Asian Financial Crisis

1997-98

Presented by:
Faisal, Muhammad
Md. Abu Noman
What caused the Asian Financial
crisis?
Macroeconomic weaknesses

Financial intermediaries

Export successes produce large earnings.

Heavy investment inflows by the early 1990s.

A bubble starts to develop

Banks were not monitored.

 Asian financial crisis
overview
The Asian financial crisis is considered to have started on July 2, 1997
with the devaluation of the Thai baht and ask IMF for assistance.

Malaysia abandons the peg and blames the speculators on July 14

Philippines seek assistance from IMF

Indonesia floats on August 14, go to the IMF on October 8

Repeated speculative attacks on Hong Kong dollar unsuccessful, but

stock market plunges between October 20-23

Global stock market decline on October 27

S. Korea devalue Nov. 28 and ask for IMF assistance

Spread over other Asia countries

Macroeconomic weaknesses

• Large current account deficit

• Large capital inflows

• Large exchange rate depreciations

• Bank lending
r uC
sti ci f e d
Large capital inflows

• Large capital inflows,

especially those
deriving from foreign
borrowing.

• These inflows
equivalent 1990-1996
– Korea: 2.5% of GDP
– Thailand: 10%
– Indonesia: 3.5%
Large capital inflows

• They were encouraged

by high economic
growth, low inflation
and relatively healthy
fiscal performance
(table1 and figure 2)
Large exchange rate depreciation (to the US
Dollar)

Currency Exchange Rate Change

(per US$1)
June 1997 July
1998
Thai Baht 24.5 41 - 40.2%
Indonesian Rupiah 2,380 14,150 - 83.2%
Philippine Peso 26.3 42 - 37.4%
Malaysian Ringgit 2.5 4.1 - 39.0%
South Korean Won 850 1,290 - 34.1%
aL
ed ) r all o D S U ot(
Large exchange rate depreciations (cont.)

Inflexible exchange rate regimes complicated

macroeconomic management and increased vulnerability.

Nominal exchange rate had depreciated in a predictable

manner in Indonesia, and was closely linked to the U.S, in
Malaysia, the Philippines and Thailand.

The crisis countries were vulnerable to capital outflows and

exchange rate devaluations because of the significant amount
of short term foreign currency debt, which was mostly un-
hedged.
Bank lending

• Private credit sector in

nominal terms expanded
rapidly during the 1990s,
at an average rate of 15
to 20% compared to
inflation rates of 3-10%.
Bank lending (cont.)

• Bank lending relied collateral rather than credit

assessment and cash flow analysis, making banks
vulnerable to excessive risk and declines in asset values.
Bank lending (cont.)
What are Financial Intermediaries and what
role did they play in the crisis?

“Financial intermediaries” were institutions perceived as having

implicit government guarantees but were in most part
unregulated and subject to sever “moral hazard” problems

Unrestrained risky lending by these institutions caused inflation of

asset prices (but not consumer goods). This over pricing of
assets was sustained by a sort of circular process of
reinforcement. The proliferation of risky lending drove up asset
prices making the collateral position of the lending institutions
seem stronger than it actually was. Also, the appearance of
soundness of the position of financial institutions further
increased risky loans putting even more upward pressure on asset
prices.
The IMF-Role

The IMF was called in to provide financial support for three

of the countries most seriously affected by the crisis:
Indonesia, Korea, and Thailand. The strategy to address the
crisis had three main components:

Financing. Some US$35 billion of IMF financial support

was provided for adjustment and reform programs in
Indonesia, Korea, and Thailand, with the assistance for
Indonesia being augmented further in 1998-99. Some
US$85 billion of financing was committed from other
multilateral and bilateral sources, although not all of this
financing actually materialized
The IMF-Role
Macroeconomic policies: Monetary policy was tightened to
halt the collapse of the countries' exchange rates--which went
well beyond what might have been warranted by
fundamentals and to prevent currency depreciation.

Structural reforms: Steps were taken to address the

weaknesses in the financial and corporate sectors. Other
reforms were intended to alleviate the social consequences of
the crisis and set the stage for a resumption of growth.
Conclusion
First, none of the governments were engaged in irresponsible
monetary expansion, in fact their inflation rates were quite low. On the
eve of the crisis all of the governments were more or less in fiscal
balance.
Second, the Asian countries did not have a troubling level of
unemployment. Therefore, there did not seem to be any pressure to
abandon the fixed exchange rate in favor of monetary expansion.

Third, there was already a boom bust cycle in the asset markets that
preceded the currency crisis.

Fourth, in all countries involved in the AFC, financial intermediaries

seem to have been central players in the crisis. In Thailand so called
“finance companies” – nonbank intermediaries that borrowed short-
term money then lent to speculative investors played a crucial role.
Links & Abreviations

 http://www.imf.org/external/np/exr/ib/2000/062300.htm
 http://www.imf.org/external/np/speeches/2004/021204.htm
 http://www.imf.org/external/pubs/ft/wp/1999/wp99138.pdf

IMF = International Monetary Fund

AFC = Asian Financial Crisis
Thanks !