South East Asian Currency Crisis :South East Asian Currency Crisis The Asian Financial Crisis was a period of financial crisis that gripped much of Asia beginning in July 1997, and raised fears of a worldwide economic meltdown due to financial contagion. The Asian financial crisis involves four basic problems or issues: (1)A shortage of foreign exchange that has caused the value of currencies and equities in Thailand, Indonesia, South Korea and other Asian countries to fall dramatically, (2) Inadequately developed financial sectors and mechanisms for allocating capital in the troubled Asian economies, (3) Effects of the crisis on both the United States and the world, and (4) The role, operations, and replenishment of funds of the International Monetary Fund.


Introduction of A.F.C :Introduction of A.F.C Asian financial crisis Initiated by two rounds of currency depreciation in 1997. First round was a precipitous drop in the value Thai baht Malaysian ringgit Philippine peso Indonesian rupiah Second round began with downward pressures hitting Taiwan dollar South Korean won Brazilian real Singaporean dollar Hong Kong dollar.


Before crisis :Before crisis Economies of south east Asia Maintained high interest rates attractive to foreign investors looking for a high rate of return. Regional economies of Thailand, Malaysia, Indonesia, Singapore, and South Korea experienced high growth rates, 8–12% GDP, in the late 1980s and early 1990s. Thailand, Indonesia and South Korea had large private current account deficit It led to excessive exposure to foreign exchange risk in both the financial and corporate sectors. In 1990’s the U.S. Economy recovered from recession


Impact :Impact It began to raise U.S. interest rates to head off inflation. At the same time, Southeast Asia's export growth slowed dramatically in the spring of 1996, deteriorating their current account position. At the end of 1996, the proportion of loans with maturity of one year or less was 62% for Indonesia, 68% for South Korea, 50% for the Philippines, 65% for Thailand, and 84% for Taiwan.


Was there a crisis ? :Was there a crisis ? Over $100billion was pulled out of the region in 1997-98 which was 5 percent of the GDP Unemployment rose to .8 million in Indonesia, 1.5 million in Thailand, 1.35 million in Korea Real wages dropped by 12.5% in Korea and 6% in Thailand


Chain of events :Chain of events Corporate failure at Korea Bank failure at Thailand Political uncertainty at Korea, Thailand, Philippines Policy mismanagement at Thailand and Korea – to defend their pegged exchange rates exhaust their Forex reserves Contagion effect hit Malaysia, Philippines, Indonesia International intervention – IMF & Moody


Events from microeconomic point of view :Events from microeconomic point of view Exchange rates depreciates Foreign lenders concerned with the repayment of loans, withdraw funds Domestic interest rates soar up Lack of bankruptcy laws and rising Non Performing Loans added to the stress of the banks Banks become illiquid and decapitalized The fall of Korean stock exchange


East Asian Countries :East Asian Countries Rounds Effects


Reasons for the crisis :Reasons for the crisis Faulty macro economic policy Demise of Industrial Policy : government used to intervene and control inflow End to policy of government coordinated investment allowed duplicative investment in key industries leading to excessive foreign borrowings between 1993-1997 Excessive risk in govt. favoured industries Crony capitalism


Slide 11:The causes and structural factors contributing to the financial crises include: private-sector debt problems and poor loan quality, rising external liabilities for borrowing countries, the close alignment between the local currency and the U. S. dollar, weakening economic performance and balance-of-payments difficulties, currency speculation, technological changes in financial markets, and a lack of confidence in the ability of the governments in question to resolve their problems successfully Declining exports


Categorization of crisis :Categorization of crisis Macroeconomic policy induced – balance of payment crisis Financial panic – sudden withdraw from solvent borrower by short term creditors Bubble collapse – overvaluation of financial asset Disorderly workout – impediment to efficient provision of working capital


Impacts :Impacts Indonesia Drastic devaluation of the rupiah from 2000 to 18000 for 1 US$ Excessive inflation Riots 16 major commercial banks were closed Governor, Bank Indonesia was sacked President Suharto was forced to step down in may after 30 years in power


Slide 14:South Korea Drastic devaluation of the won: from 1000 to 1700 for 1 US$ Credit rating of the country (moody’s): A1 to B2 National debt-to-GDP ratio more than doubled Major setback in automobile industry


Slide 15:Philippines Growth dropped to virtually zero in 1998 Peso fell significantly, from 26/US$ to even 55/US$ President Joseph Estrada was forced to resign


Measures taken to overcome crisis :Measures taken to overcome crisis High saving and investment rate Strong emphasis on education Stable macroeconomic environment Free from high inflation or major economic slumps High share of trade in GDP


Role of IMF :Role of IMF Prevent outright default on foreign obligation Limit the currency depreciation Limit inflation Rebuild foreign exchange reserves Reform the banking sector


Why was India not affected :Why was India not affected Full capital convertibility is not allowed Lock in period for foreign investment in real estate Floating exchange rate with some influence by the RBI during periods of crisis Strong fundamental growth with services sector being the prime reason External debt to GDP has been declining for the past few years


U.S.& JAPAN :U.S.& JAPAN U.S. The Dow Jones industrial plunged 554 points or 7.2%, amid ongoing worries about the Asian economies. The New York Stock Exchange briefly suspended trading. JAPAN Japan was affected because its economy is prominent in the region. Asian countries usually run a trade deficit with Japan because the latter's economy was more than twice the size of the rest of Asia together; about 40% of Japan's exports go to Asia. The Japanese yen fell to 147 as mass selling began, but Japan was the world's largest holder of currency reserves at the time, so it was easily defended, and quickly bounced back. GDP real growth rate slowed dramatically in 1997, from 5% to 1.6% and even sank into recession in 1998, due to intense competition from cheapened rivals.


Learning's :Learning's The lessons from developing country crises are summarized as: Choosing the right exchange rate regime The central importance of banking The proper sequence of reform measures The importance of contagion