Transcript Indonesian and S. Korean Financial Crisis

Key Points
Origins of the crisis
 Thai Baht
 Economy of S. Korea and Indonesia
 The Chaebols
 Beginning of the collapse
 Seoul Stock Exchange
 Default and bailout
 IMF response

Origins of the Southeast Asian
Financial Crisis

Thailand
 Fixed exchange rate to the US
dollar
 Easy credit from Western and
Japanese banks
 Massive foreign debt
 Huge real estate bubble
 Real GDP grew at 9% a year
from 85 to 96
Thai Baht
○ Pegged at 25 baht to $1 USD



May 1997 – Investors started to short
the baht
June 1997 – Baht was forced to float
Devalued to 56 baht per $1 USD by
early 1998
Consequences

Housing bubble burst
 Resulted in massive
layoffs in finance, real
estate and construction
 Stock market plunged
by 75%

$17 billion bailout
package from IMF
 Subject to IMF conditionality
Economy of South Korea


11th largest economy at the time
Dominated by chaebols
Multinational conglomerates
Implicitly backed by the government
The Chaebols
Aggressive expansion to compete with
Western MNC’s
 Led to overleveraging and negative returns
 Banks were burdened by non-performing
loans

Beginning of the Collapse

July 1997 – Kia Motors asked for emergency loans
from the government
 Was later absorbed by Hyundai


Daewoo collapsed and was sold to General
Motors
Moody’s lowered South Korea’s credit rating from
A1 to A3 then to B2
Seoul Stock Exchange



Dropped 30% in November 1997
Massive capital flight
Korean won lost half its value to the dollar from
1997 to 1998
Default and Bailout


Korea was about to default on its foreign debt
Korea was given $55 billion in new loans and
credits by the IMF
 It was the largest bailout in history up to that point.
IMF response

Structural Adjustment Programs
 Reduce government spending
 Let insolvent financial institutions fail
 Raise interest rates
 Restore confidence in the currency
Who’s to Blame?


Most Koreans blame the IMF for the crisis and refer to it
as the IMF crisis
Was the IMF truly to be blamed?
Indonesia:
Country in Southeast Asia and Oceania
 17, 508 islands, 6,000 are populated
 Area-742,050 sq mi
 Population around 230 million
 World’s 4th most populous country
 Capital city-Jakarta

Republic of Indonesia
Economy of Indonesia
Largest economy in Southeast Asia
 GDP: US $932.1 billion
 Member of G-20 major economies
 Market-based
 Over 164 state-owned enterprises

Beginning of the collapse

Depreciation of rupiah
 Rp 2,600/$1 (Aug 1997) fell to 11,000/$1
(Jan 1998)
Public debt reaching $60 bn USD
 Real GDP contracted by 13.7%
 Inflation of 77% in 1998

Initial Response
Float the rupiah
 Raise key domestic interest rates
 Tighten fiscal policy

IMF Response
Rescue package of $23 billion
 Financial sector restructuring
 Stabilizing the rupiah

 Retention of a tight monetary policy
 Flexible exchange rate policy
Source: International Monetary Fund 2009 World Economic Outlook
Source: International Monetary Fund 2009 World Economic Outlook
Questions?