South east asian financial crises 1997
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Transcript of South east asian financial crises 1997
South East Asian Financial Crises 1997
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(financial shock).
Introduction
The crisis started in Thailand with the
financial collapse of the Thai baht caused by
the decision of the Thai government to
float the baht, cutting its peg to the USD,
after exhaustive efforts to support it in the
face of a severe financial overextension that
was in part real estate driven.
At the time, Thailand had acquired a burden of foreign debt that made the country effectively bankrupt even before the collapse of its currency. As the crisis spread, most of Southeast Asia and Japan saw slumping currencies, devalued stock markets and other asset prices, and a precipitous rise in private debt
The debt crisis in East Asia stemmed from inappropriate borrowing by the private sector. Due to high rates of economic growth and a booming economy, private firms and corporations looked to finance speculative investment projects. However, firms overstretched themselves and a combination of factors caused a depreciation in the exchange rate as they struggled to meet the payments
Countries Affected in the Contagion Thailand, July, 1997 Indonesia, June to August, 1997 Korea, July, 1997 Japan had already been through its own
crisis earlier and was in an economic depression
Russia and Mexico followed a little later with crises of their own.
Fixed exchange rate system pegged to the USD. When the Dollar rose,consequently the ASEAN currencies grew too, resulting in lower exports
Decline in Export competitiveness particularly in Electrical goods.
The decrease in exports resulted in increased Trade and Current Account deficit.
Unfolding of the Crisis
The crisis first emerged in Thailand when as a crisis of loan repayment. This led to fears of loan defaults and foreign short-term creditors withdrew funds from Thai financial institutions.
The withdrawal of ST credit led to pressure on forex reserves and the value of Baht. The Bank of Thailand in its attempt to save the Baht lost all its Reserves and had to request assistance from the IMF.
The contagion then spread to Philippines, Malaysia and Indonesia.
Weakness of Macro-Economic fundamentals
Low productivity and competitiveness Inadequate supervision of Financial
institutions worsened the situation.
Weak governments lacked the political autonomy.
Causes of the crisis in 1997
Overvalued Exchange Rate & Openness of Capital Account
Overvalued exchange rates tied to an appreciating U.S. dollar led to large current account deficits and inadequate or declining long-term capital inflows resulted in heavy dependence on short-term external debt and the depletion of foreign exchange reserves
The crisis led to weaker, unstable exchange rates and weakened Financial Institutions. To tackle this, the Government imposed higher domestic Interest rates, which led to a slowdown in manufacturing and industrial activity. This brought about huge unemployment and an undesirable social impact – on food, healthcare and education.
Impact of the crisis
12
From 1985 to 1996, growth rate averaging almost 9% annually - increased pressure on Thailand's currency, the baht
From 1985 until July 1997, Baht was pegged at 25 US$
Before it started…
13
Mid-May ‘97: Thai Baht was hit by massive speculative attack
Spark: End-June ‘97, Thai Prime Minister declared that he would not devaluate the Baht
Thai Government failed to defend the Baht against International speculators
Financial Crisis hits….
What happened in Thailand…
14
Booming Thai Economy ground to a halt, contracted by 1.9%
Massive lay-offs in Finance, Real Estate & Construction: unemployment rate all-time high
Huge numbers of workers returning to their villages in the countryside and 600,000 foreign workers sent back
Stock market dropped 75%,
“Finance One” collapsed
Baht reached 56 US$ in Jan ‘98
What happened in Thailand…
15
Drastic devaluation of the rupiah: from 2,000 to 18,000 for 1 US$
Sharp price increase
Wake of widespread rioting: 500 deaths in Jakarta alone
Governor, Bank Indonesia was sacked
President Suharto was forced to step down in May 1998 after 30 years in power
What happened in Indonesia…
16
Drastic devaluation of the won: from 1,000 to 1,700 for 1 US$
Credit rating of the country (Moody’s): A1 to B2
National Debt-to-GDP ratio more than doubled
Major setback in Automobile industry
What happened in S.Korea…
17
Growth dropped to virtually zero in 1998
Peso fell significantly, from 26/US$ to even 55/US$
President Joseph Estrada was forced to resign
What happened in Philippines..
18
40% of Japan’s export go to Asia, so it was affected even if the economy was strong
Japanese Yen fall to 147 as mass selling began
GDP real growth rate slowed from 5% to 1.6%
Some companies went Bankrupt
Being world’s largest currency holder, Japan could bounce back quickly
What happened in Japan…
19
Markets did not collapse, but were severely hit
NYSE briefly suspended trading, for the first time
Dow Jones Industrial Average suffered as 3rd biggest point losses ever
Relationship with Japan changed forever: US stopped supporting the highly artificial Trade environment and Exchange Rate
What happened in US...
Mistakes of Asian Lenders
The countries involved usually had some international indebtedness, and Asian banks and borrowers used short-term credits to finance long-term loans.
Asian borrowers (banks and firms) borrowed in foreign currencies and loaned in local currency. No hedging to counter foreign exchange risk.
Mistakes of Asian Lenders
Asian bankers often did not ask to see consolidated balance sheets. They didn’t monitor the total assets and liabilities of the borrowers.
The IMF paid the bills for such banks, finance ministries and countries. Moral hazard problems! Investors should pay for bad decisions.
1. Stabilizing the Exchange Rate and Debt Management- The idea here is to stabilize the exchange rate. The firms should not be allowed to take any further debt which would imply Debt Standstill.
2. Dealing with the Social impact- deal with the Social Impact the availability of food and healthcare at affordable prices.
Proposed Solutions
3. Strengthening the Financial sector 4. Adjustment of Industrial Structures 5. International Financial markets-
surveillance system to monitor flow of capital.
6. Revitalizing the Financial Markets