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The Asian Miracle
$94.1 billion dollars flowed into East Asiabetween 1991 and 1997
Growth was fueled by export promotion,industrial policy, lowered trade barriers, andthe rapid accumulation of physical and human
capital
By 1992, income per capita averaged $11,100
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The causes of crisisA shortage of foreign exchange that has causedthe value of currency and quities
in Thailand, Indonesia, South Korea and other
Asian countries to fall dramatically.
-A weakness in banking, financial sector: short-
term loans for long term projects,
shift of loans from government and banks to
private sector, bad debt structure.
-Pegged exchange rate.
-Imbalances: imbalancing in current account
and trade account
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Countries involved..
Thailand Philippines
Hong Kong
Taiwan
Singapore
South Korea
Malaysia
Indonesia
China
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Growth in real GDP (%) in crisis-
affected countries
*Source: Asian Development Bank
Countries 1996 1997 1998
Thailand 5.5 -0.4 -8.0
Indonesia 7.8 4.9 -13.7
Malaysia 8.6 7.7 -6.2
SouthKorea
7.1 5.5 -5.5
Philippines 5.8 5.2 -0.4
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Booming Thai Economy ground to a halt, contracted by1.9%
Massive lay-offs in Finance, Real Estate & Construction:
unemployment rate all-time high
Huge numbers of workers returning to their villages in thecountryside and 600,000 foreign workers sent back
Stock market dropped
75%,Finance One collapsed
Baht reached 56 US$ inJan 98
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Drastic devaluation of the rupiah: from 2,000 to18,000 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 May1998 after 30 years in power
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Drastic devaluation of the won: from 1,000 to 1,700for 1 US$
Credit rating of the country (Moodys): A1 to B2
National Debt-to-GDP ratio more than doubled
Major setback in Automobile industry
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Growth dropped to virtually zero in 1998
Peso fell significantly, from 26/US$ toeven 55/US$
President Joseph Estrada was forced toresign
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The Hong Kong dollar comes under speculative attack.
Hong Kong overnight interest rates rise to 280%
The Hang Seng index fall 23% in three days.
The crisis worsens when Korea's sovereign credit
rating is downgraded
The largest investment bank in Hong Kong, PeregrineSecurities, goes bankrupt
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The Malaysian ringgit was "attacked" by speculators
The overnight rate jumped from under 8% to over 40%.
The ringgit had lost 50% of its value, falling from above2.50 to under 4.10 to the dollar
The construction sector contracted 23.5%, manufacturingshrunk 9% and the agriculture sector 5.9%
Overall, the country's gross domestic product plunged 6.2%in 1998
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40% of Japans export go to Asia, so it wasaffected 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 worlds largest currency holder, Japancould bounce back quickly
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Markets did not collapse, but were severely hit
NYSE briefly suspended trading, for the firsttime
Dow Jones Industrial Average suffered as 3rdbiggest point losses ever
Relationship with Japan changed forever:US stopped supporting the highly artificialTrade environment and Exchange Rate
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Artificially high Interest rate to attract investors
Large quantities of available credit
Highly-Leveraged economic climate
Asset prices pushed up to unsustainable level, andeventually collapsed
Default on Debt obligation
Panic among Lenders
Large withdrawal of credit
Credit crunch and further bankruptcies
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Speculative attacks
Deficits in balance of payments
Inefficient financial systems
Lack of capital controls
Exchange Rate regimes
External debt
Depreciative pressure on credit rates
Potential Collapse of the market
Government enters..
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In Indonesia and Thailand, the currentaccount deficit was above 5% of GDP.
ASEAN countries and Korea had a combined
deficit of $33 billion from 1995-1996 thatjumped to $87 billion in 1998-1999.
Mostly driven by overvalued currency and
over lending to moral hazard borrowers.
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Financial institutions were not especiallyconcerned with over lending due to explicit andimplicit government guarantees
Mismatch of the maturities of financialinstitutions' assets and liabilities
Deterioration in the quality of banks' portfolios
Lack of ability to assess credit risk
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The majority of the East Asian economiesengaged in capital market liberalization.
Hot money flowed out of the countries
quickly when negative speculation of occurredleaving financial institutions liquiditystrapped.
Portfolio equity investment went from $12.4
billion in 1996 to an outflow of $4.3 billion in1997 in Korea, Indonesia, Malaysia,Philippines and Thailand.
Capital inflows of $73 billion turned into
outflows of $30 billion in 1997.
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Exchange Rate Regimes
Pre-Crisis: Hong Kong, Indonesia, Korea,Malaysia, Philippines, Singapore, Taiwan andThailand pegged their currencies to the USdollar.
Depreciation of the local currencies on theforeign-exchange market means anincreased burden of external debt.
Pegged exchange rates forced Asian banksto keep interest rates comparable to USrates and compete with US trade.
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External Debt
Thailand: Foreign lending expanded from$20 billion to $98 billion between 1990 and1996.
Nearly 86% went to Thai institutions
70% of loans were short term
Corporations borrowed in dollars and loans
became two or three times more expensive.
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International Monetary Fund
Provided huge amounts of money Bailout packages amounted to $95 billion
Bailout money used to repay loans of Westernbankers
IMF imposed: High interest rates, decrease in government
spending, increase in taxes, devaluation ofcurrency
Political and economic changes Major restructuring Increased transparency Other minor reforms
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Policies Policies implemented by domestic governments
varied across economies
Taiwan and Singapore basically escaped the crisis
South Korea recovered fastest
Malaysia and China did not accept IMF policies
Prime Minister Mahathir kept interest rates low
Recession shorter than other countries Who adopted IMF policies?
Thailand, Korea, Philippines & Indonesia
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GDP & Unemployment Rates
GDP Dropped significantly and led to: High rates of unemployment, under utilization of
capital, severe economic hardship
In 1998 GDP fell by 13.1% in Indonesia, 6.7% inKorea, and 10.8% in Thailand
Unemployment Rates Malaysias unemployment rose to 405,000
Hong Kongs unemployment rose to 152,000
Thailands unemployment rose to 1.1 million Indonesias unemployment rose to 13.7 million
In South Korea, urban poverty tripled
In Indonesia, poverty doubled
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Devaluation Thai authorities decided to float the
Baht in July 1997
Crisis spread across the region
Thailand, Korea, and Indonesia
devalued their currency Exchange rate movements had
consequences
East Asian financial institutions
were bankrupt Foreign lenders were uncertain of
repayment
Insolvency spread across theeconomies
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The rapidly increasing globalization without fullyappreciate the new challenges and risk was theroot cause the Asian crisis.
Globalization, if properly managed, may helppush some developing countries into modernityand affluence. The Asian crisis has shown howimportant it is to have effective state institutions.
Developing countries must have to develop theirown defense mechanism by establishing a systemof capital controls and exchange rate regime.
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The crisis has raised the awareness of thesignificance of a healthy domestic
financial system, sufficient and strongenforcement of prudential regulations andsupervision, and a proper sequence offinancial liberalization.
Since 1997, many banking reform measureshave been taken and have furtherdeveloped financial markets.
To build a sound and safe market-orientedbanking system
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