FIN657 GROUP ASSIGNMENT

ASIA FINANCIAL CRISIS 1997 – INTRODUCTION

The Asian Financial Crisis is the result of a currency exchange rate collapse and a hot money bubble.
It began in Thailand in July 1997 and quickly spread throughout East and Southeast Asia. The
financial crisis heavily damaged currency values, stock markets, and other asset prices in many East
and Southeast Asian countries.

The Thai government ran out of foreign currency on July 2, 1997. The government was obliged to
float the Thai baht, which was formerly linked to the US dollar, because it could no longer support its
exchange rate. As a result, the baht's currency exchange rate collapsed.

The Philippine peso and the Indonesian rupiah were also devalued significantly two weeks later. The
crisis expanded throughout the world, and Asian stock markets hit multi-year lows in August. Until
October, South Korea's capital market remained reasonably stable. However, on October 28th, the
Korean won hit a new low, and on November 8th, the stock market saw its largest one-day plunge
since that date.
CAUSES OF THE ASIAN FINANCIAL CRISIS

The reasons of Asia's financial crisis are complex and controversial. The burst of the hot money
bubble is seen to be a major factor. Many Southeast Asian countries, notably Thailand, Singapore,
Malaysia, Indonesia, and South Korea, saw enormous economic growth in the late 1980s and early
1990s, with gross domestic product increases of 8% to 12%. (GDP). The "Asian economic miracle"
was coined to describe the feat. However, the achievement came with a significant risk.

The economic developments in the countries mentioned above were mainly boosted by export
growth and foreign investment. Therefore, high interest rates and fixed currency exchange rates
(pegged to the U.S. dollar) were implemented to attract hot money. Also, the exchange rate was
pegged at a rate favorable to exporters. However, both the capital market and corporates were left
exposed to foreign exchange risk due to the fixed currency exchange rate policy.

Following the United States' recovery from a recession in the mid-1990s, the Federal Reserve hiked
the interest rate against inflation. The increased interest rate enticed hot money to pour into the US
market, causing the dollar to appreciate.

The value of currencies tied to the US dollar increased as well, stifling export growth. Asset prices,
which were leveraged by massive levels of credit, began to decline as a result of a shock in both
export and foreign investment. Foreign investors, fearful of losing their money, began to withdraw.

The massive capital outflow put downward pressure on Asian currencies, causing them to
depreciate. The Thai government was forced to float the baht when it ran out of foreign cash to
support its exchange rate. As a result, the baht's value plummeted almost instantly. Shortly later, the
same thing happened to the rest of Asia.
EFFECTS OF THE ASIAN FINANCIAL CRISIS

Indonesia, Thailand, Malaysia, South Korea, and the Philippines were among the countries hardest
hit by the Asian Financial Crisis. Their currency exchange rates, stock markets, and other asset prices
all plunged. The GDPs of the countries affected dropped by double digits.

Between 1996 and 1997, Indonesia's nominal GDP per capita fell 43.2 %, Thailand's 21.2 %,
Malaysia's 19 %, South Korea's 18.5 %, and the Philippines' 12.5 %. Hong Kong, Mainland China,
Singapore, and Japan were all impacted, though to a lesser extent.

The Asian Financial Crisis has political ramifications in addition to its economic consequences.
Yongchaiyudh, Thailand's Prime Minister General, and Suharto, Indonesia's President, both resigned.
Anti-Western sentiment was stoked, particularly against George Soros, who was blamed by some for
causing the crisis by engaging in large-scale currency speculating.

The Asian Financial Crisis had an impact that was not restricted to Asia. Not only in Asia, but also in
other parts of the world, international investors have become less eager to invest in and lend to
emerging countries. Oil prices have also dropped as a result of the turmoil. As a result, the oil
business has seen several big mergers and acquisitions in order to attain economies of scale.