Asian Crisis 1997

Asian Financial Crisis 1997-98

Presented by:

Faisal, Muhammad Md. Abu Noman

What caused the Asian Financial crisis? Macroeconomic weaknesses Financial intermediaries Export successes produce large earnings. Heavy investment inflows by the early 1990s. A bubble starts to develop Banks were not monitored.

Asian financial crisis overview The Asian financial crisis is considered to have started on July 2, 1997 with the devaluation of the Thai baht and ask IMF for assistance. Malaysia abandons the peg and blames the speculators on July 14 Philippines seek assistance from IMF Indonesia floats on August 14, go to the IMF on October 8 Repeated speculative attacks on Hong Kong dollar unsuccessful, but stock market plunges between October 20-23 Global stock market decline on October 27 S. Korea devalue Nov. 28 and ask for IMF assistance Spread over other Asia countries

Macroeconomic weaknesses • Large current account deficit •

Large capital inflows

•

Large exchange rate depreciations

•

Bank lending

r uC sti ci f e d

Large capital inflows • Large capital inflows, especially those deriving from foreign borrowing. • These inflows equivalent 1990-1996 – Korea: 2.5% of GDP – Thailand: 10% – Indonesia: 3.5%

Large capital inflows • They were encouraged by high economic growth, low inflation and relatively healthy fiscal performance (table1 and figure 2)

Large exchange rate depreciation Dollar)

Currency

Exchange Rate

Change

(per US$1) June 1997 July Thai Baht

24.5

1998 41

Indonesian Rupiah

2,380

14,150

- 83.2%

Philippine Peso

26.3

42

- 37.4%

Malaysian Ringgit

2.5

4.1

- 39.0%

South Korean Won

850

1,290

- 34.1%

- 40.2%

(to the US

aL ed ) r all o D S U ot(

Large exchange rate depreciations

(cont.)

Inflexible exchange rate regimes complicated macroeconomic management and increased vulnerability.

Nominal exchange rate had depreciated in a predictable manner in Indonesia, and was closely linked to the U.S, in Malaysia, the Philippines and Thailand.

The crisis countries were vulnerable to capital outflows and exchange rate devaluations because of the significant amount of short term foreign currency debt, which was mostly unhedged.

Bank lending

• Private credit sector in nominal terms expanded rapidly during the 1990s, at an average rate of 15 to 20% compared to inflation rates of 3-10%.

Bank lending (cont.) • Bank lending relied collateral rather than credit assessment and cash flow analysis, making banks vulnerable to excessive risk and declines in asset values.

Bank lending (cont.)

What are Financial Intermediaries and what role did they play in the crisis? “Financial intermediaries” were institutions perceived as having implicit government guarantees but were in most part unregulated and subject to sever “moral hazard” problems Unrestrained risky lending by these institutions caused inflation of asset prices (but not consumer goods). This over pricing of assets was sustained by a sort of circular process of reinforcement. The proliferation of risky lending drove up asset prices making the collateral position of the lending institutions seem stronger than it actually was. Also, the appearance of soundness of the position of financial institutions further increased risky loans putting even more upward pressure on asset prices.

The IMF-Role The IMF was called in to provide financial support for three of the countries most seriously affected by the crisis: Indonesia, Korea, and Thailand. The strategy to address the crisis had three main components: Financing. Some US$35 billion of IMF financial support was provided for adjustment and reform programs in Indonesia, Korea, and Thailand, with the assistance for Indonesia being augmented further in 1998-99. Some US$85 billion of financing was committed from other multilateral and bilateral sources, although not all of this financing actually materialized

The IMF-Role Macroeconomic policies: Monetary policy was tightened to halt the collapse of the countries' exchange rates--which went well beyond what might have been warranted by fundamentals and to prevent currency depreciation.

Structural reforms: Steps were taken to address the weaknesses in the financial and corporate sectors. Other reforms were intended to alleviate the social consequences of the crisis and set the stage for a resumption of growth.

Conclusion First, none of the governments were engaged in irresponsible monetary expansion, in fact their inflation rates were quite low. On the eve of the crisis all of the governments were more or less in fiscal balance. Second, the Asian countries did not have a troubling level of unemployment. Therefore, there did not seem to be any pressure to abandon the fixed exchange rate in favor of monetary expansion. Third, there was already a boom bust cycle in the asset markets that preceded the currency crisis. Fourth, in all countries involved in the AFC, financial intermediaries seem to have been central players in the crisis. In Thailand so called “finance companies” – nonbank intermediaries that borrowed shortterm money then lent to speculative investors played a crucial role.

Links & Abreviations   

http://www.imf.org/external/np/exr/ib/2000/062300.htm http://www.imf.org/external/np/speeches/2004/021204.htm http://www.imf.org/external/pubs/ft/wp/1999/wp99138.pdf

IMF = International Monetary Fund AFC = Asian Financial Crisis

Thanks !