The Asian Crisis

THE ASIAN CRISIS • • • •

THE ASIAN CRISIS OF 1997 - 99 OVERVIEW Countries Affected in the Contagion •Thailand, July, 1997 •Indonesia, June to August, 1997 •Korea, July, 1997 •Japan had already been through its own crisis earlier and was in an economic depression •Russia and Mexico followed a little later with crises of their own.

THE ASIAN CRISIS : BOOM AND BUST First Phase : Currency undervalued Second Phase : Export successes produce large earnings. Heavy investment inflows Third Phase : Currencies were tied to US Dollar, hence were then overvalued

UNFOLDING OF THE CRISIS ( JUNE 1997 ) •lower exports •Decline in Export competitiveness •Increase in Trade and Current Account deficit. •The crisis emerged in Thailand due to crisis of loan repayment - fears of loan defaults -withdrawal of ST funds •led to pressure on forex reserves and the value of Baht, therefore it lost all its Reserves •The contagion then spread to Philippines, Malaysia and Indonesia.

M ISTAKES OF ASIAN LENDERS •Countries already were in debt, even then short-term credits financed long-term loans. •borrowers borrowed in FC and loaned in LC. No hedging to counter FX risk •Inadequate supervision of consolidated balance sheets of the borrowers. •Inadequate disclosure by the corporate

IMPACT OF THE CRISIS •Slowdown in manufacturing and industrial activity • •Huge unemployment • •Social impact • •Coincided with the worst drought conditions

THE IMF'S IMMEDIATE RESPONSE TO THE CRISIS •Approved US$35 billion as financial support for reform program •Arranged programs of economic stabilization : oclose supervision of weak institutions oclosure of unviable financial institutions orecapitalization of undercapitalized institutions