...RESEARCH PAPER 99/14 11 FEBRUARY 1999 The Asian Economic Crisis This paper considers the economic crisis that began in the financial markets of South East Asia in 1997 and the consequences for the economies of the region and the rest of the world. The paper provides a chronology of and explores the factors that led to the crisis. An overview is given of the policy measures that the international financial institutions (IFIs), such as the IMF, have taken to deal with the crisis. Some of the arguments and policy proposals made to try to avoid future crises are also covered. Eshan Karunatilleka ECONOMIC POLICY AND STATISTICS SECTION HOUSE OF COMMONS LIBRARY Recent Library Research Papers include: 98/119 98/120 99/1 Unemployment by Constituency - November 1998 Defence Statistics 1998 The Local Government Bill: Best Value and Council Tax Capping Bill No 5 of 1998-99 16.12.98 22.12.98 08.01.99 99/2 99/3 99/4 Unemployment by Constituency - December 1998 Tax Credits Bill Bill 9 of 1998-9 The Sexual Offences (Amendment) Bill: 'Age of consent' and abuse of a position of trust [Bill 10 of 1998-99] 13.01.99 18.01.99 21.01.99 99/5 99/6 99/7 The House of Lords Bill: 'Stage One' Issues Bill 34 of 1998-99 The House of Lords Bill: Options for 'Stage Two' Bill 34 of 1998-99 The House of Lords Bill: Lords reform and wider constitutional reform Bill 34 of 1998-99 28.01.99 28.01.99 28.01.99 99/8 99/9 99/10 99/11 99/12 Economic Indicators Local Government...
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...THE EAST ASIAN CRISIS Introduction: The East Asian crisis was a period of financial crisis that gripped much of Asia which beginning in July 1997 and raised fears of worldwide economic meltdown due to financial contagion.1 Several countries such as Malaysia, Thailand, Indonesia, the republic of Korea and the Philippines were hit directly while others such as Taiwan province of China, Singapore and especially Hong Kong, China were badly affected. What began as a speculative attack on the Thai baht in July 1997 quickly spread as ‘contagion’ to the other countries. Over a three-month period between July and October 1997, the baht fell nearly 40 per cent, the Malaysian ringgit and Philippine peso by about 27 per cent, the Indonesian rupiah by about 40 per cent and the Korean won approximately 35 per cent against the United States dollar. For countries that had been dubbed “miracle economies” this was a serious blow with wide-ranging economic, social and political ramifications.2 In this paper we would try to undertake an empirical analysis of the factors leading to the crisis by analysing on two major points: 1) How have these countries performed in the years leading to the crisis? 2) What was the policy response to the currency crisis and what similarities/differences were there in policy responses across countries? We try to do this by analysing the macroeconomic data of three countries, Malaysia, Thailand and the Republic of Korea, over a 13-year period, from 1990 to 2002. The...
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...The Asian Economic Crisis The Asian Economic Crisis of 1997 was a regional debacle that stirred and involved practically the rest of the world. It was a unique economical situation that no one expected or suggested. The southeastern Asian countries, such as Thailand, South Korea and Indonesia were financially sound and satisfied all the criteria that economists proclaimed necessary to maintain order and progress. However, economists and the rest of the world did not see the breaches in the economy and realize the affect those considerations would have in the exacerbation of an entire region. The purpose of this essay is to explain what the Asian Economic Crisis was, the causes, consequences, and how the world went about resolving the issue to bring this region to where it is today. The 1990s was a decade of enormous growth in Southeast Asia sustained by its exporting (Noble, 1). It was commonly known as the Asian economic miracle. Macroeconomic balances were relatively steady and inflation was under control in these Asian countries, like Thailand, Indonesia and Singapore. Because of the major progress and developments in these countries, it became an attractive location for foreign investment. Technology had reached a new brink, where people could invest internationally without having to leave the country and establish a huge investment abroad. Trading through the internet was easy, efficient and convenient. Capital Inflow into these countries was inundating the...
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...FIN 190 Asian Currency Crisis The Asian currency crisis of 1996-97 brought to light the dangers of financing massive amounts of debt in a foreign currency which the domestic currency is pegged to. It also illustrated how developing countries are ill prepared to cope with such large scale financial issues. The projected continued growth in the Asian markets was built heavily on exaggerated predictions. Between 1990 and 1996 the area witnessed an exponential development period. Prior to the 90’s southern Asia countries exported predominantly textile based products at cheap prices. As the technology wave began to flourish demand for the components required began to rise and Asian countries took full advantage of the situation. They began exporting high amounts of electronics and tech components which brought in much higher revenue than the textiles of the past. The increases in export revenue sparked a building boom. This growth fueled commercial and residential property development, purchases of industrial assets and enhancements to infrastructure. All of this was built with borrowed money. Since the economic environment was expected to continue to get better borrowing was easy and the financial institutions were eager to lend money as fast as possible. Bold investments were made mainly to increase plant capacities. The idea was that if they could produce more they continue to derive the same levels of pricing. Indonesia, Malaysia, Thailand and South Korea...
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...East Asian Crisis Financial crisis is a situation in which some financial institutions or assets suddenly lose a large part of their value. East Asian crisis was a series of currency devaluations and other events that spread through many East Asian countries beginning in the summer of 1997. The countries majorly affected by this were: 1. 2. 3. 4. 5. 6. South Korea Japan Thailand Indonesia Malaysia Philippines The countries at the center of the recent crisis were for years admired as some of the most successful emerging market economies, owing to their rapid growth and the striking gains in their populations' living standards. With their generally prudent fiscal policies and high rates of private saving, they were widely seen as models for many other countries. No one could have foreseen that these countries could suddenly become embroiled in one of the worst financial crises. Their very success led foreign investors to underestimate their underlying economic weaknesses. Partly because of the large-scale financial inflows that their economic success encouraged, there were also increased demands on policies and institutions, especially those safeguarding the financial sector; and policies and institutions failed to keep pace with these demands. Only as the crisis deepened were the fundamental policy shortcomings and their consequences fully revealed. Also, past successes may have led policymakers to deny the need for action when problems first appeared1. Several factors contributed...
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...Trisha LaFleur Econ 375 McNeil 17 November 2014 IMF’s Role on Asian Crisis In July of 1997 Thailand devalued the Baht and thus began the ‘Asian Crisis’ that would soon affect other Southeast Asian countries including the other two that were hit the hardest Indonesia and South Korea. Each country had no choice but to seek help from The International Monetary Fund (IMF). The IMF would have to pull through in aiding these countries out of this crisis, after carefully reviewing each country and see to what extent their financial problems had developed. As you can see below on Graph 1 each country’s exchange rate had depreciated tremendously during the crisis. With the demise of each Country’s currency their public debt, as shown on Chart 2 below, had grown tremendously. Thailand, Indonesia, and South Korea each developed specific financial restructuring measures that were agreed upon with the IMF. Graph 1: Chart 2: It all started on May 14th 1997 when Thailand started pouring foreign currency into the market in order to ‘to defend the Thai baht against speculative attacks,’ according to the “TimeLine of the Crisis” written by PBS. Two months later the Baht had reached an all-time low of 20% devaluation. Indonesia started to widen its ‘trading band for the rupiah in a move to discourage speculators’ only seven days after Indonesia’s reach for assistance (PBS). No more than two weeks pass until the Singapore dollar starts to devalue. Shortly after that, the...
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...East Asian Economic Crisis A large economic downturn in East Asia threatens to end its nearly 30 year run of high growth rates. The crisis has caused Asian currencies to fall 50-60%, stock markets to decline 40%, banks to close, and property values to drop. The crisis was brought on by currency devaluations, bad banking practices, high foreign debt,loose government regulation, and corruption. Due to East Asia's large impact on the world economy, the panic in Thailand, Indonesia, Korea, and other Asian countries has prompted other countries to worry about the affect on their own economies and offer aid to the financially troubled nations (Sanger 1). The East Asian crisis has affected almost all of the Asian nations, but the three hardest hit countries are Thailand, Indonesia, and South Korea. The panic began in Thailand in May of 1997 when speculators, worried about Thailand's slowing economy, exces sive debt, and political instability devalued the baht as they fled for market-driven currencies like the American dollar. Indonesia's economy soon fell soon after when the rupiah hit a record low against the U.S. dollar. Indonesia is plagued by more than $70 billion worth of bad debts and a corrupt and inefficient government. Thailand and Indonesia also suffer from being overbuilt during real estate booms that Reven2 were the result of huge influxes of cash by optimistic foreign investors. South Korea faltered under the weight of its huge foreign debt...
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...The financial crisis which began in July 1997 in the East Asian countries, Thailand, Indonesia, Malaysia and Korea, has had devastating effects on their economies. Growth rates in these countries which were in excess of five percent before 1997, turned sharply negative in 1998 and, at the time of this writing it is not yet clear when these economies will turn the corner and resume positive rates of growth. This paper examines why these countries, which were part of what has been termed "the Asian miracle" and were able to eradicate so much poverty, are now undergoing severe economic contractions, with such harmful effects on their populations. A breakdown of information in financial markets is the key factor that has driven this crisis. After laying out an asymmetric information view of the Asian financial crisis, this paper goes on to use this framework to explore lessons from this crisis. 1. An Asymmetric Information View of the Asian Crisis The financial system plays a critical role in the economy because, when it operates properly, it channels funds from those who have saved surplus funds to those who need these funds to engage in productive investment opportunities. The major barrier to the financial system performing this job properly is asymmetric information, the fact that one party to a financial contract does not have the same information as the other party, which results in moral hazard and adverse selection problems. An asymmetric information view of financial...
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...Impact of the Asian Financial Crisis in 1997 and effect to Latin America Name: Institution: Date: Abstract In 1997, the Asian Financial Crisis spread rapidly all over the Asia and affected almost all the economies in the world. Prior to the Asian Financial Crisis, the Asian countries such as Thailand, Malaysia, South Korea, Indonesia, Hong Kong and Singapore experienced a remarkable growth in the economy that was considered the highest in the world. These Asian economies increased by a notable proportion of 6 to 10 percent annually in the GDP. However, what had been regarded as an Asian miracle seemed to crumple down rapidly 1997 when these Asian countries were faced with a severe financial crisis in their local stock and currency markets. When the economies started recovering from the crisis in 1998, the stock markets in several countries had considerably lost more than 70 percent of their worth, while their currencies depreciated in comparison to the US dollar (Pettis, 2001). The Asian Financial Crisis also affected several nations in the Latin America as they experienced a relentless economic meltdown that had detrimental effects to the economies. For instance, the financial crisis force multinational firms to close down due to liquidation, the banking system deteriorated and this forced high levels of lay-offs leading to unemployment. In addition, the financial crisis resulted in the loss of the people’s purchasing power in the Latin American while nations turned to...
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...Asian Crisis • What happened and when did it happen? Asian Crisis that hit pacific Asian in middle 1997, it liked a big earthquake suddenly hit Southern Asia. In Thailand, the July 2, 1997 when it currency had to devalue, the baht, about 20% against the US dollar, as a result of intense pressure in the foreign exchange market. Not only currency speculators but also many Thai residents were trying to sell the baht and buy the US dollar, causing and worsening capital flight out of the country, as the Thai government was running out of its foreign reserves and losing market confidence in maintaining the currency value and financial stability. The interest rates were shot up, as the outflow of short-term capital intensified. Then, the previously inflated stock and real estate markets collapsed and that has led to Thailand's worst recession in the postwar period with sharply rising unemployment and business failures, and the exports cheaper, pressuring other currencies to follow suit. Once the crisis hit Thailand, it has quickly spread to Indonesia. it's rupiah came under vicious attack and had to be devalued by about 90% over the period of just a few months. Interest rates were rising sharply, as capital flight from Indonesia was accelerating a complete collapse in the financial as well as the political system in that country. The Asian Crisis also has brought down South Korea, just like Indonesia and Thailand, has gone almost bankrupt as a nation and is receiving financial...
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...The Asian financial crisis (sometimes referred to as the "Tom Yum Gung crisis" after the Thai hot-and-sour soup) started with the devaluation of Thailand’s Bath, which took place on July 2, 1997. This first devaluation of the Thai Baht was soon followed by that of the Philippine Peso, the Malaysian Ringgit, the Indonesian Rupiah and, to a lesser extent, the Singaporean Dollar. What began as a currency crisis soon affected the wider economy and led to economic downturns in other countries in the region. The Asian-Pacific economies known as Asian “tigers” were the most affected. Three of the countries: Thailand, South Korea, and Indonesia, had to seek bailout assistance from the International Monetary Fund because of the desperate balance of payments associated with the crisis. This paper was aimed to focus on the financial crisis in THAILAND and provide an insight thought on some of the related issues. Pre-Crisis (1980s-1996) Prior to 1997, Thailand had been one of the Southeast Asia’s outstanding performers. Prudent macroeconomic management, including cautious fiscal policies, a non-inflationary monetary policy and a closely monitored fixed exchange rate system, was key to Thailand‘s economic success in the 1980s and early 1990s. Thailand’s real economic growth increased from about 6 percent per year in 1976-1985 to above 8 percent in 1986-1995. At its peak in 1988-1990, growth averaged 12 percent per year (Coxhead and Plangpraphan, n.d.). World trade...
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...1. a) Venture capitalists (VCs): Provide capital for companies in early stages of development. Screen good business ideas and entrepreneurial teams from bad ones. Provide high rate of return to their investors for the associated risk. Employ experienced and savvy business people to work closely with portfolio companies. Monitor and guide companies into a well managed, fully functional company that can stand on its own, and ready to face public capital market’s scrutiny after an IPO. b) Investment Bank Underwriters: Help entrepreneurs in the actual process of doing IPO, provide advisory financial service, price company offerings, underwrite and introduce shares to investors. c) Sell-Side analysts: Publish research on public companies, Form relationships with and talk to managements of the companies, Follow trends in the industry, Make buy or sell recommendations d) Buy-Side Analysts: same duties as sell-side counterparts. Do industry research, talk to companies and management teams. Come up with earning estimates, do valuation analysis. To rate stock prices of the companies as either ‘buys’ or ‘sells’ and convince portfolio managers. Portfolio managers actually manage money and are ultimately responsible for buying or selling securities. e) Independent accountants audit financial statements of public companies to verify accuracy and freedom from fraud. Auditors are responsible for making a report to the third parties based on the company’s financial statements. They provide...
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...Thailand’s Financial/Currency Crisis One of the biggest financial crisis’ the world has ever seen was the Asian Financial Crisis of 1997. This financial crisis affected most of East Asia and raised fears of a potential worldwide economic meltdown. The Asian financial crisis called for urgent actions to be taken in order to help the countries that have been affected by the crisis. Thailand was the first country affected by the Asian financial crisis, which is why we chose to do our research on Thailand. The Asian financial crisis started with Thailand due to the financial downfall of their domestic currency. The cause of the sharp devaluation in the Thai baht was due to numerous reasons. Before the Asian financial crisis hit, there was an economic boom in Thailand due to the large amounts of capital inflow from their exports. However, a significant amount of the money that came into Thailand was put into unproductive sectors, which included real estate and foreign reserves. With this being said, a lot of the capital inflow that Thailand had was completely wasted and not put into practical use and good investments. Additionally, in the early 1990’s, Thailand had extremely weak financial regulations. There was implicit guarantee from the Thailand government to bail out the banks. This led the banks in Thailand to make risky investments that were most of the times not profitable. Thailand’s weak financial regulations also encouraged its citizens and entire financial sector...
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...| Asian Crisis of 1997 | | | Prepared by:Azra Becirovic and Sanela Bilalic | | April 21, 2012 | Long before Asian financial crisis has started, South Korea, Thailand, Indonesia, and Malaysia had an increasing economic performance; economy was fast growing, saving rates were high, and inflation low. Turning point in Asian economy was 2 July 1997, the day when Thai Baht fell around 20 % against the $US. “It all began in Thailand’ summarizes the conventional explanation of the early stages of the crisis.” (Hill, p.3) How it all began, what factors caused the crisis, what segments were affected the most, what was the backup plan, and what policies should have been taken to prevent the crisis are the points that this paper will cover. First and Second-Generation Models According to 1996 annual report of Bank for International Settlements (BIS), pre-crisis fundamentals exhibit economic performance of Asian countries. They’ve experienced moderate inflation rates of about 6%, high savings rate of 32%, and trade openness indicators of 39%. Table 1: East Asian Economic Conditions Before Crisis Although accounting and macroeconomic analytics have failed to foreseen the currency crisis, which is inevitable, first and second-generation models explain us was it due to weakening macroeconomic fundamentals or financial contagion. In accordance to first-generation model developed by Krugman 1979, market-speculative movements, in response to policies, are incompatible...
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...Implications of the Asian Financial Crisis. The Asian Financial Crisis also called the "Asian Contagion". This was a series of currency devaluations and other events that spread through many Asian markets beginning in the summer of 1997. The currency markets first failed in Thailand as the result of the government's decision to no longer peg the local currency to the U.S. dollar. Currency declines spread rapidly throughout South Asia, in turn causing stock market declines, reduced import revenues and even government upheaval. Although the economic storm that swept through Asian in 1997 has now declined, the wreckage left in its wake has undoubtedly take years to repair. By indulging in a debt spree that ultimately bought its high flying economies crashing to the ground, Asia may have lost a decade of economic progress. Beyond this, however, the crisis has raised a series of fundamental policy questions about the sustainability of the so called Asian Economic Model, the role of the IMF, and the virtues of floating and fixed exchange rates. The crisis also has important implications for international businesses. For a decade, the Asian Pacific region has been promoted by many as the future economic engine of the world economy. Businesses have invested billions of dollars in the region on the assumption that the rapid growth of the last decade would continue. But at the dawn of the aforementioned crisis, it has come grinding to a halt. So what could this mean for international...
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