East Asian Economic Crisis

1. MBA 502 - Macroeconomics
EAST ASIAN FINANCIAL CRISIS
(1997)
DİLAN SÜSLÜ
GÖKHAN TUFAN
NİLÜFER SORMAZ
TANER YILDIRIM
Spring 2014 12.05.2014

2. Outline
1. Before the East Asia Crisis (East Asia Miracle)
2. Reasons of the East Asia Crisis
3. Countries Effected by the Crisis
 Most Effected
 Thailand
 Indonesia
 South Korea
 Moderately Effected
 Singapore
 China
4. East Asia Crises and IMF
5. East Asia Crises and Turkey
6. Lessons Learned
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3. East Asia Countries
 South Korea
 Indonesia
 Philippines
 Hong Kong
 Singapore
 Malaysia
 Taiwan
 Thailand
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Source:http://en.wikipedia.org/wiki/1997_Asian_financial_crisis

4. Four Asian Tigers
 The Four Asian Tigers or Asian Dragons are the highly developed
economies of Hong Kong, Singapore, South Korea and Taiwan.
 These regions were the first newly industrialized countries, noted
for maintaining exceptionally high growth rates and rapid
industrialization between 1960’s and 1990’s.
 All four Asian Tigers had highly educated and skilled workforce and
had specialized in areas where they had a competitive advantages.
 Hong Kong and Singapore  World-leading
international financial centers
 South Korea and Taiwan  World leaders in
manufacturing information technology
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5. Tiger Cub Economies
 Their economic success stories have served as role
models for many developing countries, especially the
Tiger Cub Economies. (Indonesia, Malaysia,
Philippines and Thailand)
 They sustained rapid growth for decades.
 Each nation was non-democratic and had relatively
authoritarian political systems during the early
years.
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6. East Asia Miracle
 The success of the economic growth of the east
Asia nations is called East Asia Miracle.
 Many factors have been identified as the cause of
East Asia's relative success but the most important
key is their export oriented policy.
 Each focused on exports to rich industrialized
nations.
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7. Before East Asian Crisis (1960-
1990)
 Export policy
 High growth rate and rapid industrialization
 Decrease the number of import
 High tariff on import
 Undervalue their currency
 Increase in public and private savings
 Investment in physical and human capital
 Investment on education and rate of literate is increased
 Reached industrial countries level of development
 Productivity growth
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8.  Kept budget deficit in limit
 Authoritarian political systems
 Low inflation
 Stable and real interest rates
 High interest rate
 Attract foreign investors for high rate of return
 High rate of return
 Increased capital investments, high per capita income
Before East Asian Crisis (1960-
1990)
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9. Per Capita Gross Domestic
Product
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10. Gross Domestic Product (GDP)
Growth
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11. Per Capita Gross National Product (GNP)
Growth
The growth of per capita GNP has been extraordinary high in East Asia in 1985-1995
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
thailand
china
south
korea
singapore
indonesia
malaysia
hongkong
philippines
Avg. per capita GNP growth btw 1985-1995*
* World Bank,1997
Over this period, growth in all low-middle income economies was a mere 0.4%, while
that of all high income economies was only 0.8%.
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12. Beginning of Crisis
 At the end of 1996
0%
20%
40%
60%
80%
100%
loans with maturity <=1
loans with maturity
<=1
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* World Bank,1997

13. Before Crisis
 Decrease in bank lending caused to
increase in cross border bank loans.
 The rapid reversal of private capital inflows
into Asia.
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14. Reasons of the East Asian Crisis
 Panic and disorderly workout
 Education
 Banks
short term of liabilities of Thailand exceeded
international reserves
rapid industrialization and high growth rate
PANIC
very weak and fragile financial system and auditing system
Loans from foreign banks
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Fixed Exchange Rate

15. Panic Causes to :
 A lot of investors withdraw their funds from these nations.
 Huge outflow was occurred.
 Net private inflows dropped from $93 B to -$12.1 B.
nations cannot control their current deficit
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16. Banks
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17. Triggering Events
 In early 1997 in Thailand Hanbo Steel, Sammi Steel
and Kia Motors collapsed.
 These bankruptcies, in turn, put several merchant
banks under significant pressure.
 The Bank of Thailand (BOT) lent over 200 billion
baht ($8 billion) to distressed financial institutions
through Financial Institutions Development Fund
(FIDF).
 Usable reserve levels of Central Bank fell sharply.
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18. Thailand
 The devaluation of the Chinese renminbi, and the Japanese yen,
raising of US interest rates lost competitiveness
 Huge foreign debt
 Wrong investments with foreign debt: large part of the capital had
been put into non-productive sectors especially real estate
 May 1997: Thai Baht was hit massive speculative attack. The
government failed to defend the Baht against international speculators.
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19. Thailand
 Devaluation of Baht: 1$ became 56 Baht in Jan ’98.
 The Central Bank ran out of Foreign Reserves.
 58 out of 91 banks were closed.
 Exports declined significantly.
 Lost major customers such as U.S. and Europe.
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Baht/$

20. Indonesia
 Large number of Indonesian corporations had been borrowing in USD.
 As rupiah had strenghted respective to dollar, this strategy worked well.
 Companies had decrease their effective levels of debt and financial costs as
local currency value rose.
 In June 1997, Indonesia seemed far from crisis.
 Unlike Thailand, Indonesia has
 Low inflation
 Trade surplus more than $900 Million
 Huge foreign exchange reserves of more than $20 Billion
 Causes of the crisis
 The stock of private forign debt is very large and generally short term, has
created conditions for instability
 Weakness in the banking system
 Lack of transperancy
 Lack of protection and legal certainty
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21. Devaluation of Rupiah
Thailand floated Baht,
Indonesia widened Rupiah
band from 8% to 12%
Speculative attacks to
rupaih began
Floating exchange regime
was placed
Signed first letter with IMF
Second letter of intent with IMF
In November, crisis intensified effects
of crisis seen on balance sheets
Third letter of intent with IMF
83,2% change
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Source: www.tradingeconomics.com/indonesia/currency

22. Results of the Crisis – Indonesia
 Short term interest rates increased
sharply.
 Corporations went bankrupcy.
 Some corporations are forced stop
production and forced to lay off.
 For banks, lending money
decreased, borrowing money
increased.
 Lose more than 1/3 foreign reserves.
 Stock prices decline more than 66%.
 At the end of the year foreign cash
flow nearly stopped.
 From 239 banks 16 closed.
 Reforms in banking system.
-15
-10
-5
0
5
10
15
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
GDP Growth of Indonesia
Indonesia
Years
Growth Percentage
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Source: http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG

23. South Korea
 Less productivity and increments in wages
 High interest rates increased foreign borrowing
 In 1994: 14%
 In 1997: 25%
 Weaknesses in the balance sheet of banks and corporations
 Government related
 Won pegged to US dollar
 Financial institutional inadequacies (Implicit government guarantees and
forcing excessive lending)
 Political uncertainties (coming elections in Dec 1997)
 Open economy policy (price shocks and global trade volatility)
 Loss of competitiveness to other countries
 Slowdown of exports and economic growth
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24. Results of the Crisis – South Korea
 Jan 1997 - Corporate bankruptcies:
 Hanbo Steel, Sammi Group,
Dainong Corp, Ssangyoung group,
Kia Motors
 Drastic devaluation of the Won from
1,000 to 1,700 for 1$
 The Stock Exchange Rate index fell
from 1000 to 450
 National debt to GDP ratio became
more than doubled
 Major setback in automobile industry
 Credit rating of the country: A1 to B2
 Unemployment rate: Increase from
2% (1995) to 7% (1998)
 Decrease in Gross National Product)
GNP per capita: $9,511 to $6,823
GDP Growth % of South Korea
FX Rate and Reserves in South KoreaEast Asia Crisis
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Source: http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG

25. Moderately Effected Countries
China
Singapore
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26. China
• Not affected too much because;
o high growth
o unconvertible currency
o huge amount of reserves
• Growth rate decreased because;
o Capital/Product coefficient of China had increased
o Transferring resources from seaside (where productivity and
efficiency are high )
o Administrative and production costs increased
o Expected slowdown in direct foreign capital inflow via
technological inflow
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27. Singapore
• decrease of the demand from other Asia countries
o income effect
o increase of the Singapore Dollar against other Asia
currencies
• 70% rise of the labor cost
o 2/3 of the demand is foreign based
 Growth rate of Singapore - decreased from 7.8% to
1.5% in 1998
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28. Singapore cont’d
• Government;
o Bailout packet
 Long term
 Short term
 decreasing labor cost by 15%.
 shortening the deductions from labor costs
 removing variable costs
• Ministry of Finance;
o took precautionary measures
 increase internal consumption
 stopping the slowing down in the economy
 Government expenditure had increased 6%
 tax rates had been decreased
 various funds are transferred to local enterprises
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29. IMF and The Asian Financial Crisis
 Bailout packages amounted to $95 billion.
 High interest rates, decrease in government spending, increase
in taxes, devaluation of currency.
 Allow insolvent banks and financial institutions to fail.
 Major restructuring in banking system.
 Increased transparency.
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30. IMF Criticism on Asian Crisis
 Recession
 Could not manage to roll over of short term loans to long term loans
 World Bank Chief Economist Joseph Stiglitz:
 “Most of the policies were mistake. The problem was not
government, as in Latin America; the problem was an private sector-
-all those bankers and borrowers, for instance, who'd gambled on the
real estate bubble.”
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31. East Asian Crisis & Current Situation of Turkey
EAST ASIAN ECONOMIES
 Rapid Growth Rate
 Foreign Loan Credits – Short
Term
 Fixing Exchange Rate Policy
 Weakness In Financial System
(Banking Sector, Regulations)
 No Credit Risk Management
TURKEY
 Rapid Growth Rate
 Foreign Loan Credits – Long
Term
 Floating Exchange Rate Policy
 After 2001 crisis, financial system
stronger
 Well Managed Credit Risk
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32. GDP GROWTH RATE COMPARISON
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-15
-10
-5
0
5
10
15
1990 1991 1992 1993 1994 1995 1996 1997 1998
GDP Growth (annual %)
Indonesia
Korea, Rep.
Thailand
-6
-4
-2
0
2
4
6
8
10
12
2004 2005 2006 2007 2008 2009 2010 2011 2012
Turkey GDP Growth (annual %)

33. CURRENT ACCOUNT TO GDP RATIO
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34. Lessons Learned
 Superiority of a pure floating exchange rate system over a
managed floating system.
 Maintanence of fixed exchange rates encouraged external borrowing and led to
excessive exposure to foreign exchange risk.
 As economies pegged to USD, in valuation in USD
 caused countries’ exports to become more expensive and less competitive.
 Well functioning financial system
 Importance of foreign investors’ confidence.
 Transparency on business and goverment level is critical.
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35. References
 http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.Z
G
 www.tradingeconomics.com/indonesia/currency
 http://emlak.kanald.com.tr/haber/Sektorden_Haberler/Prof_
Dr_Erinc_Yeldan_Turkiyeyi_emlak_krizi_bekliyor/54593.as
px
 http://www.nber.org/chapters/c11011.pdf
 http://www.un.org/esa/analysis/pastmeetings/rude.pdf
 http://www.research.stlouisfed.org
 http://en.wikipedia.org/wiki/1997_Asian_financial_crisis
 World Bank,1997
 IMF, 1998
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36. Questions and Comments
THANK YOU….
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