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    Asian Crisis 1997

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    merrydallschool
    The document discusses the Asian Financial Crisis that occurred from 1997-1998. It provides background on factors that caused the crisis such as macroeconomic weaknesses, the role of financial intermediaries, and large capital inflows into Asian countries. It then describes the effects in specific countries, the IMF response, and conclusions about the primary causes of the crisis.

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    Asian Crisis 1997

    Uploaded by

    merrydallschool
    393 views19 pages
    The document discusses the Asian Financial Crisis that occurred from 1997-1998. It provides background on factors that caused the crisis such as macroeconomic weaknesses, the role of financial intermediaries, and large capital inflows into Asian countries. It then describes the effects in specific countries, the IMF response, and conclusions about the primary causes of the crisis.

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    The document discusses the Asian Financial Crisis that occurred from 1997-1998. It provides background on factors that caused the crisis such as macroeconomic weaknesses, the role of financial intermediaries, and large capital inflows into Asian countries. It then describes the effects in specific countries, the IMF response, and conclusions about the primary causes of the crisis.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    393 views19 pages

    Asian Crisis 1997

    Uploaded by

    merrydallschool
    The document discusses the Asian Financial Crisis that occurred from 1997-1998. It provides background on factors that caused the crisis such as macroeconomic weaknesses, the role of financial intermediaries, and large capital inflows into Asian countries. It then describes the effects in specific countries, the IMF response, and conclusions about the primary causes of the crisis.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 19

    Asian Financial Crisis

    1997-98

    Presented by:
    Faisal, Muhammad
    Md. Abu Noman
    What caused the Asian Financial
    crisis?
    Macroeconomic weaknesses

    Financial intermediaries

    Export successes produce large earnings.

    Heavy investment inflows by the early 1990s.

    A bubble starts to develop

    Banks were not monitored.


    Asian financial crisis
    overview
    The Asian financial crisis is considered to have started on July 2, 1997
    with the devaluation of the Thai baht and ask IMF for assistance.

    Malaysia abandons the peg and blames the speculators on July 14


    Philippines seek assistance from IMF

    Indonesia floats on August 14, go to the IMF on October 8

    Repeated speculative attacks on Hong Kong dollar unsuccessful, but


    stock market plunges between October 20-23

    Global stock market decline on October 27

    S. Korea devalue Nov. 28 and ask for IMF assistance

    Spread over other Asia countries


    Macroeconomic weaknesses

    • Large current account deficit

    • Large capital inflows

    • Large exchange rate depreciations


    • Bank lending
    r uC
    sti ci f e d
    Large capital inflows

    • Large capital inflows,


    especially those
    deriving from foreign
    borrowing.

    • These inflows
    equivalent 1990-1996
    – Korea: 2.5% of GDP
    – Thailand: 10%
    – Indonesia: 3.5%
    Large capital inflows

    • They were encouraged


    by high economic
    growth, low inflation
    and relatively healthy
    fiscal performance
    (table1 and figure 2)
    Large exchange rate depreciation (to the US
    Dollar)

    Currency Exchange Rate Change


    (per US$1)
    June 1997 July
    1998
    Thai Baht 24.5 41 - 40.2%
    Indonesian Rupiah 2,380 14,150 - 83.2%
    Philippine Peso 26.3 42 - 37.4%
    Malaysian Ringgit 2.5 4.1 - 39.0%
    South Korean Won 850 1,290 - 34.1%
    aL
    ed ) r all o D S U ot(
    Large exchange rate depreciations (cont.)

    Inflexible exchange rate regimes complicated


    macroeconomic management and increased vulnerability.

    Nominal exchange rate had depreciated in a predictable


    manner in Indonesia, and was closely linked to the U.S, in
    Malaysia, the Philippines and Thailand.

    The crisis countries were vulnerable to capital outflows and


    exchange rate devaluations because of the significant amount
    of short term foreign currency debt, which was mostly un-
    hedged.
    Bank lending

    • Private credit sector in


    nominal terms expanded
    rapidly during the 1990s,
    at an average rate of 15
    to 20% compared to
    inflation rates of 3-10%.
    Bank lending (cont.)

    • Bank lending relied collateral rather than credit


    assessment and cash flow analysis, making banks
    vulnerable to excessive risk and declines in asset values.
    Bank lending (cont.)
    What are Financial Intermediaries and what
    role did they play in the crisis?

    “Financial intermediaries” were institutions perceived as having


    implicit government guarantees but were in most part
    unregulated and subject to sever “moral hazard” problems

    Unrestrained risky lending by these institutions caused inflation of


    asset prices (but not consumer goods). This over pricing of
    assets was sustained by a sort of circular process of
    reinforcement. The proliferation of risky lending drove up asset
    prices making the collateral position of the lending institutions
    seem stronger than it actually was. Also, the appearance of
    soundness of the position of financial institutions further
    increased risky loans putting even more upward pressure on asset
    prices.
    The IMF-Role

    The IMF was called in to provide financial support for three


    of the countries most seriously affected by the crisis:
    Indonesia, Korea, and Thailand. The strategy to address the
    crisis had three main components:

    Financing. Some US$35 billion of IMF financial support


    was provided for adjustment and reform programs in
    Indonesia, Korea, and Thailand, with the assistance for
    Indonesia being augmented further in 1998-99. Some
    US$85 billion of financing was committed from other
    multilateral and bilateral sources, although not all of this
    financing actually materialized
    The IMF-Role
    Macroeconomic policies: Monetary policy was tightened to
    halt the collapse of the countries' exchange rates--which went
    well beyond what might have been warranted by
    fundamentals and to prevent currency depreciation.

    Structural reforms: Steps were taken to address the


    weaknesses in the financial and corporate sectors. Other
    reforms were intended to alleviate the social consequences of
    the crisis and set the stage for a resumption of growth.
    Conclusion
    First, none of the governments were engaged in irresponsible
    monetary expansion, in fact their inflation rates were quite low. On the
    eve of the crisis all of the governments were more or less in fiscal
    balance.
    Second, the Asian countries did not have a troubling level of
    unemployment. Therefore, there did not seem to be any pressure to
    abandon the fixed exchange rate in favor of monetary expansion.

    Third, there was already a boom bust cycle in the asset markets that
    preceded the currency crisis.

    Fourth, in all countries involved in the AFC, financial intermediaries


    seem to have been central players in the crisis. In Thailand so called
    “finance companies” – nonbank intermediaries that borrowed short-
    term money then lent to speculative investors played a crucial role.
    Links & Abreviations

     http://www.imf.org/external/np/exr/ib/2000/062300.htm
     http://www.imf.org/external/np/speeches/2004/021204.htm
     http://www.imf.org/external/pubs/ft/wp/1999/wp99138.pdf

    IMF = International Monetary Fund


    AFC = Asian Financial Crisis
    Thanks !

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