SOUTH EAST ASIAN COUNTRIES

Before 1997, Asia was attractiveBy developing countries

High interest rates

“Asian economic miracle”

The Four Asian Tigers or Asian Dragons are the highly developed economies of Hong Kong, Singapore, South Korea and Taiwan (Republic of China)

These regions were the first newly industrialized countries, noted for maintaining exceptionally high growth rates and rapid industrialization between the early 1960s and 1990s.

All four Asian Tigers have a highly educated and skilled workforce and have specialized in areas where they had a competitive advantage

Four Asian Tigers

Their economic success stories became known as the Miracle on the Han River and the Taiwan Miracle and have served as role models for many developing countries, especially the Tiger Cub Economies.

They sustained rate of double-digit growth for decades.

Each nation was non-democratic and relatively authoritarian political systems during the early years.

Most affected nations:

Indonesia

South Korea

Thailand

Hong Kong

Malaysia

Lao

Philippines

People’s Republic of China India

Taiwan

Singapore

Vietnam

Less affected nations:

The crisis started in Thailand with the financial collapse of the Thai baht after the Thai govt. Was forced to float the baht(due to lack of foreign currency to support its fixed exchange rate.), cutting its peg to the us dollar, after exhaustive efforts to support it in the face of severe financial over extension that was in part real-estate driven.

At the time, Thailand had acquired foreign debt that made the country effectively bankrupt even before the collapse of its other assets prices and a precipitous rise in private debt.

Thai baht: 24.5 to 41

Indonesian rupiah: 2,380 to 14,150

Philippine peso: 26.3 to 42

Malaysian ringgit: 2.5 to 4.1

South Korean won: 850 to 1,290

Though there has been general agreement on the existence of the crisis and its consequences, what is less clear are the causes of the crisis as well as its scope and resolution.

Indonesia , south Korea, and Thailand were the countries most effected b the crisis. Hongkong, Malaysia, loas and the Philippines were also hurt by the slump. China, Taiwan, Singapore, Brunei and Vietnam were less affected, although all suffered from a loss of demand and confidence throughout the region.

Foreign debt to GDP ratio rose from 100% to 167% in four large association of southeast Asian nations{ASEAN}.

Although most of the governments of Asian countries had seemingly sound fiscal policies, the international monetary fund{IMF} steeped into initiate a $ 40 billion program to stabilize the currencies of south Korea, Thailand and Indonesia, economies particularly hard hit by the crisis.

The effort to stabilize the domestic situation in Indonesia, however.

After, 30 years in power, president Suharto was forced to step down on 21 may 1998 in the wake of wide spread rioting that followed sharp price increases caused by a drastic devaluation of the rupiah.

The effects of the crisis lingered through 1998.

In 1998 the Philippines growth dropped to virtually zero.

from 85-96 Thailand grew 9% per year

Highest economic growth rate

Inflation was also low (3.4%-5.7%)

Baht value was 25 to the US Dollar

May 14-15, 1997 the baht faced very bad speculative attacks

In June, Prime Minister Yongchaiyudh refused to devalue the baht

Thai government failed to defend the Baht, starting the crisis

Baht lost more then half it’s value

Thai stock market dropped 75%

August 11, 1997, IMF unveiled $17 billion rescue package

August 20, 1997 IMF approved another $3.9 billion bailout package

Rumors that former Prime Minister profited from the devaluation

Finally recovered by 2001, paid off IMF debt in 2003

Indonesia was doing good in June 1997 Low inflation

$900+ Million trade surplus

$20 + Billion foreign exchange reserves

Good banking sector

However, many corporations were borrowing in U.S. Dollars

In July 1997, Indonesia widened the rupiah tradin band from 8%-12%

On August 14, 1997 the managed floating exchange regime was replaced by a free-floating system, causing the rupiah to drop more

IMF created a rescue package of $23 Billion, but didn’t help

In Sept they hit a all time low, Moody’s rated Indonesia’s long-term debt to “junk bond” status

More effects were felt in Nov when the summer’s hits were felt in the corporate books

In Feb, the President got rid of the governor of the Bank of Indonesia, but this wasn’t enough and he was eventually forced to resign

Effects Rupiah was 200 to 1 USD, afterward hit 18,000 to 1 USD

Lost 13.5% of GDP

Large corporations were funding big expansions, however failed due to excess debt

Moody’s lowered their credit rating from A1 to B2

Seoul stock exchange dropped 4% on Nov 7, 7% on Nov 8, and 7.2% on Nov 24

In 1998 Hyundia took over Kia Motors, Samsung was dissolved, and Daewoo was sold to American GM

Currency dropped from 800 per dollar to 1,700

National debt-GDP ratio went from 13%-30%

After UK gave control of Hong Kong to China the Hong Kong dollar was under speculative pressure

Authorities spent more then US $1 Billion to defend local currency

Had more then US $80 billion in foreign reserves

Stock markets became volatile

In Oct the Hang Seng Index dropped 23%

In Aug 98, interest rates jumped from 8%-23% overnight, and even 500% once

The Hong Kong Monetary Authority (HKMA) setup a system to establish rates, however speculators were taking advantage of this by short selling shares.

HKMA wound up buying HK$120 billion worth of shares in various companies to combat this

Started selling those share in 2001, profiting HK$30 billion

In July 1997, the 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%

IMF aid was refused

Various task forces were formed to fix economy

By 2005 had a surplus of US$14.04 billion

Singapore dipped into a short recession

Government kept very active management to ensure security

Government programs were put forward

Made no attempt to help capital markets, instead allowed a 60% drop, however within a year fully recovered and continued to grow

1993 1994 1995 1996

Indonesia 9.60 8.53 9.43 8.03

Korea 4.82 6.24 4.49 4.96

Malaysia 3.57 3.71 5.28 3.56

Philippines 7.58 9.06 8.11 8.41

Thailand 3.36 5.19 5.69 5.85

FX:1 $US FX: 1 $US %

6/30/98 6/30/97 change

Chinese Yuan 8.281 8.289 +0.09

HK dollar 7.745 7.747 +0.03

Indonesia rupiah 14568.89 1760 -87.92

Japanese yen 138.31 114.61 -17.58

Malaysian ringgit 4.1 1.827 -55.44

Korean won 1370 641.4 -53.18

Philippine peso 41.5 19.08 -54.02

Thai baht 42.16 17.9 -57.54

Regional Annual Growth Rate of Exports (%)

Country 1990 1991 1992 1993 1994 1995 1996

China 18.2 15.8 18.1 7.1 33.1 22.9 1.6

Indonesia 15.9 13.5 16.6 8.4 8.8 13.4 9.7

Korea 4.2 10.5 6.6 7.3 16.8 30.3 3.7

Malaysia 17.4 16.8 18.5 15.7 24.7 24.7 26.0

Philippines 4.0 8.7 11.2 13.7 20.0 31.6 16.7

Thailand -1.3 14.9 23.2 14.2 13.3 22.7 25.1

Mexico 17.7 0.7 1.4 9.2 14.2 40.3 22.6

Corruption?Korea, Indonesia, Thailand -corruption

Italy and India have corruption, but nocrisis

Bank Transparency inadequate regulatory framework

irrational lenders?

China, The US, and Japan were very strong economies and were able to survive

China held most of it’s foreign investments were in factories rather then securities

U.S. didn’t collapse, but on Oct 27,1997 the Dow Jones fell 554 points (7.2%)

Japan was affected because the economy is so prominent (yen fell to 147), but it was world’s largest holder of currency reserves so it bounced back quickly

The macro economic and the financial lesson.

The first interpretation of Asian crisis is macro economic and financial.

Many developing countries opened up financially by early 1990’s and became “emerging markets ” attributing foreign loans and investment. In developing east Asia, short term commercial bank loans were the dominant form of capital inflow.

At the first this caused domestic booms and assets market inflation. But later as the market segment turned for the worse and foreign investors pulled their money out, the balance of payment came under a severe pressure.

The domestic banking sector froze up and domestic demand fell sharply, causing a serious recession that lasted for one to two years

This macro shock was amplified by the balance sheet vulnerability caused by the weakness of Asian banks, non-banks and corporations.

Firms in developing east Asia were highly dependent on indirect finance, for working and investment capital and had debt equity ratios.

The local banks and non banks were exposed to two kinds of balance sheet mis-matches. They borrowed in USD and lent to domestic projects in local currency.

In addition they borrowed in short term loan but lent long term domestic project.

When the currency depreciation began the balance sheet of these financial institutions were immediately hit and bad debt increases. When foreigners demanded repayment they had no foreign cash.

This is liquidity problem, but as the crisis deepened, it created insolvency as well.

In addition, the collapsing domestic demand, which was caused by panic, credit crunch(malfunctioning of the banking sector) and wrong policy prescription in some countries, damaged the real estate sector and led to the accumulation of bad debt.

According to the previous view, the Asian crisis was primarily caused by the wrong speed and sequencing of external financial liberalization.

countries liberalized capital accounts too quickly and without preparation, which caused over borrowing and bubbles.

Therefore the lesson learned is:-

“YOU MUST OPEN YOUR FINANCIAL SECTOR

GRADUALLY AND IN THE RIGHT ORDER”.

The second interpretation of the Asian crisis is structural. It is true that this crisis was a macro and financial phenomenon involving banks and borrowers.

But deeper down, the real cause was the structural weakness of the developing economies in east asia. As long as these weakness remains similar crisis can occur in future.

The real solution must be the removal of these structural weakness.

One must also be careful about the other risk of doing too much. It is hard to know which system works in your country and which does not. The evolution of social and economic system is unique to each country and very difficult to evaluate.

The lesson learned is : -

“post crisis reforms for over haulting your society should be well balanced.”

The current account crisis is the traditional crisis which the IMF is well acquainted.

It is caused by inappropriate macroeconomic policy of the government and leads to the balance of payment crisis.

Its sequence is typically as follows :-

A budget deficit is motivated and inflation occurs.

A current account deficit rises and international reserves decline.

CURRENT ACCOUNT CRISIS

The country experiences difficulty in international payments and goes to IMF.

Tight budget and money, together with structure adjustment are required as the conditionality for international rescue.

“the home currency is devaluated to regain competitiveness”

The capital account crisis is a new type of crisis caused by instability of private capital flows.

It is often observed immediately after the liberalization of the capital account.

External financial transactions are liberalized in a country where the domestic banking system is under developed and the monitoring system is weak.

Domestic banks, non banks and cooperation's over borrow and foreign investors and banks over lend.

A domestic boom, assets bubbles and an increase in international reserve are observed.

CAPITAL ACCOUNT CRISIS

Reversal comes. Market sentiment changes for the worse and foreign investors suddenly leave. Currency attack begins. A huge uncontrollable depreciation follows.

A severe macro economic down turn occurs as demand collapse and banking crisis reinforce each other.

These two crisis, which require very different policy responses, should be clearly distinguished

“The Asian crisis was a CAPITAL ACCOUNT crisis. The big problem was the policy prescription for a current account crisis was administered to this crisis.”

Such was the scope and the severity of the collapses involved that outside intervention, considered by many as a new kind of colonialism became urgently needed.

Since the countries melting down were among not only the richest in their region, but in the world and since hundred of billions of dollars were at stake , any responses to the crisis was likely to be cooperative and international, in this case through IMF.

The IMF created a series of bailouts{rescue package} for the most affected economies to enable affected nations.

In other words IMF support was conditional on a series of drastic economic reforms influenced by neoliberal economies principles called a “structural adjustment package” {SAP}.

The SAP’s called on crisis-struck nations to reduce government spending and deficits, allow insolvent banks and financial institutions to fail and aggressively raise interest rates. The reason was that these steps would restore confidence in the nations fiscal policy.Solvency penalized insolvent companies, and protect currency values.

However the greatest critism of the IMF’s role in the crisis was targeted towards its response. As country after country fell into crisis, many local business and governments that had taken out loans in us dollars, which suddenly became much more expensive relative to their local currency which formed their earned income, found themselves unable to pay their creditors.

During and after the Asian crisis, IMF was severely critised for in appropriate policy advice.

According to this crisis IMF made to big errors :-

1) EXANTE (before the crisis) :- IMF failed to prevent the Asian crisis. Infact it created the conditions for such a crisis by encouraging financial opening to countries which were not ready for it.

2) EXPOST (after the crisis ) :- IMF failed to crisis after it erupted. Infact many contend that the crisis was aggravated and prolonged by IMF’s wrong policy advice.

(a) the priority should be stopping the regional currency crisis; structural reforms should be undertaken later, not during the crisis.

(b) don't apply “current account crisis” measure.

(c) calm the market. This is a delicate psychological game against market traders, and you must know very well how financial market work.

Timing and sequencing are the key.

The crisis had significant macroeconomic level effects, including sharp reductions in values of currencies, stock market, and other asset prices of several asiancountries.

The nominal US dollar GDP of ASEAN fell by US $ 9.2 BILLION in 1997 and $ 218.2 BILLION (31.7%) in 1998.

In south Korea, the $ 170.9 BILLION fall in 1998 was equal to 33.1% of the 1997 GDP.

Money business collapses and consequences, millions of people fell below the poverty line in 1997-1998.

Indonesia, south Korea and Thailand were the countries most affected by the crisis.

APPRECIATION OF YEN

CHEAP THAI LABOUR

JAPANESE FDI

HIGH RETURN IN

THAILAND

OVER – HEATING

OF THAILAND

ECONOMY

OVER

BUILDING OF

INDUSTRIES

RISE IN

LABOUR COST

INDISCRIMINATE

OF FUNDS BY

BANKS

WEAK

FINANCIAL

SYSTEM

REAL

ESTATE

BUBBLE

INFLATION

CHEAP

CHINESE

EXPORT

EXPORT

SUFFERS

LARGE CURRENT A/C DEFICIT

IMPORT

RISES

DEPRECIATION

OF THE

CURRENCY

CRASH OF

FINANCIAL

SYSTEM

Can we explain this… Let’s assume that foreign

investors buy “Thai Bond”

when they invest

Exceedingly high interest

rate attracts more such

investment

So ,

Bond Demand > Bond

Supply and

Money demand < Money

Supply

Equilibrium is disturbed when Interest rate is pushed to artificially high,

higher than the optimum rate r*

With higher rate r, M/p Asset price falls

(Money/price) decreases Govt increases Interest rate