but Japan was the worlds largest
growth trajectory.[40]
holder of currency reserves at the time, so it was eas-

13 CONSEQUENCES

ily defended, and quickly bounced back. The real GDP

growth rate slowed dramatically in 1997, from 5% to
1.6%, and even sank into recession in 1998 due to intense
competition from cheapened rivals. The Asian nancial
crisis also led to more bankruptcies in Japan. In addition, with South Koreas devalued currency, and Chinas
steady gains, many companies complained outright that
they could not compete.[41]
Another longer-term result was the changing relationship
between the United States and Japan, with the United
States no longer openly supporting the highly articial
trade environment and exchange rates that governed economic relations between the two countries for almost ve
decades after World War II.[42]

13
13.1

Consequences
Asia

The crisis had signicant macroeconomic-level eects,

including sharp reductions in values of currencies, stock
markets, and other asset prices of several Asian countries.[43] 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.[44] Many businesses
collapsed, and as a consequence, millions of people fell
below the poverty line in 19971998. Indonesia, South
Korea and Thailand were the countries most aected by
the crisis.
The above tabulation shows that despite the prompt raising of interest rates to 32% in the Philippines upon the
onset of crisis in mid-July 1997, and to 65% in Indonesia upon the intensication of crisis in 1998, their local
currencies depreciated just the same and did not perform
better than those of South Korea, Thailand, and Malaysia,
which countries had their high interest rates set at generally lower than 20% during the Asian crisis. This created
grave doubts on the credibility of IMF and the validity of
its high-interest-rate prescription to economic crisis.
The economic crisis also led to a political upheaval,
most notably culminating in the resignations of President Suharto in Indonesia and Prime Minister General
Chavalit Yongchaiyudh in Thailand. There was a general rise in anti-Western sentiment, with George Soros
and the IMF in particular singled out as targets of criticisms. Heavy U.S. investment in Thailand ended, replaced by mostly European investment, though Japanese
investment was sustained. Islamic and other separatist
movements intensied in Southeast Asia as central authorities weakened.[46]
New regulations weakened the inuence of the bamboo
network, a network of overseas Chinese family-owned
businesses that dominate the private sector of Southeast
Asia. After the crisis, business relationships were more

frequently based on contracts, rather than the trust and

family ties of the traditional bamboo network.[47]
More long-term consequences included reversal of the
relative gains made in the boom years just preceding the
crisis. Nominal U.S. dollar GDP per capital fell 42.3% in
Indonesia in 1997, 21.2% in Thailand, 19% in Malaysia,
18.5% in South Korea and 12.5% in the Philippines.[44]
The CIA World Factbook reported that the per capita income (measured by purchasing power parity) in Thailand
declined from $8,800 to $8,300 between 1997 and 2005;
in Indonesia it increased from $2,628 to $3,185;[48] in
Malaysia it declined from $11,100 to $10,400. Over the
same period, world per capita income rose from $6,500
to $9,300.[49] Indeed, the CIA's analysis asserted that the
economy of Indonesia was still smaller in 2005 than it had
been in 1997, suggesting an impact on that country similar to that of the Great Depression. Within East Asia,
the bulk of investment and a signicant amount of economic weight shifted from Japan and ASEAN to China
and India.[50]
The crisis has been intensively analyzed by economists
for its breadth, speed, and dynamism; it aected dozens
of countries, had a direct impact on the livelihood of millions, happened within the course of a mere few months,
and at each stage of the crisis leading economists, in
particular the international institutions, seemed a step
behind. Perhaps more interesting to economists was
the speed with which it ended, leaving most of the developed economies unharmed. These curiosities have
prompted an explosion of literature about nancial economics and a litany of explanations why the crisis occurred. A number of critiques have been leveled against
the conduct of the IMF in the crisis, including one by former World Bank economist Joseph Stiglitz. Politically
there were some benets. In several countries, particularly South Korea and Indonesia, there was renewed push
for improved corporate governance. Rampaging ination
weakened the authority of the Suharto regime and led to
its toppling in 1998, as well as accelerating East Timor's
independence.[51]

13.2 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 nancial pinch in OPEC nations and other oil exporters. In
response to a severe fall in oil prices, the supermajors
that emerged in the late-1990s, undertook some major
mergers and acquisitions between 1998 and 2002 often
in an eort to improve economies of scale, hedge against
oil price volatility, and reduce large cash reserves through
reinvestment.[52]

9
The reduction in oil revenue also contributed to the 1998
Russian nancial 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 nancial 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 in the late 1990s (see
Argentine debt crisis).[53]
The crisis in general was part of a global backlash against
the Washington Consensus and institutions such as the
IMF and World Bank, which simultaneously became unpopular in developed countries following the rise of the
anti-globalization movement in 1999. Four major rounds
of world trade talks since the crisis, in Seattle, Doha,
Cancn, and Hong Kong, have failed to produce a signicant agreement as developing countries have become
more assertive, and nations are increasingly turning toward regional or bilateral free trade agreements (FTAs)
as an alternative to global institutions.
Many nations learned from this, and quickly built up
foreign exchange reserves as a hedge against attacks, including Japan, China, South Korea. Pan Asian currency
swaps were introduced in the event of another crisis.
However, interestingly enough, such nations as Brazil,
Russia, and India as well as most of East Asia began
copying the Japanese model of weakening their currencies, restructuring their economies so as to create a
current account surplus to build large foreign currency
reserves. This has led to an ever-increasing funding for
U.S. treasury bonds, allowing or aiding housing (in 2001
2005) and stock asset bubbles (in 19962000) to develop
in the United States.

14

See also

1998 Russian nancial crisis, partly connected to the

1997 Asian nancial crisis
Bamboo network
General:
Financial contagion
Liquidity crisis
Stock disasters in Hong Kong

15

References

Books
Delhaise Philippe F. (1998) Asia in Crisis : The Implosion of the Banking and Finance Systems. John
Wiley & Sons. ISBN 0-471-83193-X

Kaufman, GG., Krueger, TH., Hunter, WC. (1999)

The Asian Financial Crisis: Origins, Implications
and Solutions. Springer. ISBN 0-7923-8472-5
Pettis, Michael (2001). The Volatility Machine:
Emerging Economies and the Threat of Financial
Collapse. Oxford University Press. ISBN 0-19514330-2.
Blustein, Paul (2001). The Chastening: Inside the
Crisis that Rocked the Global Financial System and
Humbled the IMF. PublicAairs. ISBN 1-89162081-9.
Fengbo Zhang: Opinion on Financial Crisis, 6. Defeating the World Financial Storm China Youth
Publishing House (2000)
Noland, Markus, Li-gang Liu, Sherman Robinson,
and Zhi Wang. (1998) Global Economic Eects of
the Asian Currency Devaluations. Policy Analyses in
International Economics, no. 56. Washington, DC:
Institute for International Economics.
Pempel, T. J. (1999) The Politics of the Asian Economic Crisis. Ithaca, NY: Cornell University Press.
Ries, Philippe. (2000) The Asian Storm: Asias Economic Crisis Examined.
Tecson, Marcelo L. (2005) Puzzlers: Economic Sting
(The Case Against IMF, Central Banks, and IMFPrescribed High Interest Rates) Makati City, Philippines: Raiders of the Lost Gold Publication
Muchhala, Bhumika, ed. (2007) Ten Years After: Revisiting the Asian Financial Crisis. Washington, DC: Woodrow Wilson International Center for
Scholars Asia Program.
Ito, Takatoshi and Andrew K. Rose (2006).
nancial sector development in the Pacic Rim. University of Chicago Press. ISBN 978-0-226-386843.
Papers
Ngian Kee Jin (March 2000). Coping with the Asian
Financial Crisis: The Singapore Experience. Institute
of Southeast Asian Studies. ISSN 0219-3582
Tiwari, Rajnish (2003). Post-crisis Exchange Rate
Regimes in Southeast Asia, Seminar Paper, University of Hamburg.
Kilgour, Andrea (1999). The changing economic situation in Vietnam: A product of the Asian crisis?
S. Radelet, J.D. Sachs, R.N. Cooper, B.P. Bosworth
(1998). The East Asian Financial Crisis: Diagnosis, Remedies, Prospects. Brookings Papers on Economic Activity.

10
Stiglitz, Joseph (1996). Some Lessons From The East
Asian Miracle. The World Bank Research Observer.

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[17] Financial Crisis and Global Governance: A Network

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[20] Financial Crisis and Global Governance: A Network
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June 2012. by Taylan Yenilmez, Tinbergen Institute and
Burak Saltoglu, Bogazici University
[22] Joint Comminuque The 30th ASEAN Ministerial Meeting (AMM) The Thirtieth ASEAN Ministerial Meeting
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[23] Halloran, Richard. Chinas Decisive Role in the Asian Financial Crisis. Global Beat Issue Brief No. 24. 27 January 1998.
[24] Woo-Cumings, Meredith (July 2003), South Korean
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[25] Noland: pp. 98103

[8] Blustein: p. 73

[26] 'Fast-track' capitalism by Walden Bello.

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[12] FIRE-SALE FDI by Paul Krugman.

[30] Liebhold, David. Thailands Scapegoat? Battling extradition over charges of embezzlement, a nancier says hes
the fall guy for the 1997 nancial crash. Time.com. 27
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11

[31] Raghavan, Anita (26 December 1997). Japan Stocks

Slide Again on Fears About Stability. Wall Street Journal. Retrieved 2 September 2009.
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= 2930; 31 October = 3640; 31 December = 5535. Accessed 2009-08-20. Archived 2009-09-04.
[33] http://www.oanda.com/convert/fxhistory 31 January =
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Archived 2009-09-04.
[34] Bayani Cruz, We will hold on to blue-chip shares: Tsang,
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[35] Capital controls in Malaysia*, by Martin Khor
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[37] INTERNATIONAL BUSINESS; Malaysia Extends
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[38] Malaysias stockmarket; Daylight Robbery.
The
Economist. 10 July 1999. Retrieved 10 December 2012.
[39] The CIA World Factbook Malaysia
[40] Ngian Kee Jin: p. 12
[41] Pettis: pp. 5560
[42] Pettis: p. 79
[43] Tiwari: pp. 13
[44] http://www.adb.org/sites/default/files/KI/2001/rt11_
ki2001.xls
[45] Cheetham, R. 1998. Asia Crisis. Paper presented at conference, U.S.-ASEAN-Japan policy Dialogue. School of
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[46] Radelet: pp. 56
[47] Min Chen (2004). Asian Management Systems: Chinese,
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[49] The Asian nancial crisis ten years later: assessing the past
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[50] Kilgour, Andrea (1999). The changing economic situation in Vietnam: A product of the Asian crisis?
[51] Weisbrot: p. 6
[52] Slick Deal?". NewsHour with Jim Lehrer. 1 December
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[53] The Crash transcript. PBS Frontline.

16 External links
Impact on Indonesia from the Dean Peter Krogh
Foreign Aairs Digital Archives
Congressional Research Service report for US
Congress
Asias Financial Sector: 12 Things to Know Asian
Development Bank

12

17

17
17.1

TEXT AND IMAGE SOURCES, CONTRIBUTORS, AND LICENSES

Text and image sources, contributors, and licenses

Text

1997 Asian nancial crisis Source: http://en.wikipedia.org/wiki/1997%20Asian%20financial%20crisis?oldid=635835503 Contributors:

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