Topic:-

South-East Asian Crisis

THE ECONOMIC CRISIS OF 1997-99

Presented To:-Dr V. B . Angadi

Presented By:-

Names• Niraj Agrawal• Pranav Bhatia• Prerna Dandona• Sumit Marwa• Baldeep Kaur• Rahul Mehra

Roll No011322555758

Unfolding of the Crisis

• 1. Fixed exchange rate system pegged to the USD. When the Dollar rose, consequently the ASEAN currencies grew too, resulting in lower exports.

• 2. Decline in Export competitiveness particularly in Electrical goods.

Ctnd……

• 3. The decrease in exports resulted in increased Trade and Current Account deficit.

• 4. 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.

Ctnd…..

• 5. 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.

• 6. The contagion then spread to Philippines, Malaysia and Indonesia.

Analysis

ANALYSIS• Causes of the crisis in 1997

There are 2 main theses as to the causes of the crisis.• 1. Weakness of Macro-Economic

fundamentals• 2. Overvalued Exchange Rate &

Openness of Capital Account

Weakness of Macro-Economic fundamentals

• The basic weaknesses in the Macro-Economic fundamentals itself led to Low productivity and competitiveness vis-à-vis other regions of the world.

• Inadequate supervision of Financial institutions and lack of adequate disclosure by the corporate world further worsened the situation.

Ctnd…• Weak governments lacked the political

autonomy or will to enact the deflationary policies necessary to reduce current account deficits and domestic asset bubbles.

• They also contributed to the cronyism and ethical problem that encouraged over borrowing, over lending, and over investment in the private corporate sector as well as in state projects.

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.

• This resulted in heavy dependence on short-term external debt and the depletion of foreign exchange reserves.

Ctnd……

• The Opening up of Capital Account led to local financial institutions over borrowing more from foreign sources.

• All this made a currency devaluation inevitable and attracting speculators eager to benefit from it.

• The overall quality of investments declined with reduction investor confidence which was a result of bad news that the export market had slowed down.

Impact of the crisis• 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.

Ctnd….

• To make matters worse, the financial crisis coincided with the worst drought conditions in the ASEAN region.

• Since ASEAN is the fourth largest trading block in the world, the spillover effect was on world trade.

DEBATE ON CAUSES OF THE CRISIS

The great debate on causes is whether the blame should be allocated to domestic policies and practices or to the intrinsic and volatile nature of the global financial system. 

In the first phase of the crisis, as it spread from Thailand to Malaysia, Indonesia, the Philippines, then to South Korea, the international establishment and the G7 countries placed the blame squarely on domestic ills in the East Asian countries.  

This view put the blame on the developments of the global financial system, with the combination of the following features: 

• Financial deregulation and liberalization across the world (as the legal basis);

• The increasing interconnection of markets and speed of transactions through computer technology (as the technological basis); and

• The development of large institutional financial players (such as the speculative hedge funds, the investment banks, and the huge mutual and pension funds).

Ctnd…..

Financial liberalization • Firstly, the countries concerned carried out a process of

financial liberalization, where foreign exchange was made convertible with local currency not only for trade and direct-investment purposes but also for autonomous capital inflows and outflows (i.e. for "capital account" transactions); and where inflows and outflows of funds were largely deregulated and permitted.  

• This facilitated the large inflows of funds in the form of international bank loans to local banks and companies, purchase of bonds, and portfolio investment in the local stock markets.

Currency depreciation and debt crisis

• The full extent of the three countries' external debt was only revealed after the crisis had broken out. It was later found that .The debt levels had climbed rapidly to dizzying heights: about US$150 billion for South Korea and Indonesia, and about US$100 billion for Thailand. 

• Most of the debt (especially for Korea and Thailand) was contracted by the private sector. In particular, the build-up of short-term debts was becoming alarming.

• What transformed this debt build-up into a major crisis for Thailand, Indonesia and South Korea was the sharp and sudden depreciation of their currencies, coupled with the reduction of their foreign reserves in anti-speculation attempts.  

Proposed Solutions• Stabilizing the Exchange Rate and

Debt Management• Dealing with the Social impact• Strengthening the Financial sector• Adjustment of Industrial Structures• International Financial markets• Revitalizing the Financial Markets

Steps to Handle the Crisis

1. The progressive openness of ASEAN economies

2. Sound Financial measures

3. The growing integration of the ASEAN economy

4. The expansion and diversification of ASEAN

The progressive openness of ASEAN economies

1. ASEAN economies are on the steady path of liberalization, privatization and deregulation.

2. ASEAN is moving toward new forms of linkage with other countries and regions.

3. The process of expanding co-operation between ASEAN and China, Japan and the Republic of Korea - the process known as ASEAN+3 - is rapidly gaining momentum.

Sound Financial measures

1. ASEAN plans to adopt sound financial practices and standards by 2003. Capital markets will be deepened, particularly the bond market, to provide a wide variety of instruments with longer maturity and ample liquidity.

2. Common currency is being given serious consideration.

3. Capital account liberalization shall be properly sequenced to allow freer flow of capitals.

The expansion and diversification of ASEAN

• Expansion of ASEAN will give investors more choices in deciding where to locate their operations for the increasingly integrated ASEAN market or for production for export elsewhere in the world.

• ASEAN is making a special effort to upgrade the skills of the people of the newer members and build their institutional capacity.

The growing integration of the ASEAN economy

Under the ASEAN commitment to AFTA (ASEAN Free Trade Area) more than 85 per cent of tariff lines in the AFTA scheme already in the minimal-tariff zone and there is a proposal to abolish all import duties on trade by 2010.

ASEAN countries are streamlining and harmonizing customs procedures. They are entering into mutual recognition arrangements.