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    A Case On South East Asian Economic Crisis of 1997: Vaishali Rihen Batra (B. A. (H) Economics)

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    Vaishali Uzziel
    The document provides an overview of the 1997 Asian Financial Crisis that affected several Southeast Asian countries. It begins by describing how the crisis started in Thailand due to factors like floating the Thai baht currency, real estate overextension, excessive foreign exposure, and the collapse of the Thai currency. The crisis then spread to other countries in the region like Indonesia, South Korea, Hong Kong, Malaysia, and the Philippines. The IMF provided $40 billion to stabilize currencies. The document then examines the economic conditions and policies that contributed to the crisis across multiple countries in the region.

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    A Case On South East Asian Economic Crisis of 1997: Vaishali Rihen Batra (B. A. (H) Economics)

    Uploaded by

    Vaishali Uzziel
    44 views20 pages
    The document provides an overview of the 1997 Asian Financial Crisis that affected several Southeast Asian countries. It begins by describing how the crisis started in Thailand due to factors like floating the Thai baht currency, real estate overextension, excessive foreign exposure, and the collapse of the Thai currency. The crisis then spread to other countries in the region like Indonesia, South Korea, Hong Kong, Malaysia, and the Philippines. The IMF provided $40 billion to stabilize currencies. The document then examines the economic conditions and policies that contributed to the crisis across multiple countries in the region.

    Original Description:

    Asian Crisis of 1997

    Original Title

    Asian Crisis

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    The document provides an overview of the 1997 Asian Financial Crisis that affected several Southeast Asian countries. It begins by describing how the crisis started in Thailand due to factors like floating the Thai baht currency, real estate overextension, excessive foreign exposure, and the collapse of the Thai currency. The crisis then spread to other countries in the region like Indonesia, South Korea, Hong Kong, Malaysia, and the Philippines. The IMF provided $40 billion to stabilize currencies. The document then examines the economic conditions and policies that contributed to the crisis across multiple countries in the region.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    44 views20 pages

    A Case On South East Asian Economic Crisis of 1997: Vaishali Rihen Batra (B. A. (H) Economics)

    Uploaded by

    Vaishali Uzziel
    The document provides an overview of the 1997 Asian Financial Crisis that affected several Southeast Asian countries. It begins by describing how the crisis started in Thailand due to factors like floating the Thai baht currency, real estate overextension, excessive foreign exposure, and the collapse of the Thai currency. The crisis then spread to other countries in the region like Indonesia, South Korea, Hong Kong, Malaysia, and the Philippines. The IMF provided $40 billion to stabilize currencies. The document then examines the economic conditions and policies that contributed to the crisis across multiple countries in the region.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 20

    A CASE ON

    SOUTH EAST ASIAN


    ECONOMIC CRISIS OF 1997
    VAISHALI
    RIHEN BATRA
    [B. A. (H) ECONOMICS]

    INTRODUCTION

    The Asian Financial Crisis was a period of financial crisis that


    gripped much of Asia beginning in July 1997, and raised fears
    of a worldwide economic meltdown due to financial contagion.

    Started in Thailand

    Floating the pegged currency


    Real estate driven financial over extension
    Excessive foreign exposure
    Resulting collapse of the Thai Baht

    Also affected Indonesia, South Korea, Hong Kong, Malaysia,


    Philippines.

    IMF $40 billion to stabilize their currencies

    THE ASIAN MIRACLE

    1960s 1990s: Thailand, South Korea, Hong Kong,


    Singapore, Taiwan, Indonesia
    Maintained very high growth rates (8-12%)

    Primarily due to:


    Maintained High Interest rates to attract foreign investments
    Rapid industrialization
    Industrial Policies supporting exports
    Below market interest rates for exporting industries, etc

    PHASES
    Initiated by two rounds of currency depreciation in 1997

    1.
    2.
    3.
    4.

    .
    1.
    2.
    3.
    4.
    5.

    First round was a precipitous drop in value


    Thai baht
    Malaysian ringgit
    Philippine peso
    Indonesian rupiah
    Second round began with downward pressures hitting
    Taiwan dollar
    South Korean Won
    Brazilian real
    Singaporean dollar
    Hong Kong dollar

    PRE CRISIS SCENARIO

    Foreign Capital Inflows:


    o US was in recession => Low interest rates
    o Asian Tigers - 50% of capital inflows in Asia
    o Dramatic run-up in Asset prices

    Pegged Currencies
    Encouraged external borrowing

    High exports driving rapid economic growth


    Export to GDP ratio grew from 35% to 55%

    Excessive exposure to forex movements

    THE BUBBLE

    Thailands economy bubble fuelled by Hot money

    Debt-GDP Ratios went upto 180%

    More and more was required as the bubble grew

    Development money went in a largely uncontrolled manner to


    certain people only, not particularly the best suited or most efficient, but
    those closest to the centers of power.

    Real estate speculation

    Countries became excessively dependent upon exports for their


    economy

    Very high leverage & exposure to forex risk

    THE TIPPING POINT

    U.S. economyrecovered from a recession in the early


    1990s,

    Began to raise U.S. interest rates to head off inflation.


    This made the U.S. a more attractive investment destination
    relative to Southeast Asia, which had been attracting hot
    money flows through high short-term interest rates,
    and raised the value of the U.S. dollar.
    For Asian currencies pegged to the U.S. dollar, the higher
    U.S. dollar caused their own exports to become more
    expensive and less competitive in the global markets.
    At the same time, Southeast Asia's export growth slowed
    dramatically in the spring of 1996, deteriorating their
    current account position.

    THE DOWN TURN

    Asset prices began to collapse


    Causing individuals & companies to default
    Panic among lenders led to withdrawal of funds
    Credit crunch & bankruptcies

    Depreciative pressures on exchange rates

    Government action:
    Raised interest rates tremendously to prevent capital flight
    Buying up excess domestic currency at fixed rate to maintain the peg

    Not sustainable in the long run (due to limited supply of forex reserves)

    Capital fleeing could not be stopped

    Central bank allowed currencies to float


    Drastic Depreciation
    Further increasing the debt obligations and worsening the crisis

    WAS THERE A CRISIS ?

    Over $100billion was pulled out of the region in 199798 which was 5 percent of the GDP

    Unemployment rose to 0.8milliom in Indonesia, 1.5


    million in Thailand , 1.35million in Korea

    Real wages dropped by 12.5% in Korea and 6% in


    Thailand

    THAILAND

    Prominent economy of South-east Asia.

    During 1985-96 was growing at highest rate of 9%.

    Real Estate sector was booming.

    High interest rate attracted investments from US and west.

    Export growth was very high.

    REASON FOR FAILURE

    Thailand Baht was pegged at 25 to US $.


    At the same time US had increased interest rate to curb
    inflation this made US investors to take their money from
    Thailand and invest in US.
    This trigger the outflow of $,resulted in devaluation of baht
    and it reached its lowest point of 56 units per $.
    This made foreign loan costlier by three times.
    It resulted in collapsed of various company and biggest
    financial corporation Finance One.
    There was fear among foreign investors about their money
    so they started pulling money from this markets.
    This deepens crisis, due to this many people lost their jobs.
    Political instability.

    INDONESIA

    Drastic devaluation of rupiah from 2000 to 18000 for 1US dollar

    Excessive inflation

    Riots

    16 major commercial banks were closed

    Governor, Bank Indonesia was sacked

    President Suharto was forced to step down in may after 30 years in


    power

    This conditions improved when IMF provided bailout package.

    SOUTH KOREA

    Won: from 1000 to 1700 for 1 US dollar

    Credit rating of the country (moody's) : A1 to B2

    National debt-to-GDP ratio more than doubled

    Major setback in automobile industry (Daewoo motors sold


    to General motors)

    PHILIPPINES

    Growth dropped to virtually zero in 1998

    Peso fell significantly , from 26/US$ to even 55/ US$

    President Joseph Estrada was forced to resign

    Stock market fell to 1000 points from 3000

    Raised interest rates by 3.75%

    Overnight rates jumped from 15% to 32%

    Huge outflow of money

    MALAYSIA

    Attacked by Speculators

    Overnight rates jumped from 8% to 40%

    Stock markets fell by 50% from 1200 to 600

    All sectors were hurt, construction sector contracted 23.5%,


    manufacturing shrunk 9% and the agriculture sector 5.9%

    3.80 peg against dollar

    First ever recession

    IMF INTERVENTION

    The IMF treated the Asian financial crisis like other


    situations where countries could not meet their balance of
    payment obligations. The Fund made loan arrangements to
    enable countries to meet foreign debt payments (largely to
    private banks in these cases) on the condition that the
    recipient countries adopt structural adjustment policies.
    The policies being:
    Reduce Spending
    Privatization
    Heavy Taxation

    IMPACT OF IMF
    INTERVENTION

    In South Korea, a country whose income approaches European levels,


    unemployment skyrocketed from approximately 3 percent to 10
    percent. "IMF suicides" became common among workers who lost
    their jobs and dignity.

    In Indonesia, the worst hit country, poverty rates rose from an official
    level of 11 percent before the crisis to 40 to 60 percent in varying
    estimates. GDP declined by 15 percent in one year.

    In September 1998, UNICEF reported that more than half the children
    under two years old in Java, Indonesia's most populous island, were
    suffering from malnutrition.

    At one point, the food shortage became so severe that then-President


    B.J. Habibie implored citizens to fast twice a week. Many had no
    choice.

    OVERCOMING THE CRISIS

    High saving and investment rate


    Strong emphasis on education
    Stable macroeconomic environment
    Free from high inflation or major economic slumps
    High share of trade in GDP

    LEARNINGS

    Over dependence on foreign capital, especially short-term


    foreign capital, makes an economy and its exchange rate
    vulnerable
    Foreign direct investment is better than foreign portfolio
    investment or loans because it is less mobile
    Long-term loans is better than short-term loans because
    they are not subject to immediate withdrawal
    Currency and maturity mismatch by domestic borrowers
    aggravates the problem
    Short-term foreign-currency denominated loans should be
    carefully monitored and controlled in order to avoid the
    compounding of currency mismatch by maturity mismatch
    Short-term foreign funds are inherently different from shortterm domestic funds because the former is much more
    likely to leave at
    the first sign of real or imagined trouble

    PRESENT SCENARIO
    As was the case in 1997/98, markets are in a
    certain state of disarray. Today we have
    concerns over the extent of the Chinese
    slowdown, the reversion in the Euro area
    towards stagnation along with rising
    deflationary risks, and the drive (aided and
    abetted by the Organization of the Petroleum
    Exporting Countries) for substantially lower
    petrol prices.

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