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1997 Asian Crisis

TeamTeamTeamTeam :

Shreerajavel Rengaraj

Pankaj Kale

K.T. Vinod

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ContentsAsian Market Miracle

BeginningEffects on Asian Countries

Role of IMF

Effect of America and India

Causes of Crisis

Lessons learned.

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Asian Crisis Definition

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East Asian CountriesThailand

Malaysia

Indonesia

Philippines

Hong Kong

South Korea

Singapore

Taiwan

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Asian Countries Rounds Effects

Effects Countries

Majorly Thailand, IndonesiaSouth Korea

Fairly Malaysia, PhilippinesHong Kong, Taiwan

Mild Singapore, Japan, China

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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.

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Asian Weakness

Banking regulations.

Fixed Exchange Rate.

Current A/c Deficit.

Crony capitalism.

Paul Krugman Myth of Asian Miracle.

UNCTAD Raised Concerns.

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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.

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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

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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.

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CONTAGION

Spreads to other countries

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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.

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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 : Constructiondropped 23%,Manufacturing 9%, Agriculture 5.9%,GDP6.2%

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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% onNov 8, and 7.2% on Nov 24

1998 Hyundai took over Kia Motors, Samsung was

dissolved, and Daewoo was sold to American GM

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Philippines 1998, Growth dropped to virtually zero.

Peso fell significantly from 26 US $ to 55 US $.

President Estrada forced to Resign.

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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.

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Recovery

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Role of IMF Created a series of bailout for most affected economy.

Provided $120 billion as bailout package.

SAP Structural Adjustment Package.

1. Change currency, banking and financial system.

2. Reduced Govt spending and deficits.

3. Close insolvent banks and financial institutions.

4. Raise interest rate.

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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 toits controversial role.

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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.

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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 RBIduring periods of crisis.

Strong Fundamental growth with services sector beingthe prime reason.

External Debt to GDP has been declining for the pastfew years.

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Reasons for crisis Bank Failure.

Corporate Failure.

Mistakes in Policies.

Political Uncertainty.

Contagion.

International Interventions.

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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 squeezeand a sharp rise in interest rates

Offshore creditors grew reluctant to roll over short-termloans.

The lack of clear bankruptcy laws and workoutmechanisms

The losses on foreign exchange exposure and the risein non-performing loans eroded the capital base of thebanks

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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%, Thailand4.2% and Malaysia 4.9%.

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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

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Thank You