Financial Institution and Markets 2nd Assignment Date: 5th April, 2016

1997 ASIAN CRISIS

During the early 1990s, East Asian countries like Thailand, Indonesia, Singapore, Hong

Kong, South Korea, Malaysia were having the massive economic growth. The main reasons

behind the high growth were exports oriented economies, cheap and well-educated labors, high

investments of foreign companies, low inflation, high saving rates, stable exchange rates and

open economies. However, during the period of 1997-98, these countries experienced downfall

of its currency markets and stock markets. The Asian crisis can be said as the series of

devaluation of the currency followed by other events like decline of stock market that spread

through different countries.

The crisis started in July 1997 with Thailand and had the contagion effect to different

other countries. There was no any capital control in Thailand. The government of the country

borrowed too much from the international market. The currency markets first failed in Thailand

when Thai government was forced to float its currency because of the lack of foreign currency to

support Thai Baht. Thai baht depreciated the most followed by Malaysian ringgit, the Indonesian

rupiah, and the Philippine peso along with slight depreciations of the Singaporean dollar, the

Taiwan dollar, and the Korean won. Many of these country’s currency was formally or

informally pegged with the US dollar. Thus, the main cause of the crisis was the weakness in the

financial system of the country. Large capital inflows were supported by pegged exchange rates

because foreign investors need not have to worry about the exchange rates. There was the

shortage of the foreign exchange causing the value of domestic currency to fall intensely.

Roles of Assets Management Companies (AMCs) During The Crisis: During the Asian crisis,

when it became clear that the primary cause was weakness in the financial systems, the

governments of Indonesia, Korea, and Malaysia immediately established centralized AMCs to

Financial Institution and Markets 2nd Assignment Date: 5th April, 2016

provide better management structures for problem assets. The depreciation of Malaysian ringgit

had an adverse effect on the banking sector of the country. Many companies including the large

corporations that have borrowed from the banks were unable to repay their loans. As a result,

banks were unable to provide sufficient funds to finance business activities. Thus, Asset

Management Company was formed in order to manage the impaired assets including non-

performing loans (NPLs) of the financial institutions. The main objective of the Asset

management companies was to remove the NPLs from the balance sheets of the financial

institutions and to maximize their recovery value. Good assets of the distressed financial

institutions were separated from their bad assets and Asset management companies used to act as

the vehicle to manage those bad assets. This would free the banks from the burden of debts that

had prevented them from providing loans to their customers.

This separation of the non-performing assets of the banks would help them to focus on

rebuilding the banks and on new lending while AMCs could concentrate on the recovery of those

bad assets. This helped the bank to improve the quality of their asset portfolio, led to the growth

of domestic credit and improve their profitability. Korean Asset management corporation, Thai

financial sector restructuring, Indonesian bank restructuring agency, Malaysian Danaharta, etc

were some of the asset management companies established during the crisis. Since, the root

cause of the crisis was the weaknesses in the financial systems, AMCs helped in the disposal,

collection and restructuring of the nonperforming assets of the banks that helped the banks to

focus on their core business activities and helped to restore soundness of overall financial

system.

Name: Niraj Taujale

MBA V (W/E)