FINANCIAL CRISES OF

SOUTH ASIA IN 1997

Submitted to:

Sir Mazhar Farid

Submitted by:

Naseem Ashraf (FA14-MBA-11)

Ali Raza (FA14-MBA-08)
M.Baleegh Ud Din (FA14-MBA-20)
Shanza Ansari (BBA-19)
Zainab Warraich (BBA-38)

LAHORE GARRISON UNIVERSITY,PHASE

VI,SECTOR C, DHA LAHORE

Introduction
Asian financial crises was the period of financial crises that gripped much of east Asian
countries beginning in July 1997 and raise fear of worldwide economic meltdown due to
financial contagion.This crises not only effect the Asian countries but this make huge
problems for the non south Asian countries as well.This was a biggest currency collapse
which arises in THAILAND by the devaluation of the Thailand currency,BAHT.IMF plays
a vital role to overcome this crises to stabilize economies but its massive impact were very
huge to overcome.

Background
In 1990s mostly south Asian countries were having high growth rate.That time was very
favorable fr the growth of the developing countries.

Asian Miracles

The reason for economic growth in south Asian countries was:

High interest rate on investment

High savings and GDP rate(8-12%)
Power full export policies(export to rich countries)
Moderate inflation
Increase in asset values(land and stock prices)
Investment on human capital to enhance productivity
Allocation of resources was very good
US economy was not at boom at that time so balance of payment was good

The economies of Korea,Thailand,Indonesia and Malaysia had for many years been
miracles with high annual growth rate.Transformation of these rural less developed
countries to middle income emerging countries was a remarkable success story of the
world economic history.

Thailands Economy

Thailands economy was growing good in 1985-1996 at the rate of 9% per annul.Its
inflation rate was between 3.4 -5.7%.Thailand was having its currency pegged with the US
dollar and until June 1997 this was pegged by 25 to 1 US dollar.This was attractive for
speculators because it was having huge capital inflow.More or less Thailand s economy was
going its best and then the time of downturn started.

Downturn

On 14th and 15th May 1997,the BAHT was hit by massive speculative attacks.The value of
Thailand currency start decreasing its value and at June 1997,Thai prime minister
declared that they will not devaluate BAHT further.But the control or power was in the
hand of certain groups so value continues to decline.90%of foreign reserve was consumed
to defend BAHT.Government was failed to recover this and Thai economy comes to a halt.
Eventually, After consuming reserve the Thai government was forced to float the BAHT
and on 2nd July 1997 the value of BAHT was set by the currency market of the world.this
was the spark which ignited the Asian financial crises.

Causes of downturn
Following factors was lead to cause downturn the economy of the THAILAND:

Devaluation of BAHT,As it was peg at 56 BAHT to 1$

Dropped of stock market at 75%
Collapsed of biggest finance company,FIANACE ONE
Depression of real estate and construction business
Failure of financial institution
Non performing assets
Non performing loans
Lack of capital inflow
Brain drain
Buying up excessive domestic currency at fixed rate to maintain peg
Central bank allowed currency to float
Mismatch between foreign asset and liabilities

Causes of Asian crises

The currency crisis that started in Thailand spread to the neighboring countries of
Southeast Asian eventually triggered serious crisis in the currency and financial markets of
South Korea which had just recently joined the ranks of the advanced economies of the
world. While there is a tendency to speak of these crises which covered the entire region as
a single event and phenomenon, background factors and causes are not necessarily
identical among the affected nations. The crises also served to uncover serious structural
flaws in these countries,including weaknesses in the financial sector, delays in vital
transformations in the industrial structure, and defects in corporate governance. The
structural flaws are regarded as a major factor in obstructing the return to stability by the
affected currencies.
Following elements contributed in this crises:

Devaluation of Thai currency

Downfall of Thai economy
Lack of transparency of financial sectors
Corruption
Contagion
Overvaluation of dollar
Recession of US economy
Decrease in market share of export of South Asian countries
Export oriented economic structure of the US
Structural issues
Increase in foreign debt to GDP ratio(from 100-167% and cross 180% at the worst of
crises)
Increase in US interest rate
Macro economic policies
Under development of credit market
Lack of foreign reserves
Lack of hedge funds

Effects on south Asian countries

What happened in Indonesia:

Devaluation of rupiah from 2000 to 14000 for 1 US $

Lack of FDI
Inflation
Widespread rioting
Jakarta stock exchange was its historical lowest position

What happened in south Korea:

 Devaluation of won by 1000 to 1700 per US $
Debt-GDP ratio doubled
Major set back in automobile industry
Hyundai took over KIA motors
Samsung motors was dissolve
Daewo express was acquired by American company General motors

What happened to US and JAPAN:

Decrease in export(40% export share was with Asia which was affected)
Dot com bubble
Housing bubble and mortgage crises
Japanese yen fall to 147
Real GDP growth rate fall from 5% to 1.6%

Consequences of the crises

The Asian currency crises were not prompt brought under control. Currencies continued
to depreciate and the crises spread to other countries.But ultimate general consequences of
this crises are given below:

Sharp reduction in world currencies

Unfavorable stock exchange
Many business of world collapsed
Million of people feel from poverty line
Unemployment
Decrease in oil prices($11 for 1 barrel)
Inflation
Many mergers and acquisitions were held
Russia financial crises
Many countries learn from this crises and maintain their foreign reserves and hedge
funds
At this stage the IMF intervened to try and stabilise the crisis. However, their
intervention has proved very controversial, with many arguing that their intervention
made things worse.

Role of IMF

When the international community provides financial support to rectify a drastic drop in
the currency value of an affected country, it is clearly necessary to require the country to
accept an economic adjustment program. By the same token, it is quite natural under the
current international monetary system for the IMF to play a leading role in formulating
the adjustment program. Reviewing the cases of the three Asian countries hit by the
currency crises, it is notable that their agreements with the IMF contained provisions for
the implementation of structural reforms, including the reform of their financial
systems.But many markets collapsed even after the announcement of bail-out packages
due to cultural and political reasons.

IMF economic reforms:

Structural adjustment
package
Reduce government
spending
Increase interest rate
Reduce deficit
Inspection of funds to
restore confidence
Immediate bank closures
Fiscal contraction
Tight domestic credit

Conclusion
The Asian financial crises was arise due to the collapse of currency and financial markets
of the south Asian countries.This crises flu not only hit the south Asian countries but also
the non south Asian countries and lead to many crises in the economic history of the
world.Although,IMF start playing its role to stabilize the economies and encourage the
currencies but political and cultural system was hurdle for IMF.At the same time the role
of IMF was also reluctant. The IMF insisted on fiscal restraint lower spending, higher
taxes and privatization. This contraction fiscal policy caused the economic downturn to
exacerbate and the economy plunged into recession. Bankruptcies increased and there was
a flight of capital.