The Southeast-Asian Financial Crisis

8/14/2019 The Southeast-Asian Financial Crisis

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Group members:

Reena Alva 04

Disha Anandpara05

Vicky Barot 06Rachel Joshua 29

Rishabh Kapoor 33

Afzal Patel 49


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Flow of presentationINTRODUCTION

CAUSES OF SOUTH EAST ASIAN CRISIS

EFFECTS OF CRISIS IN THE REGIONIMF AND ITS HANDLING OF THE CRISIS

GLOBAL IMPACT OF THE CRISIS

STEPS TO OVERCOME THE CRISIS


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Southeast Asia before

crisisSoutheast Asia one of the most successful emerging

market countries

Southeast Asia attracted foreign investors on the

grounds of high interest ratesHigh GDP growth rates.

This achievement was widely acclaimed by financialinstitutions including the IMF and World Bank, and wasknown as part of the "Asian economic miracle

As a result it experienced high inflow of money &increased asset prices.


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Beginning of the downfallDecision of the Thai government to float the

baht

Southeast Asia then saw slumping currencies

Burden of Foreign DebtStock Market and other asset prices devalued

Rise in private debt

Most countries experienced large currentaccount deficits.


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Countries most affected were Indonesia,

South Korea and Thailand , countries likeHong Kong, Malaysia, and the Philippinesalso faced economic slowdown.

A slowdown of exports and performanceafter 1996.

Generally prudent fiscal policies and highprivate saving rates did not provide with

the possibility of these countries to face ameltdown.


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The crisis can be divided into 2 phases

The 1st phase 1996 to onset of crisis followed

by IMF funding.The 2nd phase covers period from may 1998

after short period of stabilization.


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Unsustainable Current Account deficit

Over Dependence on Short Termborrowings

Poor Regulation of the Economy

Over-Inflated Asset Prices


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Effects of the Crisis in the

RegionEquity Markets Collapsed

Capital Crunch

High Interest rates

Devaluation of Currency

Impact on Export Industry


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Impact on Domestic Industry due to highInterest rates

Unemployment

Reduction in Foreign Exchange

Bankruptcy of Financial Institution


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IMF POLICY HAD NUMBER

OF KEY ELMENTSA. FINANCIAL ASISTANCEThe rescue funding for the Asian Crisiseconomies was organised by the IMF over the

course of the second half of 1997.54 The need forinternational assistance to stricken economies isusually only triggered when there is a danger ofsovereign default. In trying to defend their

currencies from speculation, the Thai, Korean andIndonesian governments were in danger ofdefaulting on their repayment commitments bylate 1997 and thus needed aid.


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B. The Austerity Programme

1.Fiscal Policy

Fiscal policy is tightened to limit the needfor inflows of capital from overseas.

So that money could be diverted to paysome of

the costs of bank restructuring. IMF staff inWashington had apparently wanted a fiscal

contraction of 3-4% of GDP, but the staff inThailand found the authorities reluctant to

see a contraction of more than 2%.


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2. Monetary Policy

A high interest rate policy has the twin effectsof reducing the need for external capital

inflows and helping to maintain export

competitiveness by controlling domesticprices. If

monetary policy is not tightened, the benefitof the devaluation is lost:


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C. Restructuring

The IMF programs arranged for:

The re-capitalisation of undercapitalisedinstitutions;

Close supervision of weak institutions;

Increased potential for foreign participation indomestic financial systems.


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The Global Impact of the Asian

Crisis

Loss of global financial wealth $ 2.3 trillion

= 19% of OECD consumers expenditure

Effects seen through reduced trade flowsand lower FDI


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A. The Wealth Effect: Falls in

Equity MarketsCOUNTRIES AFFECTED:

The UK, pension funds had about 5% of theirassets, approximately $50 billion, in the Pacificregion

Flows from the US into the regions equitymarkets amounted to $33 billion

Japan was the most exposed western economyto the South East Asian markets


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B. International TradeSouth East Asian currency devaluation =

weakening of demand for western goods =brake on the growth of exports of foreigncountries

On the import side: South East Asian

producers cut prices to maintain demand =Western manufacturers were pressurised intoreducing their prices


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C. Foreign Direct

InvestmentIncrease in the cost of acquiring overseas

assets

Most affected : UK, due to delay ortermination of Korean projects


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CRISIS


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Aggressive openness to ASEAN

EconomiesEmphasis on liberalization, Privatization and

Deregulation.

New form of linkage with other countries

ASEAN+3


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Sound Financial

MeasuresDeepening strong Bond Market

Common Currency

Capital account Liberalization


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Growth Integration of ASEAN

EconomiesAFTA

Streamlining harmonizing Custom procedures

Trans ASEAN highway system, ASEAN powergrid, trans SEAN gas pipeline network,telecommunication interconnectivity.


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Documents

The Southeast-Asian Financial Crisis