Transcript Asia Financial Crisis

Asia Financial Crisis
By: Phong Van and Sandeep Kumar
History
 Before 1997, Asia was attractive
By developing countries
High interest rates
 “Asian economic miracle”
Four Asian Tigers
Introduction
 July 1997
 Countries
most affected
by the Asian
Financial
Crisis.
Introduction
 Most affected:
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Indonesia
South Korea
Thailand
Hong Kong
Malaysia
Lao
Philippines
Introduction
 Least affected
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People’s Republic of China
India
Taiwan
Singapore
Vietnam
Introduction
 Thailand
 Thai baht
 Real estate
 Burden of foreign debt
 Southeast Asia and Japan
 Slumping currencies
 Devalued stock market
 Steep rise in private debt.
IMF Role
 $40 billion program to stabilize the currencies
of South Korea, Thailand, and Indonesia.
 Bailouts (rescue packages) for the most
affected economies to enable affected nations
to avoid default.
 Structural adjustment package
SAP
 cut back on government spending to reduce
deficits,
 allow insolvent banks and financial institutions
to fail and aggressively raise interest rates.
 The reasoning was that these steps would
restore confidence in the nations’ fiscal
solvency, penalize insolvent companies, and
protect currency values.
IMF and High Interest Rates
 to attain the chain objectives of tightened money supply
 discouraged currency speculation
 stabilized exchange rate
 curbed currency depreciation
 ultimately contained inflation.
Consequences
 significant macro-level effects
 including sharp reductions in values of currencies
 stock markets
 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 in 1998.
The Currency exchange rate per USD
June 1997 compare to July 1998
 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
Thailand
Thailand
 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
Thailand
 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%
Thailand
 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
Indonesia
Indonesia
 Indonesia was doing good in June 1997
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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%
Indonesia
 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
Indonesia
 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
South Korea
South Korea
 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%
Hong Kong
Hong Kong
 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
Hong Kong
 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
Malaysia
Malaysia
 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
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Construction dropped 23%
Manufacturing 9%
Agriculture 5.9%
GDP 6.2%
Malaysia
 IMF aid was refused
 Various task forces were formed to fix economy
 By 2005 had a surplus of US$14.04 billion
Singapore
Singapore
 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
Less Affected Countries
 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
Conclusion
 Many businesses collapsed and millions of people fell
below the poverty line
 Indonesia, South Korea, and Thailand were most
affected
 Heavy U.S. investment shifted from Thailand to Europe
 Many countries pushed for corporate governing to
avoid problems later
 Investors were reluctant to lend to developing countries
References
 Kaufman, GG., Krueger, TH., Hunter, WC. (1999) The
Asian Financial Crisis: Origins, Implications and
Solutions. Springer.
 Weisbrot, Mark (August 2007). Ten Years After: The
Lasting Impact of the Asian Financial Crisis
 http://en.wikipedia.org/wiki/1997_Asian_Financial_Crisi
s
 Tecson, Marcelo L. (2009), "IMF Must Renounce Its
Weapon of Mass Destruction: High Interest Rates"
Any Questions?
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