Transcript The East Asia Crisis

The East Asia Crisis
Prior to the Crisis
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“The Asian Miracle”
$94.1 billion dollars flowed into East Asia
between 1991 and 1997
Growth was fueled by export promotion,
industrial policy, lowered trade barriers, and
the rapid accumulation of physical and human
capital
By 1992, income per capita averaged $11,100
The Collapse of the Thai Baht
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July 1996: Bangkok Bank of Commerce fails and the
Bank of Thailand expands the money supply to
support the financial systems, putting pressure on
the baht.
May 14, 1997: The stock market declines 7 percent
amid political instability
June 19, 1997: Finance Minister Virava resigns
sending the stock market tumbling 11 percent
July 2, 1997: The fixed exchange rate is abandoned
and the Thai is floated freely, devaluing 25 percent
What Caused The Crisis?
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Factors contributing to the crisis:
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Speculative attacks
Deficits in balance of payments
Inefficient financial systems
Lack of capital controls
Exchange Rate regimes
External debt
Speculative Attacks
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Korea: Widespread corporate bankruptcy from large
firms that borrowed heavily caused foreign banks to
become weary that their loans would not be repayed.
Indonesia: Large scale borrowing from off-shore banks
with loose regulation made the extent of the firms’ debt
understated.
Malaysia: The real estate bubble burst lead to foreign
investors selling to sell their stocks causing the stock
market to crash and Malaysian banks were left with bad
loans.
Other countries: Contagion effect – the crisis spread
because of investors worrying that others countries in
the region would face similar problems
Balance of Payment Deficits
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In Indonesia and Thailand, the current
account deficit was above 5% of GDP.
ASEAN countries and Korea had a combined
deficit of $33 billion from 1995-1996 that
jumped to $87 billion in 1998-1999.
Mostly driven by overvalued currency and
over lending to moral hazard borrowers.
Inefficient Financial Systems
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Financial institutions were not especially
concerned with over lending due to explicit
and implicit government guarantees
Mismatch of the maturities of financial
institutions' assets and liabilities
Deterioration in the quality of banks' portfolios
Lack of ability to assess credit risk
Capital Flows
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The majority of the East Asian economies
engaged in capital market liberalization.
“Hot money” flowed out of the countries
quickly when negative speculation of occurred
leaving financial institutions liquidity strapped.
Portfolio equity investment went from $12.4
billion in 1996 to an outflow of $4.3 billion in
1997 in Korea, Indonesia, Malaysia,
Philippines and Thailand.
Capital inflows of $73 billion turned into
outflows of $30 billion in 1997.
Exchange Rate Regimes
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Pre-Crisis: Hong Kong, Indonesia, Korea,
Malaysia, Philippines, Singapore, Taiwan
and Thailand pegged their currencies to
the US dollar.
Depreciation of the local currencies on the
foreign-exchange market means an
increased burden of external debt.
Pegged exchange rates forced Asian
banks to keep interest rates comparable to
US rates and compete with US trade.
Exchange Rate Regimes
Debt
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Thailand: Foreign lending expanded from $20
billion to $98 billion between 1990 and 1996.
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Nearly 86% went to Thai institutions
70% of loans were short term
Corporations borrowed in dollars and loans
became two or three times more expensive.
East Asia Crisis
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1997 - 1998 economies hit
by banking and exchange
rate crises
Greatest economic crisis
since Great Depression
Most literature focuses on:
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Japan, Hong Kong, South
Korea, Singapore, Taiwan,
Indonesia, Malaysia, &
Thailand
Most affected
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Indonesia, South Korea,
Thailand, Philippines, &
Malaysia
East Asia Crisis
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1996 – investors poured $100 billion into East
Asian countries & 20 million workers
benefited
The crisis affected other parts of the world
and caused a global financial crisis
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Russia & Brazil affected
Economies experienced reductions in
poverty, income inequality, & increase in life
expectancy
Policies
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Policies implemented by domestic governments
varied across economies
Taiwan and Singapore basically escaped the crisis
South Korea recovered fastest
Malaysia and China did not accept IMF policies
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Prime Minister Mahathir kept interest rates low
Recession shorter than other countries
Who adopted IMF policies?
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Thailand, Korea, Philippines & Indonesia
International Monetary Fund
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Provided huge amounts of money
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Bailout packages amounted to $95 billion
Bailout money used to repay loans of Western
bankers
IMF imposed:
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High interest rates, decrease in government spending,
increase in taxes, devaluation of currency
Political and economic changes
Major restructuring
Increased transparency
Other minor reforms
GDP & Unemployment Rates
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GDP Dropped significantly and led to:
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In 1998 GDP fell by 13.1% in Indonesia, 6.7% in
Korea, and 10.8% in Thailand
Unemployment Rates
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High rates of unemployment, under utilization of
capital, severe economic hardship
Malaysia’s unemployment rose to 405,000
Hong Kong’s unemployment rose to 152,000
Thailand’s unemployment rose to 1.1 million
Indonesia’s unemployment rose to 13.7 million
In South Korea, urban poverty tripled
In Indonesia, poverty doubled
Devaluation
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Thai authorities decided to float the Baht in
July 1997
Crisis spread across the region
Thailand, Korea, and Indonesia devalued
their currency
Exchange rate movements had
consequences
East Asian financial institutions were
bankrupt
Foreign lenders were uncertain of
repayment
Insolvency spread across the economies
Deteriorating Financial
Conditions
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Fuelled further withdrawal of capital
Firms who borrowed prudently were having
trouble obtaining credit
Financial sector problems spilled into
economic activity
In Thailand lenders reduced exposure
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Creditors fled region
Who were the victims?
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Children were the victims of the
East Asia crisis
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Gains in child mortality
Less vaccinations
Reduced malnutrition
Maternal mortality, approximately
40,000 women
Sanitation and education threatened
33 Million children suffered from
malnutrition
Thailand’s UNICEF Ambassador
Anand Panyarachun speaks
about East Asian crisis