Post on 17-Jul-2015
HistoryBefore 1997, Asia was attractive
By developing countries
High interest rates
“Asian economic miracle”F
our Asian Tigers
IntroductionThailand
Thai bahtReal estateBurden of foreign debt
Southeast Asia and Japan Slumping currenciesDevalued stock marketSteep rise in private debt.
IMF Role$40 billion program to stabilize the currencies of
South Korea, Thailand, and Indonesia.
Bailouts (rescue packages) for the most affected economies to enable affected nations to avoid default.
Structural adjustment package
SAPcut back on government spending to reduce
deficits,
allow insolvent banks and financial institutions to fail and aggressively raise interest rates.
The reasoning was that these steps would restore confidence in the nations’ fiscal solvency, penalize insolvent companies, and protect currency values.
IMF and High Interest Ratesto attain the chain objectives of tightened money supply
discouraged currency speculation
stabilized exchange rate
curbed currency depreciation
ultimately contained inflation.
Consequencessignificant macro-level effects
including sharp reductions in values of currencies
stock markets
other asset prices of several Asian countries.
The nominal US dollar GDP of ASEAN fell by US$9.2 billion in 1997 and $218.2 billion in 1998.
The Currency exchange rate per USDJune 1997 compare to July 1998
Thai baht: 24.5 to 41
Indonesian rupiah: 2,380 to 14,150
Philippine peso: 26.3 to 42
Malaysian ringgit: 2.5 to 4.1
South Korean won: 850 to 1,290
Thailandfrom 85-96 Thailand grew 9% per year
Highest economic growth rate
Inflation was also low (3.4%-5.7%)
Baht value was 25 to the US Dollar
ThailandMay 14-15, 1997 the baht faced very bad speculative
attacks
In June, Prime Minister Yongchaiyudh refused to devalue the baht
Thai government failed to defend the Baht, starting the crisis
Baht lost more then half it’s value
Thai stock market dropped 75%
ThailandAugust 11, 1997, IMF unveiled $17 billion rescue
package
August 20, 1997 IMF approved another $3.9 billion bailout package
Rumors that former Prime Minister profited from the devaluation
Finally recovered by 2001, paid off IMF debt in 2003
IndonesiaIndonesia was doing good in June 1997
Low inflation$900+ Million trade surplus$20 + Billion foreign exchange reservesGood banking sector
However, many corporations were borrowing in U.S. DollarsIn July 1997, Indonesia widened the rupiah tradin band from
8%-12%
IndonesiaOn August 14, 1997 the managed floating exchange
regime was replaced by a free-floating system, causing the rupiah to drop more
IMF created a rescue package of $23 Billion, but didn’t help
In Sept they hit a all time low, Moody’s rated Indonesia’s long-term debt to “junk bond” status
More effects were felt in Nov when the summer’s hits were felt in the corporate books
IndonesiaIn Feb, the President got rid of the governor of the Bank
of Indonesia, but this wasn’t enough and he was eventually forced to resign
EffectsRupiah was 200 to 1 USD, afterward hit 18,000 to 1 USDLost 13.5% of GDP
South KoreaLarge corporations were funding big expansions, however
failed due to excess debt
Moody’s lowered their credit rating from A1 to B2
Seoul stock exchange dropped 4% on Nov 7, 7% on Nov 8, and 7.2% on Nov 24
In 1998 Hyundia took over Kia Motors, Samsung was dissolved, and Daewoo was sold to American GM
Currency dropped from 800 per dollar to 1,700
National debt-GDP ratio went from 13%-30%
Hong KongAfter UK gave control of Hong Kong to China the Hong
Kong dollar was under speculative pressure
Authorities spent more then US $1 Billion to defend local currency
Had more then US $80 billion in foreign reserves
Stock markets became volatile
In Oct the Hang Seng Index dropped 23%
In Aug 98, interest rates jumped from 8%-23% overnight, and even 500% once
Hong KongThe Hong Kong Monetary Authority (HKMA) setup a
system to establish rates, however speculators were taking advantage of this by short selling shares.
HKMA wound up buying HK$120 billion worth of shares in various companies to combat this
Started selling those share in 2001, profiting HK$30 billion
MalaysiaIn July 1997, the Malaysian ringgit jumped overnight
from 8% to over 40%
Ratings had fallen from investment grade to junk
Lost 50% of value, from 2.50 to 3.80 to the dollar
Output of real economy declinedConstruction dropped 23%Manufacturing 9%Agriculture 5.9%GDP 6.2%
MalaysiaIMF aid was refused
Various task forces were formed to fix economy
By 2005 had a surplus of US$14.04 billion
SingaporeSingapore dipped into a short recession
Government kept very active management to ensure security
Government programs were put forward
Made no attempt to help capital markets, instead allowed a 60% drop, however within a year fully recovered and continued to grow
Less Affected CountriesChina, The US, and Japan were very strong economies
and were able to survive
China held most of it’s foreign investments were in factories rather then securities
U.S. didn’t collapse, but on Oct 27,1997 the Dow Jones fell 554 points (7.2%)
Japan was affected because the economy is so prominent (yen fell to 147), but it was world’s largest holder of currency reserves so it bounced back quickly
ConclusionMany businesses collapsed and millions of people fell
below the poverty line
Indonesia, South Korea, and Thailand were most affected
Heavy U.S. investment shifted from Thailand to Europe
Many countries pushed for corporate governing to avoid problems later
Investors were reluctant to lend to developing countries
ReferencesKaufman, GG., Krueger, TH., Hunter, WC. (1999) The
Asian Financial Crisis: Origins, Implications and Solutions. Springer.
Weisbrot, Mark (August 2007). Ten Years After: The Lasting Impact of the Asian Financial Crisis
http://en.wikipedia.org/wiki/1997_Asian_Financial_Crisis
Tecson, Marcelo L. (2009), "IMF Must Renounce Its Weapon of Mass Destruction: High Interest Rates"