Financial crisis in Asia

Sebastian Ramirez Cardenas

General Theory
Explanation of Currency Crisis (main cause)

Real • Overevaluation of domestic currency which renders exports

Overevalu
uncompetitive on international market.
• Volume of exports will decline while volume of imports incresases.
• Makes it uncompetitive for foreigns to pay for goods produced in

ation
country

Fiscal • Leaves an exchange rate peg unsustainable.

• When country has large fiscal deficit and needs to print money to

Indisciplin finance that deficit.

• You get more domestic money but that causes that it turns out to be less
value.

e • A float would cause capital gain for holders of foreign currency.

Consequence of Currency crises

Failures in the Failures in Domestic

International Capital
Problems in the market arise, and foreign Financial
Banking Markets
systems are not prepared to sustain all
Market
investors withdraw investments.
Any project dependent on foreign investors
loss
Raising interest rate, causes borrowers to default,
collapses. leads to banking crisis.
Banking crisis leads to not being able to defend
currency peg.
How it all started
 South Korea
Economic strategy Aiming to become Financed growth
Economic plans
based on massive more competitive in with credits from
designed to put
investment in world economy. other countries
producers ahead of
manufacturing and rather than relying
consumers. • Little room for
production. democratic pluralism on domestic
savings.
11th largest
• Borrowing from United
Annual growth of Income per capita States
economy mids
GNP around 8,6% 9,250 USD
1990s
 Thailand
Constitutional
monarchy, strong Thai politics been 1987-1988:
society bound by nominated by • Economic growth
centuries of military and are a exceeded 6%
cultural and social bureaucratic elite. • Manufacturing
increased by 8%
traditions.
Specialized in 1996 cu¡ountry
textile production. began to
• Export 50% of it. acumulate short-
term debt.
• High interest rates to
maintain value of

1969 aimed to foster
economic development
and as result civil order.
1981 try to focus on
heavy industrialization
• A lot of involvement from
government in marketplace.
• Construction of auto
manufacturing, petrochemical
plants etc.
Malaysia
Growth in country relied
heavily on exploitation of
natural resources.
Plan NDP
• Focused on export-oriented
manufacturing indsustry.
1960s recognize inward-
focused strategy wasn’t
1950s and 1960s relied
viable due to being very
on import substitution
small country, with small
domestic market.
GNP anaul growth of Income per capita up to
8.5% 4,000 USD
 Indonesia
Economy has been
managed by western-
educated technocrats. GDP growth of 6% Income per capita 1,030
• Capital market liberalization annually. USD
• Trade liberalization
• Tax reform
• Loosening restrictions on foreign
direct investment.

Funding needs of
Agricultura had constant Indonesia’s development
growth. exceeded countries capital
resources.
What
happened
 • Mids 1997 Asia’s economies looked
healthy as they had over the last two
decades.
• Growth was strong, unemployment was
low!

General • Interest rates where higher than in USA,

Japan or Europe
• Some raise in private and public debt
• Debt was manageable
• Asian economies continued to appear
miraculous.
Chronology
January 1997
• South Korea
• Hanbo Steel fails.
• First bankruptcy of a leading Korean conglomerate in more than
10 years.
February 1997
• Thailand
• Somprasong missed scheduled payments on its foreign debts
• First Thai firm to do so.
March 1997
• Thailand
• First signs of financial problems
• Bad property threat
• Government pledges to purchase 3.9 Billion USD in failed property loans from financial companies.

• Malaysia
• Central Bank imposes restrictions on bank loans for purchase of properties
• South Korea
• Another Jaebol fails.
• Same as in January 1997
April 1997
• Thailand
• Authorities are forced to suspend trading in their shares on Bangkok Stock
Exchange
May 1997
• Japan
• Central bank offers concerns about the yen’s despreciation
• Hint the might raise interest rates to defend currency.
• Thailand
• Baht attacked by speculation due to slow economy.
• Philippines
• Central bank raise overnight rate to 13%
June 1997
• Thailand
• Baht continues under speculation of currency investors.
• Using foreign currency reserves to buy baht.
• From 30 billion USD in foreign exchange reserves to only 1.14 billion USD
• Minister Amnuay Viravan defending that currency will go up again.
• Resigns June 19
• New minister Mr. Thanong
• Bank of Thailand has lent over 8 billion USD to weak financial institutions.
• South Korea
• Starts discussion about financial reform package
July 1997
• Thailand
• Indonesia
• Floats the baht.
• Lead to reevalitation by international investors to evaluate strength of • Rupiah suffers speculative attack
economy
• Foreign investors flee . • Central bank responded by widening trading
• Immediate 15% collapse in value of baht.
band to 12%
• Panick amongst international and domestic investors.
• Allows foreign ownership of its financial firms. • Singapore
• Philllippine
• Central bank is forced to defend peso from spillover as investors flee.
• Currency depreciates to its lowest level
• Turn to IMF, get help. against dollar since February 1995
• 1.1 billion USD

• Malaysia • South Korea

• Currency comes under aslout • Kia experienced sharp liquidity crisis and
• Central banks are forced to liquidate substantial foreign currency.
• 14th of July allowing ringgit to float. petitioned the government for emergency
• 24th of July ringgits hits a 38-month low fo 2,653 to a dolar loans.
August 1997
• Thailand • Hong Kong
• Suspension of 48 finance companies • Hong Kong Monetary Authority
• IMF gives rescue package of 17 billion pushes overnight interest rate
USD.
higher.
• Indonesia
• Malaysia
• On August 13th rupiah hits historic low
2,682 to the USD • Currency speculators attack
• August 14th allows rupiah to float ringgit
• Short after sinks to another record low • Central bank imposes controls on
2,755 to the USD lending to short-term sellers.
September 1997
• Philippines • Thailand
• Peso continues to fall
• Hitting record low early September • IMF states that it is growing
• Malaysia impatient with progress of
• Currency trading and convertibility may be financial restructuring
restricted
• Delay of several multi-billion dollar construction • China
projects.
• President announces a new long-
• Indonesia
• Rupiah begins rapid depreciation range goal of major privatization
• Delay of several major infrastructure projects of state-owned enterprises.
• Worth 39 trillion rupiah
October 1997
• Indonesia
• Rupiah drops to new low of 3,847 against a USD.
• Announce publicly that they will seek emergency aid
from IMF.
• Bail-out set at 28 billion USD.
• Malasiya
• 17th of October announces fiscal tightening in attempt
to prevent crisis from impacting real economy.
• Stock market and currency continue to decline.
• Taiwan
• Currency under attack
• Brazil, Argentina, and Mexico
• Stock prices pot their biggest single-day loss.
• Hong Kong
• Shaken by crisis
• From 20th to 23rd October stock market lost 25% of its value.
• Officials suspend trading to stem the losses.
• Thailand
• Legislature adapts new regulations regarding foreign
ownership of financial institutions.
• South Korea
• Won coming under pressure
• Now firmly drawn into the crisis.
• China
• New rules are announced that restrict the types of
institutions that may hold foreign exchange as a measure of
tightening control of currency.
November 1997
• Thailand • Soutk Korea
• After only 11 month in power minister • Investor and public confidence are
resigns badly shaken by devaluation of won
• New negotiations with IMF
• Stock market has fallen 28% in 1997
• Malaysia • Currency has lost 14% if its value
• Stock markets and currency are hit yet • Reaching record low.
again • Fears of gobal contagion
• Indonesia • Specially Latin America
• Central bank closes 16 commercial • Brazil announces 18 billion USD budget
cutback
banks
December 1997
• Philippines
• Peso declines lowest level in 25 years.
• Thailand
• Continues effort to clean house
• Permamentely closing 56 finance companies
• Baht hits lowest level since Thai Central Bank started keeping
records in 1969
• Malaysia
• Ringgit falls to its lowest level since it was floated in 1973
• Banks will be allowed to terminate credit to unworthy borrowers
• Currency has suffered 33% depreciation against USD
• More than 50% stock market lost since July 1997
• Indonesia
• Between July and late December, rupiah lost 58% of its value.
• South Korea
• Currency and stock prices have lost half of their value.
• No funds available anymore.
• Finally negotiate bail-out plan with IMF
• Worth 57 billion USD.
• Allow won to float
• Foreigners are now permitted to acquire 55% of listed companies.
• Large jaebol are ordered to increase transparency
• Japanese products will be allowed greater access to the Korean
market.
• Coryo Investment and Securities declares bankruptcy
• First Korean financial institution to do so in over 30 years.
• 30th of December several big international banks express their
support to Korea.
• Indonesia, Malaysia, and Thailand
• Downgraded to junk bond status
January 1998
• China • Philippines
• Closure of 150 trust companies as well as 12 • Peso also hits a record low against USD
informal OTC exchanges • Thailand
• Indonesia • Pay cuts for politicians and senior civil servants
• Rupiah experiences a series of majot declines in • Reduction in military spending
early to mids January • Rise in value-added tax
• Recovers currency drops to 17,000 pero USD • Increase in exercise duties on certain imported
• Less than 80% of its July 1997 value. luxury goods and cars
• Currency recovers by late January to 9,850/10,800
• South Korean
• 228 companies are unable to service their debt
• Foreign exchange reserves stabilise for the first
• Malaysia time since crisis began.
• Ringgit drops to new all-time low against USD • Closes 10 merchant banks
February 1998
• First evidence of restoration • Philippines
• Februrary 2nd rumors that crisis is over • Peso rises
• America
• Asian crisis is beginning to affect US economy
• Thailand
• Japan • Wins concession in its aid package
• Economic Planning Agency declares economy • Allow the reduction in domestic interest
stagnant with the worst performance over 20 years rates which had been raised to maintain
• Indonesia baht.
• Rupiah experiences short-term gain on prospect that
a currency board may be adopted • South Korea
• Indonesians burn down shops owned by ethnic • Agrees to expand its social safety net
Chinese during protests
and raise unemployment benefits.
March 1998
• Indonesia
• Raise awarment of hyperinflation
• Thailand
• Price levels are rising at pace not seen since 1960 • Equity and currency market
• Food prices are rising
• By end of march expecting to improve
rises
• World Bank gives 1.5 billion to country
• South Korea
• 47 domestic banks will get rehabilitaded
• Malasyia • Appears to be improving and
• Sime Darby Bhd reqiuieres capital infussion in continues rapid progress
excess of 1 billion ringgits
• Panic and the affect of destroyed market
toward economic reform
confidence
April 1998
• Thailand
• 16 commercial banks and 35 fiance companies have survived crisis
• South Korea
• Restrinctions against foreign-led takeovers of Korean firms are lifted.
• China
• Announces its intent to help Indonesia with goods and reiterates its commitment not
to devalue its currency.
• Indonesia
• Announces 95% of the countries 200 banks will require new capital
And how does the future look like?