The 1997 1998 Asian Financial Crisis Spill over effect on the United States

Nguyen Manh Linh Vietnam Sukkasem Lomathmanyvong Laos Wang Xiang China Andi Riza Indonesia

Objectives
THE

MAJOR CAUSES OF THE CRISIS

SPILL

OVER EFFECT ON SPECIFIC COUNTRY: United State of America

General Overview

The most important effects of the Asian crisis on the US economy worked through international trade:
In 1996, US trade with East Asia accounted for 30% of export, and 40% of import of goods In 1997 export of good and service to East Asia represented 11.9% of U.S. GDP (only 4.8% in 1960) Capital transfer, Investments

Asian financial crisis exerted mixed effects on US employment and economic activities, depressed some sectors and stimulated other sectors
Reduced export ( by 12% in 1998 !) Increased Import Domestic demand boosted (lower commodities price)! Lower interest and inflation rates !

Access to financing in Asia

Companies

in Asia tend to rely more on bank borrowing than on issuing bonds or stocks Government preferred development financial baking system with banks => can control and regulate who access to loan. Well-connected with bank and government tend to have best access to financing

Private sector debt and poor loan quality

Borrowed short-term loan for long term

projects like infrastructure and real estate development. government and central banks to banks and non-bank private sector band and has been aligned with dollar

Type of borrower has shifted away from the Exchange rate fluctuate only within narrow

Maturity Distribution
90 80 70 60 50 40 30 20 10 0

84 62 68 50 65

Indonesia

SouthKorea

Philippines

Thailand

Taiwan

(Proportion of

loans with maturity one year or less at the end of 1996)

Causes of the crisis (1)

Inadequately development financial services
sector

Lack of control and sufficient regulations in

capital market

Close alignment between the local currency and

US dollar

Causes of the crisis (2)

Weakening Economic performance and balance
of payment difficulties

Currency speculation Technological changes financial market Lack of confidence in the ability of the
governments in questions to resolve their problems successfully.

Why United State ?

American is major investor in the region Financial market is interlink and U.S financial
market is most efficient one

The currency turmoil effect the U.S. imports,

exports and value of US dollar

US activities in IMF: Funding and legislative

issues in operation

Spill over mechanism (1)

Macroeconomic level

Economic growth Flows of trade Capital flows Exchange and interest rates

Spill over mechanism (2)

Microeconomic level on each industry

Competition Price Demand Business opportunities Revenues and profits of firms

MACROECONOMIC PERSPECTIVES

Macro Economic performance indicators

GDP growth rate Export/Import Capital flows Inflation/Consumer price index Interest rates Exchange rates

Devaluation of currencies
Indonesia
1996 0 1997 1998 1999 2000
2 1996

Malaysia
1997 1998 1999 2000

2000

2. 5

4000
3

6000
3. 5

8000
4

10000

10014
4. 5

3. 92

12000

Devaluation of currencies
Thailand
19 96 2 0 19 97 19 98 19 99 20 00

Philippines
19 96 2 0 1 7 99 19 98 19 99 200 0

2 5
2 5

3 0
3 0

3 5
3 5

4 0

40. 89
4 0

4 5

4 .3 1 6
4 5

5 0

Trade Balance
(Billions U.S.Dollar)
1200 1000 800 600 400 200 0 -200 -400
1990 1992 1994 Export Import

911.9 682.1

-229.8
1996 Balance 1998

 Asian
5

countries group is third trade partner of United States after EU and Japan
3.2
3

Current Account

Percentage of GDP

1
1

-1

-3

-2.5

-5 1986 1988 1990 1992 1994 1996 1998 2000

EU

USA

Japan

Trade deficit between USA- Asia

0 -2,000 -4,000 -6,000 -8,000 -10,000 -12,000 -14,000 1993 1994 1995 1996 1997 1998 1999 -7,041.70 -8,197.80 -10,043.00
Million $

Indonesia

M alaysia

Thailand

Why steady deficit ?

Slowdown of Asia economies => Less demand for export Drop in value of Asia currencies and appreciation of U.S. Dollar => raise cost and price for export and decrease those of import. High unemployment rate in many Asia countries => Very low wage for many labor intensive export Surplus in capital account implied an rise in the deficit in current account

FDI in United States (Millions $)

300, 000 250, 000 200, 000 150, 000 100, 000 50, 000 0 1993 1994 1995 1996 1997 1998 1999 109, 264 193, 375

Interest Rate
10 8 6 4 2 0 1994 1995 1996 1997 1998 1999 5.36 8.44 8.35 4.8

Pr i m r at e char ged by banks e O year t r easur y bi l l ne

Interest rate

Less demand for lending abroad Shift liquid capital from troubled Asia to invest in United states Encourage domestic borrowing Steady grow of domestic home construction and vehicle sale (deposit selling) Positive effect for economic growth !!!

Consumer Price Index

3.5 3 2.5 2 1.5 1 0.5 0 1994 1995 1996 1997 1998 1999 1.6 2.3

Lower inflation

Low price of goods as result of competion between domestic and export one Low price of oil because of falling demand in Asia of oil and other commodities Higher purchasing power

Inflation Rate
6 5 4

Percentage

3
1.88175818

2 1 0 -1 1986 1988 1990

EU

1.000860669 0.501206609

1992
USA

1994

1996
Japan

1998

2000

Oil Price at Crisis Period

35 Dollars per Barrel 30 25 20 15 10
Jan92 Jan93 Jan94 Jan95 Jan96 Jan97 Jan98 Jan99 Jan00 Jan01

Down price

Fallen 30% to end of 1997

United States Personal Income

( Per Capita )
30, 000 25, 000 20, 000 15, 000 10, 000 5, 000 0 1993 1994 1995 1996 1997 1998 1999 25, 932 27, 195

Blessing or Curse(1)
Forecaste U.S. Economic grown with slowdown pace
from 3.8% in 1997 to 2,5% in 1998:

Losess in loan and financial intrument in troubled Asia Steady deficit in balace of trade Bad status of U.S. subsidiaries and direct investment
projects in Asia

Contribution of the States to IMF to deal with the crisis

(1.8 billion of U.S. Dollar)

Real Growth Rate of GDP

0.08 0.06

Annual growth rate

0.044
0.04 0.02 0.00 -0.02 -0.04 1986 1988 1990
EU

0.027

-0.025
1992
USA

1994

1996
Japan

1998

2000

Blessing or Curse(2)
In fact, there is positive effect. The grown rate up to
4.2% in 1997 from 3.6% in 1996 and continuosly raised to 4.3% in 1998:

Increase capital inflow Eased the upward pressure on U.S. interest rate Encourage domestic business grow Economies of Asia countries are more open Opportunities to takeover companies with bad financial condition in Asia

S & P 500 Index

10 60 10 40 10 20 10 00 80 0 60 0 40 0 20 0 0 19 90 19 92 19 94 19 96 19 98 1 2 .2 ,2 9 0 90 7 .4

MICROECONOMIC PERSPECTIVES

Major sectors affected (1)

Creditors and investors in Asia suffered loses:
U.S. bank, pension funds, and investors suffered loses Exporters to Asia faced declining demand: U.S. makers of major export items (heavy equipment, aircraft,
manufacturing machinery and agricultural commodities)

Producers of commodities used in the manufacture of

products in Asia: e.g. chemicals, cotton,copper, and rubber Businesses competing with import from Asia faced increasing competition and downward pressure on prices: e.g. automobiles, apparel, consumer electronics, steel, etc.

Major sectors affected ( 2 )

Labor engaged in manufacturing competing products
hurt by Asian depreciation

Businesses that sell import from Asia gained

opportunities: distributors and retailers of products from trouble Asian
economies (e.g. Korean automobile dealers)

U.S. MNCs seeking market access in Asia, particularly

in financial sectors gain opportunities: lessened entry barriers acquisition of existing firms that needed restructuring and
recapitalization at relatively low prices

Major sectors affected ( 3 )

U.S. MNCs with manufacturing subsidiaries in Asia
faced difficulties and stagnation:
60% of their output is sold in the region, local sales stagnated excess capacity rising costs of import in countries with depreciated currencies falling price of finished export to U.S. and other hard currency markets

Industries that use components from Asia benefit on

lower costs of production

Implication of The Asian crisis for the U.S Economic Sectors

Sectors reviewed:

Financial Agriculture High-tech Textile Steel Paper

Claims on Asian Countries by United States

17% 18% I ndonesi a South K orea M aysi a al Phi l i ppi n Tai w an ailand Th 33% 8%

11%

13%

Financial sector
Citicorp:
Net income dropped from $224 m in 1996 to 218 m in

1997

J.P. Morgan:
Reported NPL of $587 m of its total $5.4 billion in loan,

swaps, and debt investment in Indonesia, Thailand and S. Korea Considered about 60% of its allowance for creditr losses of $1.08billion to be related to exposures in these three countries

Hi-Tech industry (1)

Financial crisis caused U.S. high-tech exports to
decline nearly 3%, or $3.6 billion, in the first nine months of 1998 (Source: American Electronics Association, AEA)

Export activity was slowest in the third quarter,

contrasted against the first half of the year, when exports were down only 0.5%. Compared to the third quarter of 1997, exports were off 8%, the AEA said.

U.S. high-tech merchandise exports decline first time in

this decade (William T. Archey, AEA president and chief executive)

Hi-tech industry ( 2 )
For the first nine months of 1998:
Electronics exports to Mexico grew nearly 10%, or 1.2
billion, the largest dollar gain.

China bought 40% more electronics goods from the U.S.,

an increase of $612 million.

Exports to Europe and Canada, two major U.S. high-tech

export destinations, grew 2.5% and 1.8% respectively.

Electronics exports to Brazil, the United States' largest

South American trading partners, were down nearly $500 million in the first nine months. Exports to South America as a whole increased 1% during the period.

U.S. high-tech exports to Asia, excluding China, were off

nearly 15% for the nine-month period. Electronics exports were down 70% to Indonesia; 33% to Korea; 26% to Thailand; and 13% to Japan.

AGRICULTURE (1)
Why the Asian Crisis influence on U.S. Agriculture ?

Changes in exchange rates of currencies relative to the U.S. dollar made U.S. agricultural products more expansive
Dramatically slower income growth and actual drops in income lowered the purchasing power of Asian consumers

The international financial bailouts of some Asian countries required change in trade policies Economic problems in Asia are a drag on economic growth elsewhere. this affects demand for farm goods in all markets, not just in Asia

AGRICULTURE (2)
There are two effects in the U.S. agriculture :
- First, quantities shipped to Asia decline - Second, the dollar prices of agricultural commodities are lower than they would have been in all markets

In 1998, exports from U.S. to Canada and Mexico actually

increased over this period, however, in Asian markets we see the dramatic impacts of income losses and exchange rate declines

999 U.S. Agricultural Exports Valued in 1998 Compared with 1997

markets World Total Japan Canada Mexico Korea Taiwan Netherlands Hong Kong China United Kingdom Philippine Indonesia Thailand Malaysia % change -9.5 -13.7 3.3 18.9 -22.1 -31.2 -19.8 -12.8 -16.5 -9.9 -4.2 -17.9 -41.1 -23.4 -41.4 Commodity Agriculture Total Wheat Rice Coarse Grains Feeds & fodder % change -9.5 -9.6 29.6 -16.5 -13.7 -34.5 Red meats (fresh/frozen) -4.7 Dairy products -2.0 Cotton -5.4 Fresh fruits -12.5 Fresh vegetables 0.8 Tree nuts -3.9 Nursery & cut flowers 8.1 Processed fruits & vegetables +0.4 Wine & beer 7.2

TEXTILE INDUSTRY (1)

Prior to Asian crisis, the U.S. textile industry has proven itself
a global competitor, developed innovative new products and dramatically expanded its export base

In 1997-1998, the currencies of almost all the major textile

exporting countries in Asia collapsed, causing a shock wave of artificially low priced textile products to hit the U.S.

The results is U.S. textile products have plummeted since

1997, U.S textile profits have evaporated, and last year, turned sharply negative

Textile fiber consumption is down almost 30% since the

Asian crisis began

TEXTILE INDUSTRY ( 2 )
Over the last 12 months, the U.S. textile crisis has intensified
as Asian currencies have continued to fall : - over 100 textile plants in the U.S. have been closed - textile industry employment was down nearly 60,000 , or more than ten percent of the U.S. textile workforce - In year 2000 was the first annual loss for the textile industry in the more than 50 years

STEEL INDUSTRY (1)

One of the most productive and cost effective in the
world: invested more than $35 billion in new plant and equipment
since 1995 far more than any other nation.

Labor productivity has increased by 174% since 1980. During

the same time period, real wages (adjusted for inflation) for American steelworkers have remained stagnant

Steel is still the backbone of industrial America:

Nearly 2 million Americans are directly and indirectly
employed by the steel industry.

Key steel-consuming industries employ 6 million U.S. workers,

representing nearly 15% of the GNP.

STEEL INDUSTRY ( 2 )
14 steel companies have filed for bankruptcy since the crisis began
in 1997.

By the end of 1998, the industry was operating at less than 65% of
its capacity the lowest operating level in more than 14 years.

Steel imports, which totaled less than 16 million tons in 1991, more
than doubled in 10 years to an annual total of nearly 39 million tons in 2000.

Prices for steel products have fallen below their low point during
the Asian crisis.

More than 15,000 steelworker jobs have been lost since January
1998 8,400 in the last six months.

Wall Street has abandoned the U.S. steel industry, driving stock
values so low that 40% of our steelmaking capacity could be purchased for just over $700 million less than 10% of the cost of building new capacity.

PAPER INDUSTRY
In 1996, Harnischfeger Industries Inc, a paper making
equipment, agreed to sell $600 million of papermaking equipment to Asia Pulp and Paper Company Ltd, as part of that companys broad expansion plan

But as the Asian Financial crisis swelled, Asia Pulp

and Paper has paid for only two of those machines. And the other two units are not proceeding

Harnishfeger has lost its sales because of Asian

Financial crisis

CONCLUSIONS
Both positive and negative impacts on United State
economy

Wider effect on specific industries at

microeconomic level

Impact was minor on macroeconomic level International trade and capital market tied the world
together

Sources of Information ?

IMF, WB, WTO, ADB websites CRS Report for Congress Countries Reports www.thaieconwatch.com www.house.gov www.stern.nyu.edu www.census.gov www.usitc.com www.mof.go.jp www.harvard.edu ...