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.
 Type of borrower has shifted away from the
government and central banks to banks and
non-bank private sector
 Exchange rate fluctuate only within narrow
band and has been aligned with dollar
 Maturity Distribution
90 84
80
68
70 62 65
60 50
50
40
30
20
10
0
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 Malaysia
1996 1997 1998 1999 2000 1996 1997 1998 1999 2000
0 2

2000
2.5

4000
3

6000

3.5
8000

4
10000 3.92
10014

12000 4.5
 Devaluation of currencies
Thailand Philippines
1996 1 99 7 1 99 8 1999 2000 1996 1997 19 98 1999 2000
20 20

25
25

30

30

35

35
40

40.89
40
45
41.36

45 50
 Trade Balance
(Billions U.S.Dollar)

1200 911.9
1000 682.1
800
600
400
200
0
-200
-229.8
-400
1990 1992 1994 1996 1998
Export Import Balance
 Current Account
 Asian countries group is third trade partner
of United States after EU and Japan
5

3.2
3
P ercentage of G D P

1
1

-1

-2.5
-3

-5
1986 1988 1990 1992 1994 1996 1998 2000

EU USA Japan
 Trade deficit between
USA- Asia
0 Million $
-2,000
-4,000
-6,000
-8,000 -7,041.70
-10,000
-8,197.80
-12,000 -10,043.00
-14,000
1994

1995
1993

1996

1997

1998

1999
Indonesia Malaysia 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
193,375
200,000

150,000 109,264
100,000

50,000

0
1993 1994 1995 1996 1997 1998 1999
 Interest Rate
10
8.44 8.35
8

6 5.36 4.8
4

0
1994 1995 1996 1997 1998 1999

Prime rate charged by banks

One year treasury bill
 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 2.3
2
1.5 1.6
1
0.5
0
1994 1995 1996 1997 1998 1999
 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

4
Percentage

3
1.88175818
2

1 1.000860669

0 0.501206609

-1
1986 1988 1990 1992 1994 1996 1998 2000

EU USA Japan
 Oil Price at Crisis Period
35

30
Dollars per Barrel

Down price
25

20

15

10
Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan-
92 93 94 95 96 97 98 99 00 01

Fallen 30% to end of 1997

 United States Personal Income
( Per Capita )

30,000 27,195
25,932
25,000

20,000

15,000

10,000

5,000

0
1993 1994 1995 1996 1997 1998 1999
 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
0.044
Annual growth rate

0.04

0.02
0.027

0.00

-0.02
-0.025
-0.04
1986 1988 1990 1992 1994 1996 1998 2000

EU USA Japan
 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
1600
1400
1,229.20
1200
970.4
1000
800
600
400
200
0
1990 1992 1994 1996 1998
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%

Indonesia
South Korea
11% Malaysia
Philippin
Taiwan
Thailand
13% 33%

8%
 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 % change Commodity % change

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