Key Points

Origins of the crisis Thai Baht Economy of S. Korea and Indonesia The Chaebols Beginning of the collapse Seoul Stock Exchange Default and bailout IMF response

Origins of the Southeast Asian Financial Crisis Thailand

Fixed exchange rate to the US dollar

Easy credit from Western and Japanese banks

Massive foreign debtHuge real estate bubbleReal GDP grew at 9% a year

from 85 to 96

Thai Baht

○ Pegged at 25 baht to $1 USD May 1997 – Investors started to short

the baht June 1997 – Baht was forced to float Devalued to 56 baht per $1 USD by

early 1998

Consequences

Housing bubble burst Resulted in massive

layoffs in finance, real estate and construction

Stock market plunged by 75%

$17 billion bailout package from IMF Subject to IMF conditionality

Economy of South Korea

11th largest economy at the time Dominated by chaebols

Multinational conglomerates

Implicitly backed by the government

The Chaebols

Aggressive expansion to compete with Western MNC’s

Led to overleveraging and negative returns Banks were burdened by non-performing

loans

Beginning of the Collapse

July 1997 – Kia Motors asked for emergency loans from the government Was later absorbed by Hyundai

Daewoo collapsed and was sold to General Motors

Moody’s lowered South Korea’s credit rating from A1 to A3 then to B2

Seoul Stock Exchange

Dropped 30% in November 1997 Massive capital flight Korean won lost half its value to the dollar from

1997 to 1998

Default and Bailout

Korea was about to default on its foreign debt Korea was given $55 billion in new loans and

credits by the IMF It was the largest bailout in history up to that point.

IMF response

Structural Adjustment Programs Reduce government spending Let insolvent financial institutions fail Raise interest rates Restore confidence in the currency

Who’s to Blame?

Most Koreans blame the IMF for the crisis and refer to it as the IMF crisis

Was the IMF truly to be blamed?

Indonesia: Country in Southeast Asia and Oceania 17, 508 islands, 6,000 are populated Area-742,050 sq mi Population around 230 million World’s 4th most populous country Capital city-Jakarta

Republic of Indonesia

Economy of Indonesia

Largest economy in Southeast Asia GDP: US $932.1 billion Member of G-20 major economies Market-based Over 164 state-owned enterprises

Beginning of the collapse Depreciation of rupiah

Rp 2,600/$1 (Aug 1997) fell to 11,000/$1 (Jan 1998)

Public debt reaching $60 bn USD Real GDP contracted by 13.7% Inflation of 77% in 1998

Initial Response

Float the rupiah Raise key domestic interest rates Tighten fiscal policy

IMF Response

Rescue package of $23 billion Financial sector restructuring Stabilizing the rupiah

Retention of a tight monetary policy Flexible exchange rate policy

Source: International Monetary Fund - 2009 World Economic Outlook

Source: International Monetary Fund - 2009 World Economic Outlook

Questions?