-Lhamu Tsering

Agenda.. East Asia pre

crisis Thailand Crisis timeline The dilemma Asian

Weaknesses After the shock

Countries involved.. Thailand Philippines Hong Kong Taiwan Singapore South

Korea Malaysia Indonesia China

Thailand.. 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 weakenThe 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 currenciesRaise import prices leading to inflation

threatThreat that potentially viable banks

and companies may become bankrupt 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:1. 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

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 decisionsEast Asian CA/GDP annual averages, percent of

GDP)

Country 1990-1997 1998-2000 2001-2004

China 1.5 2.4 2.5

Hong Kong 0.6 4.1 8.7

Indonesia -2.5 4.6 3.9

Malaysia -5.6 12.8 10.3

South Korea -1.6 6.5 1.9

Taiwan 4 2.3 8.1

Thailand -6.3 10.2 5.1

Questions?????...