1997 Asian Crisis

Team : Shreerajavel Rengaraj Pankaj Kale K.T. Vinod

Contents
Asian Market Miracle Beginning Effects on Asian Countries Role of IMF Effect of America and India Causes of Crisis Lessons learned.

Asian Crisis Definition

East Asian Countries

Thailand Malaysia Indonesia Philippines Hong Kong South Korea Singapore Taiwan

Asian Countries Rounds Effects

Effects Majorly Countries Thailand, Indonesia South Korea

Fairly

Malaysia, Philippines Hong Kong, Taiwan

Mild

Singapore, Japan, China

Asian Miracle
Attracted half of total capital inflow. High savings and investment rate. Robust growth (8-12% GDP). Moderate inflation. Export to rich nations. Increase in asset values ( land and stock prices). Acknowledged by IMF and World Bank.

Asian Weakness
Banking regulations. Fixed Exchange Rate. Current A/c Deficit. Crony capitalism. Paul Krugman Myth of Asian Miracle. UNCTAD Raised Concerns.

The StartThailand
1985-96 , Thailand grew at an average of 9% per year. Low Inflation within (3.4 to 5.7%) Until July 97 Baht was pegged to 25 US $ Economy attractive to speculators Huge capital inflow. By 1995, Net capital inflow of US$ 14.239 billion.

Thailand Cont..
Stock market 175% , Property sector 395%. 50 banks and non banks financial institutes emerged. 10-35% of bank loans went to bricks and mortar. FDI to Thai economy fell from 33.57% to 15.90% Mismatch between foreign assets and liabilities. Starting 1995, economy slows down

Thailand Cont..
May 1997 , Baht hit by Massive Speculative Attack. June End , Thai PM declared he wont devaluate Baht. 90% of countrys foreign reserve used to defend Baht. Govt Fails, July moves to flexible exchange rate. Thailands booming economy comes to a halt. Thailand approached IMF.

CONTAGION

Spreads to other countries

Indonesia
Devaluation of Rupiah from 2000 to 18000 per US $. 16 major commercial banks were closed. Bank of Indonesia governor sacked. President Suharto , steps down after 30 yrs in Power. Moodys downgrades long term debt to Junk Bond.

Malaysia
July 1997, 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 declined : Construction dropped 23%,Manufacturing 9%, Agriculture 5.9%,GDP 6.2%

South Korea
Devaluation of Won: from 1000 to 1700 Per US $ Moody downgrades credit rating from A1 - B2 National debt-GDP ratio went from 13%-30% Seoul stock exchange dropped 4% on Nov 7, 7% on Nov 8, and 7.2% on Nov 24 1998 Hyundai took over Kia Motors, Samsung was dissolved, and Daewoo was sold to American GM

Philippines
1998, Growth dropped to virtually zero. Peso fell significantly from 26 US $ to 55 US $. President Estrada forced to Resign.

Japan
40% of Japans export go to Asia. Japanese Yen fell to 147 as mass selling began. GDP growth rate slowed from 5% to 1.6%. Some companies went bankrupt.

Recovery

Role of IMF
Created a series of bailout for most affected economy. Provided $120 billion as bailout package. SAP Structural Adjustment Package.
1. 2. 3. 4.
Change currency, banking and financial system. Reduced Govt spending and deficits. Close insolvent banks and financial institutions. Raise interest rate.

Effects of IMF
Domestic bank lending stopped surprisingly in countries with Fund programs. Currency depreciation and stock market collapse continued long after the programs were signed. More bankruptcy. Locals called the financial crisis the IMF crisis due to its controversial role.

Effect on America
LTCM controlled 100 billion global business asset. Sep 98,LTCM losses piles up and goes out of control. Wall Street verdict Disaster.

Why India was not affected

Full Capital Convertibility was not allowed. Lock in Period for foreign investment in real estate. Floating exchange rate with some influence by the RBI during periods of crisis. Strong Fundamental growth with services sector being the prime reason. External Debt to GDP has been declining for the past few years.

Reasons for crisis

Bank Failure. Corporate Failure. Mistakes in Policies. Political Uncertainty. Contagion. International Interventions.

Reasons.Cont.
The withdrawal of foreign funds triggered a chain reaction which quickly developed into a financial panic. The withdrawal of funds also set off a liquidity squeeze and a sharp rise in interest rates Offshore creditors grew reluctant to roll over short-term loans. The lack of clear bankruptcy laws and workout mechanisms The losses on foreign exchange exposure and the rise in non-performing loans eroded the capital base of the banks

1999
Economic conditions begin to improve by early 99. Jan 2000, currency depreciation improved. Stock prices started rising. Positive growth rates Korea growth rate was 9.2%, Indonesia 0.1%, Thailand 4.2% and Malaysia 4.9%.

Learnings
The lessons from Developing Country Crisis are Summarized as :
Choosing the right exchange rate regime The Central Importance of Banking The Proper Sequence of reform Measures The Importance of Contagion

Thank You