Transcript East Asian Financial Crisis - College of Arts & Sciences

-Lhamu Tsering
Agenda..
East Asia pre crisis
 Thailand
 Crisis timeline
 The dilemma
 Asian Weaknesses
 After the shock
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Countries involved..
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Thailand
Philippines
Hong Kong
Taiwan
Singapore
South Korea
Malaysia
Indonesia
China
Thailand..
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May 1997: Thailand spends billions of its foreign reserves to defend the Thai
baht against speculative attacks

In case of Thailand:
 Allowing too many short-term capital flows to accumulate with a high degree
of currency speculation,
 Sustaining a fixed exchange rate when it was no longer suitable,
 Lack of sufficient risk management system at the national level as well as
regional level.
 concerns of large current account deficits
 weakness in the Thai financial system
 culminating with the failure of a major finance company, Finance One
Speculative attacks brings down investor confidence causing- “capital flight”
 Crisis in Thailand turned out to be a contagion

Crisis Timeline..

July 1997
 Thailand is forced to devalue the baht, which drops the
value of the baht by as much as 20%-- a record (had
actually attempted a 15% controlled devaluation)
 Malaysia’s central bank intervenes to defend the ringgit.
 The Philippine peso is devalued. Indonesia widens its
trading band for the rupiah in a move to discourage
speculators
 The Singapore dollar starts a gradual decline.
Crisis timeline..Contd/.

August1997
 Thailand agrees to adopt tough economic measures
proposed by the IMF in return for a $17 billion loan
from the international lender and Asian nations.
The Thai government closes 42 ailing finance
companies and imposes tax hikes as part of the
IMF's insistence on austerity
 Indonesia abandons the rupiah's trading band and
allows the currency to float freely, triggering a
plunge in the currency
Crisis timeline..Contd/.

October1997
 Indonesia asks the IMF and World Bank for help after the rupiah
falls more than 30% in two months, despite interventions by the
country's central bank to prop up the currency
 Hong Kong's stock index falls 10.4% after it raises bank lending
rates to 300% to fend off speculative attacks on the Hong Kong
dollar. The plunge on the Hong Kong Stock Exchange wipes
$29.3 billion off the value of stock shares.
 The South Korean won begins to weaken
 The IMF agrees to a loan package for Indonesia that eventually
swells to $40 billion. In return, the government closes 16
financially insolvent banks and promises other wide-ranging
reforms
Crisis timeline..Contd/.

November1997
 Bank of Korea allows the won to fall below 1000 against the
dollar (record low)

December 1997
 IMF approves a $57 billion bailout package to the South
Korea
 As part of IMF economic restructuring plan, the Thai
government closes 56 insolvent finance companies (30,000
white collar jobs lost)
 South Korea’s first president elected from country’s
opposition party. In days the won hits new low.
 $3 billion emergency loan released by the world bank , part of
a $10 billion support package.
Crisis timeline..Contd/.

January 1998:
 Release of Indonesia budget plan pulls the rupiah to an all-time low
 Inflation rises. Prices for basic food staples in Indonesia increase by
as much as 80%
 The rupiah plunges to 12,000 rupiah against the dollar

June 1998
 Japan announces that its economy is in a recession
 Yen falls to levels near 144 to the dollar. US treaury and Federal
reserve intervenes to prop up the yen

August 1998
 Wall Street reacts; the Dow plunges 300 points in its third biggest
loss
Dilemma..

Drop in currencies
 Raise import prices leading to inflation threat
 Threat that potentially viable banks and
companies may become bankrupt
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Defend the currency
 would mean to raise interest rates
 Threat of economic slump resulting in the
failure of banks
Asian Weaknesses..

Weaknesses that became apparent after the crisis:
Productivity: economic expansion before crisis later
explained by the rapid growth of production inputs
(capital and labor) – but relatively little increase in
productivity
2. Banking Regulation: Ineffective government supervision
3. Exchange rate regimes- Mostly pegged exchange rate
system
4. Legal Framework: lack of structured legal framework to
deal with bankruptcy
1.
After the Shock..
 Ties of some currencies to the dollar had to be abandoned resolving
floating rate systems
 Supervisory process reforms
 Need for accumulation of high levels of international reserves
 Evidence that excessive capital inflows to a country to take advantage
of high rates can cause unwise investment decisions
East Asian CA/GDP annual averages, percent of GDP)
Country
China
Hong Kong
Indonesia
Malaysia
South Korea
Taiwan
Thailand
1990-1997
1998-2000
2001-2004
1.5
0.6
-2.5
-5.6
-1.6
4
-6.3
2.4
2.5
4.1
8.7
4.6
3.9
12.8
10.3
6.5
1.9
2.3
8.1
10.2
5.1
 Questions?????...