South East Asian Crisis and its effect on economies

2. SOUTH EAST ASIAN COUNTRIES

3.  Before 1997, Asia was attractive
By developing countries
High interest rates
 “Asian economic miracle”

4. Four Asian Tigers
 The Four Asian Tigers or Asian Dragons are the highly
developed economies of Hong Kong, Singapore, South
Korea and Taiwan (Republic of China)
 These regions were the first newly industrialized countries,
noted for maintaining exceptionally high growth rates and
rapid industrialization between the early 1960s and 1990s.
 All four Asian Tigers have a highly educated and skilled
workforce and have specialized in areas where they had a
competitive advantage

5.  Their economic success stories became known as the
Miracle on the Han River and the Taiwan Miracle and
have served as role models for many developing
countries, especially the Tiger Cub Economies.
 They sustained rate of double-digit growth for
decades.
 Each nation was non-democratic and relatively
authoritarian political systems during the early years.

7. Most affected nations:
 Indonesia
 South Korea
 Thailand
 Hong Kong
 Malaysia
 Lao
 Philippines
Less affected nations:
 People’s Republic of China
 India
 Taiwan
 Singapore
 Vietnam

8.  The crisis started in Thailand with the financial
collapse of the Thai baht after the Thai govt. Was
forced to float the baht(due to lack of foreign currency
to support its fixed exchange rate.), cutting its peg to
the us dollar, after exhaustive efforts to support it in
the face of severe financial over extension that was in
part real-estate driven.
 At the time, Thailand had acquired foreign debt that
made the country effectively bankrupt even before the
collapse of its other assets prices and a precipitous rise
in private debt.

9.  Thai baht: 24.5 to 41
 Indonesian rupiah: 2,380 to 14,150
 Philippine peso: 26.3 to 42
 Malaysian ringgit: 2.5 to 4.1
 South Korean won: 850 to 1,290

10.  Though there has been general agreement on the
existence of the crisis and its consequences, what is
less clear are the causes of the crisis as well as its scope
and resolution.
 Indonesia , south Korea, and Thailand were the
countries most effected b the crisis. Hongkong,
Malaysia, loas and the Philippines were also hurt by
the slump. China, Taiwan, Singapore, Brunei and
Vietnam were less affected, although all suffered from
a loss of demand and confidence throughout the
region.
 Foreign debt to GDP ratio rose from 100% to 167% in
four large association of southeast Asian
nations{ASEAN}.

11.  Although most of the governments of Asian countries
had seemingly sound fiscal policies, the international
monetary fund{IMF} steeped into initiate a $ 40 billion
program to stabilize the currencies of south Korea,
Thailand and Indonesia, economies particularly hard
hit by the crisis.
 The effort to stabilize the domestic situation in
Indonesia, however.
 After, 30 years in power, president Suharto was forced
to step down on 21 may 1998 in the wake of wide
spread rioting that followed sharp price increases
caused by a drastic devaluation of the rupiah.
 The effects of the crisis lingered through 1998.
 In 1998 the Philippines growth dropped to virtually
zero.

14.  from 85-96 Thailand grew 9% per year
 Highest economic growth rate
 Inflation was also low (3.4%-5.7%)
 Baht value was 25 to the US Dollar

15.  May 14-15, 1997 the baht faced very bad speculative
attacks
 In June, Prime Minister Yongchaiyudh refused to
devalue the baht
 Thai government failed to defend the Baht, starting
the crisis
 Baht lost more then half it’s value
 Thai stock market dropped 75%

16.  August 11, 1997, IMF unveiled $17 billion rescue
package
 August 20, 1997 IMF approved another $3.9 billion
bailout package
 Rumors that former Prime Minister profited from the
devaluation
 Finally recovered by 2001, paid off IMF debt in 2003

17.  Indonesia was doing good in June 1997
 Low inflation
 $900+ Million trade surplus
 $20 + Billion foreign exchange reserves
 Good banking sector
However, many corporations were borrowing in U.S.
Dollars
In July 1997, Indonesia widened the rupiah tradin band
from 8%-12%

18.  On August 14, 1997 the managed floating exchange
regime was replaced by a free-floating system, causing
the rupiah to drop more
 IMF created a rescue package of $23 Billion, but didn’t
help
 In Sept they hit a all time low, Moody’s rated
Indonesia’s long-term debt to “junk bond” status
 More effects were felt in Nov when the summer’s hits
were felt in the corporate books

19.  In Feb, the President got rid of the governor of the
Bank of Indonesia, but this wasn’t enough and he was
eventually forced to resign
 Effects
 Rupiah was 200 to 1 USD, afterward hit 18,000 to 1 USD
 Lost 13.5% of GDP

20.  Large corporations were funding big expansions,
however failed due to excess debt
 Moody’s lowered their credit rating from A1 to B2
 Seoul stock exchange dropped 4% on Nov 7, 7% on Nov
8, and 7.2% on Nov 24
 In 1998 Hyundia took over Kia Motors, Samsung was
dissolved, and Daewoo was sold to American GM
 Currency dropped from 800 per dollar to 1,700
 National debt-GDP ratio went from 13%-30%

21.  After UK gave control of Hong Kong to China the
Hong Kong dollar was under speculative pressure
 Authorities spent more then US $1 Billion to defend
local currency
 Had more then US $80 billion in foreign reserves
 Stock markets became volatile
 In Oct the Hang Seng Index dropped 23%
 In Aug 98, interest rates jumped from 8%-23%
overnight, and even 500% once

22.  The Hong Kong Monetary Authority (HKMA) setup a
system to establish rates, however speculators were
taking advantage of this by short selling shares.
 HKMA wound up buying HK$120 billion worth of
shares in various companies to combat this
 Started selling those share in 2001, profiting HK$30
billion

23.  In July 1997, the Malaysian ringgit jumped overnight
from 8% to over 40%
 Ratings had fallen from investment grade to junk
 Lost 50% of value, from 2.50 to 3.80 to the dollar
 Output of real economy declined
 Construction dropped 23%
 Manufacturing 9%
 Agriculture 5.9%
 GDP 6.2%

24.  IMF aid was refused
 Various task forces were formed to fix economy
 By 2005 had a surplus of US$14.04 billion

25.  Singapore dipped into a short recession
 Government kept very active management to ensure
security
 Government programs were put forward
 Made no attempt to help capital markets, instead
allowed a 60% drop, however within a year fully
recovered and continued to grow

26. 1993 1994 1995 1996
Indonesia 9.60 8.53 9.43 8.03
Korea 4.82 6.24 4.49 4.96
Malaysia 3.57 3.71 5.28 3.56
Philippines 7.58 9.06 8.11 8.41
Thailand 3.36 5.19 5.69 5.85

27. FX:1 $US FX: 1 $US %
6/30/98 6/30/97 change
Chinese Yuan 8.281 8.289 +0.09
HK dollar 7.745 7.747 +0.03
Indonesia rupiah 14568.89 1760 -87.92
Japanese yen 138.31 114.61 -17.58
Malaysian ringgit 4.1 1.827 -55.44
Korean won 1370 641.4 -53.18
Philippine peso 41.5 19.08 -54.02
Thai baht 42.16 17.9 -57.54

28. Regional Annual Growth Rate of Exports (%)
Country 1990 1991 1992 1993 1994 1995 1996
China 18.2 15.8 18.1 7.1 33.1 22.9 1.6
Indonesia 15.9 13.5 16.6 8.4 8.8 13.4 9.7
Korea 4.2 10.5 6.6 7.3 16.8 30.3 3.7
Malaysia 17.4 16.8 18.5 15.7 24.7 24.7 26.0
Philippines 4.0 8.7 11.2 13.7 20.0 31.6 16.7
Thailand -1.3 14.9 23.2 14.2 13.3 22.7 25.1
Mexico 17.7 0.7 1.4 9.2 14.2 40.3 22.6

29. Corruption?
Korea, Indonesia, Thailand -corruption
 Italy and India have corruption, but no
crisis
Bank Transparency
 inadequate regulatory framework
 irrational lenders?

30.  China, The US, and Japan were very strong
economies and were able to survive
 China held most of it’s foreign investments were in
factories rather then securities
 U.S. didn’t collapse, but on Oct 27,1997 the Dow Jones
fell 554 points (7.2%)
 Japan was affected because the economy is so
prominent (yen fell to 147), but it was world’s largest
holder of currency reserves so it bounced back
quickly

31.  The macro economic and the financial lesson.
The first interpretation of Asian crisis is macro economic and
financial.
Many developing countries opened up financially by early
1990’s and became “emerging markets ” attributing foreign
loans and investment. In developing east Asia, short term
commercial bank loans were the dominant form of capital
inflow.
At the first this caused domestic booms and assets market
inflation. But later as the market segment turned for the
worse and foreign investors pulled their money out, the
balance of payment came under a severe pressure.

32.  The domestic banking sector froze up and domestic
demand fell sharply, causing a serious recession that
lasted for one to two years
 This macro shock was amplified by the balance sheet
vulnerability caused by the weakness of Asian banks,
non-banks and corporations.
 Firms in developing east Asia were highly dependent
on indirect finance, for working and investment
capital and had debt equity ratios.
 The local banks and non banks were exposed to two
kinds of balance sheet mis-matches. They borrowed in
USD and lent to domestic projects in local currency.

33.  In addition they borrowed in short term loan but lent
long term domestic project.
 When the currency depreciation began the balance
sheet of these financial institutions were immediately
hit and bad debt increases. When foreigners
demanded repayment they had no foreign cash.
 This is liquidity problem, but as the crisis deepened, it
created insolvency as well.
 In addition, the collapsing domestic demand, which
was caused by panic, credit crunch(malfunctioning of
the banking sector) and wrong policy prescription in
some countries, damaged the real estate sector and led
to the accumulation of bad debt.

34.  According to the previous view, the Asian crisis was
primarily caused by the wrong speed and sequencing
of external financial liberalization.
 countries liberalized capital accounts too quickly and
without preparation, which caused over borrowing
and bubbles.
 Therefore the lesson learned is:-
“YOU MUST OPEN YOUR FINANCIAL SECTOR
GRADUALLY AND IN THE RIGHT ORDER”.

36.  The second interpretation of the Asian crisis is
structural. It is true that this crisis was a macro and
financial phenomenon involving banks and borrowers.
 But deeper down, the real cause was the structural
weakness of the developing economies in east asia. As
long as these weakness remains similar crisis can occur
in future.
 The real solution must be the removal of these
structural weakness.

37.  One must also be careful about the other risk of doing
too much. It is hard to know which system works in
your country and which does not. The evolution of
social and economic system is unique to each country
and very difficult to evaluate.
 The lesson learned is : -
“post crisis reforms for over haulting your society
should be well balanced.”

38. CURRENT ACCOUNT CRISIS
 The current account crisis is the traditional crisis
which the IMF is well acquainted.
 It is caused by inappropriate macroeconomic policy of
the government and leads to the balance of payment
crisis.
 Its sequence is typically as follows :-
 A budget deficit is motivated and inflation occurs.
 A current account deficit rises and international
reserves decline.

39.  The country experiences difficulty in international
payments and goes to IMF.
 Tight budget and money, together with structure
adjustment are required as the conditionality for
international rescue.
“the home currency is devaluated to regain
competitiveness”

40. CAPITAL ACCOUNT CRISIS
 The capital account crisis is a new type of crisis caused
by instability of private capital flows.
 It is often observed immediately after the liberalization
of the capital account.
 External financial transactions are liberalized in a
country where the domestic banking system is under
developed and the monitoring system is weak.
 Domestic banks, non banks and cooperation's over
borrow and foreign investors and banks over lend.
 A domestic boom, assets bubbles and an increase in
international reserve are observed.

41.  Reversal comes. Market sentiment changes for the
worse and foreign investors suddenly leave. Currency
attack begins. A huge uncontrollable depreciation
follows.
 A severe macro economic down turn occurs as demand
collapse and banking crisis reinforce each other.
These two crisis, which require very different policy
responses, should be clearly distinguished
“The Asian crisis was a CAPITAL ACCOUNT crisis. The
big problem was the policy prescription for a current
account crisis was administered to this crisis.”

43.  Such was the scope and the severity of the collapses
involved that outside intervention, considered by
many as a new kind of colonialism became urgently
needed.
 Since the countries melting down were among not
only the richest in their region, but in the world and
since hundred of billions of dollars were at stake , any
responses to the crisis was likely to be cooperative and
international, in this case through IMF.
 The IMF created a series of bailouts{rescue package}
for the most affected economies to enable affected
nations.

44.  In other words IMF support was conditional on a series of
drastic economic reforms influenced by neoliberal
economies principles called a “structural adjustment
package” {SAP}.
 The SAP’s called on crisis-struck nations to reduce
government spending and deficits, allow insolvent banks
and financial institutions to fail and aggressively raise
interest rates. The reason was that these steps would
restore confidence in the nations fiscal policy.
Solvency penalized insolvent companies, and protect
currency values.
 However the greatest critism of the IMF’s role in the crisis
was targeted towards its response. As country after country
fell into crisis, many local business and governments that
had taken out loans in us dollars, which suddenly became
much more expensive relative to their local currency which
formed their earned income, found themselves unable to
pay their creditors.

45.  During and after the Asian crisis, IMF was severely
critised for in appropriate policy advice.
 According to this crisis IMF made to big errors :-
 1) EXANTE (before the crisis) :- IMF failed to prevent
the Asian crisis. Infact it created the conditions for
such a crisis by encouraging financial opening to
countries which were not ready for it.
 2) EXPOST (after the crisis ) :- IMF failed to crisis after
it erupted. Infact many contend that the crisis was
aggravated and prolonged by IMF’s wrong policy
advice.

46.  (a) the priority should be stopping the regional
currency crisis; structural reforms should be
undertaken later, not during the crisis.
 (b) don't apply “current account crisis” measure.
 (c) calm the market. This is a delicate psychological
game against market traders, and you must know very
well how financial market work.
 Timing and sequencing are the key.

47.  The crisis had significant macroeconomic level effects,
including sharp reductions in values of currencies,
stock market, and other asset prices of several asian
countries.
 The nominal US dollar GDP of ASEAN fell by US $ 9.2
BILLION in 1997 and $ 218.2 BILLION (31.7%) in 1998.
 In south Korea, the $ 170.9 BILLION fall in 1998 was
equal to 33.1% of the 1997 GDP.
 Money business collapses and consequences, millions
of people fell below the poverty line in 1997-1998.
 Indonesia, south Korea and Thailand were the
countries most affected by the crisis.

48. APPRECIATION OF YEN
CHEAP THAI LABOUR
JAPANESE FDI
HIGH RETURN IN
THAILAND
OVER – HEATING
OF THAILAND
ECONOMY
OVER
BUILDING OF
INDUSTRIES
RISE IN
LABOUR COST
INDISCRIMINATE
OF FUNDS BY
BANKS
WEAK
FINANCIAL
SYSTEM
REAL
ESTATE
BUBBLE

49. INFLATION
CHEAP
CHINESE
EXPORT
EXPORT
SUFFERS
IMPORT
RISES
LARGE CURRENT A/C DEFICIT
CRASH OF
FINANCIAL
SYSTEM
DEPRECIATION
OF THE
CURRENCY

50. Can we explain this… Let’s assume that foreign
investors buy “Thai Bond”
when they invest
Exceedingly high interest
rate attracts more such
investment
So ,
Bond Demand > Bond
Supply and
Money demand < Money
Supply
Equilibrium is disturbed when Interest rate is pushed to artificially high,
higher than the optimum rate r*
With higher rate r, M/p Asset price falls
(Money/price) decreases Govt increases Interest rate