Asian Financial Crisis

Asian
Financial
Crisis:
1997
SUBMITTED TO: DR.JAVED IQBAL

Submitted by: Ramsha Ali
Asian financial crisis (1997)
The Asian financial crisis was a period of financial crisis marked by devaluation of many Asian
currencies starting from July 1997 and was also commonly referred to as the “Asian contagion”.
it is the third major crisis of 90’s after crises of European monetary system and the Mexican peso
crisis in 1994.
This financial crisis raises fears of a worldwide economic meltdown due to massive depreciation
of Asian currencies.
How it happened?
The Asian financial crisis was ignited by financial intervention from the IMF and the World
Bank encouraging the Asian economies to relax capital controls. The crisis started in Thailand
with the financial collapse of Thai baht. In the late 90’s US increased increased interest rate to
reduce inflationary pressure. Higher interest rate in the US made east less attractive place to
move money flows. The Thai baht was initially pegged to the US dollar and was supported by
Thailand foreign currency reserves. When Thai baht suffered massive currency devaluation due
to severe financial overextension which was partly, real state sector driven, the government
exhausted all of its foreign reserves to defend the peg and was finally forced to float the baht.
At the time Thailand had acquired a burden of foreign debt that made the country effectively
bankrupt even before the collapse of its currency. The crisis in Thailand sparked a chain of
events causing the neighboring Asian economies to slump contributing to market declines in the
US, Europe and Russia. As the crisis spread most of the south Asian and japan saw slumping
currencies, devalued stock markets and other asset prices and a precipitous rise in private debt.
Indonesia, South Korea and Thailand were the most effected by the crisis. Few countries like
Malaysia, Hong Kong etc. suffered moderately. Although all suffered from a loss of demand and
confidence throughout the region.
IMF role:
What made it worse that foreign debt to GDP ratios rose from 100% to 167% in the four large
associations of south East Asian nations (ASEAN). At that time the IMF stepped in to initiate a
40$ billion program to stabilize the currencies of South Korea, Thailand and Indonesia,
economies which were particularly effected by the crisis. However, their intervention has proved
very controversial, with many arguing that their intervention made things worse. The IMF
insisted on fiscal restraint – lower spending, higher taxes and privatization. Such big loans has
been given only from the IMF so after making a close surveillance and full discussion with the
local government, the IMF signed some agreement with some countries. The Indonesia was
deeply affected so IMF policy consists of following point:
 First, the board macroeconomic framework. The program was designed to avoid a decline in
output, while containing inflation to 20% that year, with the aim of bringing it back to single-
digit level next year, despite the sharp depreciation of the rupiah. At the same time, the external
current account balance was expected to move from a deficit into a sizeable surplus, thereby
generating additional foreign exchange to help the country to repay its external debt.
 Second, the budget. The 1998-99 budgets would be revised, to accord with the newly agreed
macroeconomic framework, while still adhering to Indonesia's long-standing balanced-budget
principle. To achieve the objective, serious measures would be required. In particular, action
would need to be taken to curb energy subsidies, which have grown to unsustainable proportions
as the rupiah's depreciation has pushed domestic prices far below world levels. Accordingly, the
government would phase out subsidies gradually by raising both fuel and electricity prices in
steps,
 Third, fiscal transparency. In order to ensure that the public is kept fully informed of all
government activities, the accounts of the reforestation and investment funds would be brought
onto the budget in 1998-99.
 Public spending must be limited only to those items that are of vital importance to the country.
For this reason, the program envisages that development spending would be curtailed, including
by cancelling immediately the 12 infrastructure projects that were recently postponed or paced
under review.
 Monetary policy will need to be kept firm for a sustained period, until confidence in the currency
is restored. As the program measures take hold and confidence returns, market interest rates
should gradually begin to fall, while capital that has moved overseas should return to the
country, providing the banks with sufficient liquidity to resume their lending activity.
 Structural reforms. The program envisages that virtually all of the restrictions that have been put
in place will soon be swept away.
Actually, such big help from the IMF did work. For example, in Thailand and Korea, after
implementing the IMF-supported program, the market confidence in both economies returned
after January 1998. The currency had strengthened and the stock markets had been up, new
foreign investment and portfolio investment flowed back. Furthermore, market participants
began to differentiate among countries---and cautiously return to the countries where economic
problems had been forcefully addressed.
How Malaysia become successful?
The recovery from the crisis was prenominal in case of Malaysia among all the Asian countries
there were certain reasons behind it. First of all instead of instantly going towards aid from IMF
Malaysian government use their own policies to recover from the crisis rather than panicking and
instantly using the funds from foreign to maintain their liquidity. Secondly their delayed
response to crisis was also an efficient measure. at that time when Western countries are using all
types of measures such as QE, LTROs, TARP, Target2 and etc. to inject funds into their
economies in an attempt to reflate their economies. By the time when Malaysia imposed the
capital control (1st September 1998), the crisis had already devastated other countries by more
than a year. Much of the foreign capital that had already left is coming back to ‘bottom fish’ so
as to say, since much of the equities and asset prices are offering at rock bottom prices. Further
to that those IMF-3 economies that embrace IMF aid are on their way to recovery.
Another main reason for the delayed response is the internal bickering between Mahathir and his
deputy (Anwar Ibrahim – Finance Minister then). The imposition of the capital control is
‘purposely timed on 1st September 1998’ because they know that Anwar is going to be sacked
the next day.
The measure that Malaysia took mainly includes the movement of the ringgit from a free float
to a fixed exchange rate regime. Bank Negara fixed the ringgit at 3.8 to the dollar. Capital
controls were imposed while aid offered from the IMF was refused. Various task force agencies
were formed. The Corporate Debt Restructuring Committee dealt with corporate loans.
Danaharta discounted and bought bad loans from banks to facilitate orderly asset
realization. Dana modal recapitalized banks.

Asian Financial Crisis

Uploaded by

Copyright:

Available Formats

Asian Financial Crisis

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Asian Financial Crisis

Uploaded by

Copyright:

Available Formats

Asian

SUBMITTED TO: DR.JAVED IQBAL

How Malaysia become successful?

You might also like