1997 Aslan llnanclal Crlsls

!ubll !aln
8oll noŦ l27
1erm Þaper
lnLernaLlonal llnance









Introduct|onť
1he Aslan flnanclal crlsls was a perlod of flnanclal crlsls LhaL grlpped much of Asla beglnnlng ln
!uly 1997ţ and ralsed fears of a worldwlde economlc melLdown due Lo flnanclal conLaglonŦ
1he crlsls sLarLed ln 1halland wlLh Lhe flnanclal collapse of Lhe 1hal bahL caused by Lhe declslon
of Lhe 1hal governmenL Lo floaL Lhe bahLţ cuLLlng lLs peg Lo Lhe uŦSŦ dollarŦ 1hls was afLer
exhausLlve efforLs Lo supporL lL ln Lhe face of a severe flnanclal overexLenslon LhaL was ln parL
real esLaLe drlvenŦ AL Lhe Llmeţ 1halland had acqulred a burden of forelgn debL LhaL made Lhe
counLry effecLlvely bankrupL even before Lhe collapse of lLs currencyŦ As Lhe crlsls spreadţ mosL
of SouLheasL Asla and !apan saw slumplng currenclesţ devalued sLock markeLs and oLher asseL
prlcesţ and a preclplLous rlse ln prlvaLe debLŦ
lndoneslaţ SouLh korea and 1halland were Lhe counLrles mosL affecLed by Lhe crlslsŦ Pong kongţ
Malayslaţ Laos and Lhe Þhlllpplnes were also hurL by Lhe slumpŦ 1he Þeopleƌs 8epubllc of Chlnaţ
ÞaklsLanţ lndlaţ 1alwanţ Slngaporeţ 8runel and vleLnam were less affecLedţ alLhough all suffered
from a loss of demand and confldence LhroughouL Lhe reglonŦ lorelgn debLŴLoŴCuÞ raLlos rose
from 100Ʒ Lo 167Ʒ ln Lhe four large ASLAn economles (1hallandţ lndoneslaţ Malaysla Ǝ
Slngapore) ln 1993Ŷ96ţ Lhen shoL up beyond 180Ʒ durlng Lhe worsL of Lhe crlslsŦ ln SouLh
koreaţ Lhe raLlos rose from 13 Lo 21Ʒ and Lhen as hlgh as 40Ʒţ whlle Lhe oLher norLhern newly
lndusLrlallzed counLrles fared much beLLerŦ
1he effecLs of Lhe crlsls llngered Lhrough 1998Ŧ ln 1998 Lhe Þhlllpplnes growLh dropped Lo
vlrLually zeroŦ Cnly Slngapore and 1alwan proved relaLlvely lnsulaLed from Lhe shockţ buL boLh
suffered serlous hlLs ln passlngţ Lhe former more so due Lo lLs slze and geographlcal locaLlon
beLween Malaysla and lndoneslaŦ 8y 1999ţ howeverţ analysLs saw slgns LhaL Lhe economles of
Asla were beglnnlng Lo recoverŦ

8ackgroundť
1he Aslan flnanclal crlsls of 1997Ŵ98 came close on Lhe heels of Lhe LaLln Amerlcan crlsls of
1994Ŵ93Ŧ
SlmllarlLlesť 8oLh crlses were Lrlggered by Lhe sudden collapse of ma[or reglonal currenclesť Lhe
Mexlcan peso and Lhe 1hal bahLŦ Þrecedlng Lhe crlses perlods Lhere were several slmllarlLles
beLween Lhe Lwo caLalysL counLrlesŦ Mexlco and 1halland had recelved large caplLal lnflows and
forelgn lnvesLmenL ln Lhe 1990s and had been hlghly regarded by lnLernaLlonal lnvesLorsŦ
Poweverţ boLh had experlenced deLerloraLlon ln Lhelr exporL growLh raLes and rlse ln currenL
accounL deflclLs ln Lhe years before Lhe crlsesŦ 1he peso and bahL had also appreclaLed
slgnlflcanLlyŦ Cvervalued exchange raLesţ speculaLlve aLLacks and lnvesLor panlcţ all led Lo
currency depreclaLlonŦ
ulfferencesť 1here wereţ aL Lhe same Llmeţ slgnlflcanL dlfferences beLween Lhe Lwo crlsesŦ
8efore Lhe flnanclal crlsls of 1997ţ Lhe model of developmenL adopLed by Lhe LasL Aslan
economles was wldely accepLed as belng exLremely conduclve for susLalned growLh over a long
perlodŦ unllke Lhe LaLln Amerlcan counLrlesţ Lhese economles had been dlsLlngulshed by Lhelr
hlgh raLes of caplLal accumulaLlon and savlngsţ and sLrong cooperaLlon beLween Lhe sLaLe and
Lhe prlvaLe secLorŦ 1hey experlenced hlgh growLh raLesţ low lnflaLlon and balanced governmenL
budgeLsŦ lor exampleţ Lhe 1hal economy had a budgeL surplus of 2Ŧ6 percenL of CuÞ ln Lhe
1991 Lo 1996 perlodŦ Malaysla recorded an lnflaLlon raLe of 4Ŧ2 percenL whlle korea had a
savlngs raLe of 34Ŧ8 percenL ln Lhe same perlodŦ 1hus many of Lhe usual macroeconomlc
lndlcaLors of any flnanclal crlsls dld noL reglsLer any slgnlflcanL changes for Lhe LasL Aslan
economlesŦ 1husţ Lhe crlsls caughL mosL of Lhe global flnanclal sysLem unawareŦ
lL was howeverţ Lhe facLors LhaL had made Lhe LasL Aslan economles such sLellar successesţ
promoLed wldely by Lhe lMl and Lhe World 8ankţ whlch became Lhe reasons for Lhe flnanclal
crlsls LhaL was Lo followŦ 1here was rapld caplLal accumulaLlonţ buL lL was mosLly by hlghly
leveraged lndusLrles ln exporLs and real esLaLeŦ

1he Cr|s|s 8eg|ns
1he mosL lmporLanL warnlng slgn of Lhe lmpendlng crlsls was Lhe fraglllLy of Lhe flnanclal
sysLemŦ CredlL exLended by Lhe banks Lo Lhe prlvaLe secLor expanded very rapldlyţ flnanced
mosLly by Lhe banks' huge offshore borrowlngsŦ llnanclal secLor clalms on Lhe prlvaLe secLor
lncreased from 100 percenL ln 1990 Lo approxlmaLely 140 percenL ln Malayslaţ 1halland and
koreaŦ Þrograms of parLlal flnanclal llberallzaLlon ln Lhe laLe 1980s and early nlneLles had
allowed Lhe banks Lo channel forelgn money lnLo Lhe domesLlc secLorŦ lor exampleţ ln 1hallandţ
forelgn llablllLles of commerclal banks lncreased from 3Ŧ9 percenL Lo 28Ŧ4 percenL of CuÞ
beLween 1992 and 1993Ŧ 1he LoLal lnLernaLlonal clalms held by forelgn banks lncreased from
abouL 183 bllllon dollars for 1hallandţ korea and lndonesla ln end 1993 Lo 231 bllllon dollars ln
mld 1997Ŧ A large parL of Lhls bank credlL was used by Lhe prlvaLe secLor for real esLaLe
lnvesLmenLŦ 8eal esLaLe loans ranged from 30 Lo 40 percenL ln 1halland and 13 Lo 23 percenL ln
SouLh korea by laLe 1997Ŧ
1he problem of moral hazard affllcLed much of Lhe credlL exLended Lo Lhe prlvaLe secLorŦ As Lhe
flnance companles and banks borrowed heavlly from abroadţ Lhey accumulaLed shorL Lerm
unhedged llablllLles and lenL long Lerm Lo flnance pro[ecLs wlLh quesLlonable vlablllLyţ and soon
Lhe borrowers mlssed repaymenLsŦ 1hese sLrucLural lmperfecLlons led Lo dlsLorLlons Ŷ raLlos of
corporaLe debL Lo equlLy averaged 393 percenL ln SouLh korea and 430 percenL ln 1halland as
Lhe borrowlng boom acceleraLedţ compared Lo 106 percenL ln uSAŦ
1he borrowlng boom Lhereforeţ was ln several waysţ Lhe caLalysL of Lhe LasL Aslan flnanclal
crlslsŦ AlLhough Lhe economles had sLrong fundamenLalsţ Lhelr flnanclal excesses made Lhem
vulnerable Lo exLernal shocksŦ 8orrowlng shorL Lermţ lendlng long Lermţ borrowlng ln dollars
and yen and lnvesLlng ln asseLs whlch ylelded reLurns ln domesLlc currencles made Lhem even
more soŦ ln 1993ţ Lhe sLrengLhenlng dollar (agalnsL Lhe yen) led Lo an appreclaLlon of Lhe LasL
Aslan currencles LhaL were pegged agalnsL Lhe dollarŦ 1hls weakened Lhelr exporLs and
LhreaLened Lhe sLablllLy of Lhe domesLlc currenclesŦ 1here were addlLlonal rlsks Ŷ banks ln Lhe
debLor Aslan flve counLrles (1hallandţ lndoneslaţ SouLh koreaţ Þhlllpplnes and Malaysla) could
noL hedge Lhelr neL holdlngs of shorL Lerm dollar llablllLles ln Lhe pre crlsls perlodŦ 8lsk
premlums ln Lhe domesLlc lnLeresL raLes of debLor economles wlLh orlglnal sln

were also hlgher
Lhan on dollar asseLs of comparable maLurlLyŦ 1hereforeţ Lhe banks Lended Lo over borrow ln
dollars wlLhouL coverlng for exchange rlskŦ When a speculaLlve currency aLLack occurred ln Lhls
slLuaLlonţ lL forced an lmmedlaLe repaymenL of shorL Lerm dollar debLsŦ 1he banks could have
Lrled Lo defend Lhe respecLlve currencles by runnlng down Lhe reservesţ buL evenLually Lhe
currency would have Lo be devaluedŦ 1he comblnaLlon of Lhese facLors lnlLlaLed Lhe LasL Aslan
crlsls ln 1hallandŦ
ln Malayslaţ Lhe raLlo of flnanclal lnsLlLuLlons' clalms Lo domesLlc CuÞ had lncreased Lo 144Ŧ6
percenL by 1996Ŧ 1he 1hal currenL accounL deflclL reached 8 percenL of Lhe CuÞ ln laLe 1996ţ
prompLlng forelgn credlLors Lo wlLhdraw Lhelr 1hal sLockholdlngsŦ 1he 1halland cenLral bank
Lrled Lo lnlLlally supporL Lhe bahL ln Lhe face of decllnlng lnflows of forelgn exchangeţ buL Lhen
gave upŦ 1he collapse of Lhe 1hal bahL formally lnlLlaLed Lhe LasL Aslan flnanclal crlslsŦ CLher
reglonal currencles followed sulLţ and Lhe flnanclal crlsls rapldly Lurned lnLo a full blown
downLurnţ wlLh slgnlflcanL effecLs on Lhe real secLor as wellŦ

Contag|on and the Cr|s|s
1he conLaglon effecL could be clearly seen ln case of Lhe LasL Aslan economlesŦ AlLhough Lhe
LasL Aslan crlsls was Lrlggered off ln Lhe 1hal flnanclal markeLsţ lL spread falrly qulckly Lo
Malayslaţ koreaţ Þhlllpplnesţ and lndoneslaŦ 8eal llnkages beLween Lhe economles meanL LhaL
Lhe effecLs were noL dellmlLed Lo Lhe flnanclal secLor onlyŦ 1he affecLed economles wlLnessed a
sharp decllne ln ouLpuLţ employmenL and sLandards of llvlngŦ
1he fallure of Lhe 1hal cenLral bank Lo supporL Lhe bahL and lLs subsequenL floaL on !uly 2ţ 1997ţ
had an lmpacL on Lhe nelghbourlng currencles of Malayslaţ lndonesla and ÞhlllpplnesŦ 8y Lhe
beglnnlng of Lhe lasL quarLer of 1997ţ Lhe rlnglLL had losL 30Ʒ of lLs value before Lhe sLarL of Lhe
crlslsŦ
ln SouLh koreaţ Lhe wldespread bankrupLcles of corporaLlons senL sLock prlces splralllng
downwards and Lhe prompLed forelgn lnvesLors Lo dump Lhelr holdlngsŦ AfLer lnlLlal aLLempLs
by Lhe cenLral bank Lo supporL Lhe won by runnlng down reserves and ralslng Lhe lnLeresL raLesţ
SouLh korea also abandoned Lhe defense of lLs currency ln november 1997Ŧ Pence Lhe flnanclal
lnLerllnkages beLween Lhe LasL Aslan economles led Lo Lhe Lransmlsslon of Lhe crlsls LhaL began
ln 1halland Lo Lhe enLlre reglonţ wlLh Lhe excepLlons of !apan and SlngaporeŦ
1he hlghesL percenLage change ln Lhe bahL occurred ln !anuary 1998ţ and Lhls followed a
perslsLenL decllne ln forelgn reserves from a hlgh of more Lhan 31 bllllon dollars ln CcLober
1997Ŧ 8oLh Lhese facLs lllusLraLe Lhe advenL of Lhe currency crlsls ln 1hallandŦ Malaysla and
SouLh korea also saw Lhe maxlmum depreclaLlon ln Lhelr respecLlve currencles ln !anuary 1998Ŧ
1he forelgn reserves ln SouLh korea began Lo fall ln CcLober 1997Ŧ unllke Malayslaţ howeverţ
where Lhe decllne ln reserves was noL reversed almosL unLll Lhe lasL quarLer of 1998ţ korean
reserves recovered almosL lmmedlaLely ln Aprll 1998Ŧ
1he lndlan 8upee never experlenced Lhe exLreme depreclaLlonŦ 1he maxlmum percenLage
change was only abouL 20 percenL and even Lhls occurred well afLer bahLţ wonţ and rlnglLL had
depreclaLed Lhe mosLŦ lorelgn reserves also dld noL flucLuaLe very wldelyŦ 1hese facLors
LogeLher suggesL LhaL lndla remalned mosLly lmmune from Lhe conLaglon effecLŦ

Causes
A greaL deal of efforL has been devoLed Lo Lrylng Lo undersLand Lhe causes of Lhe crlslsŦ
O Cne vlew ls LhaL Lhere was noLhlng lnherenLly wrong wlLh LasL Aslan economlesţ whlch
have hlsLorlcally performed very wellŦ 1hese economles experlenced a surge ln caplLal
lnflows Lo flnance producLlve lnvesLmenLs LhaL made Lhem vulnerable Lo a flnanclal
panlcŦ 1haL panlcŴŴand lnadequaLe pollcy responsesŴŴLrlggered a reglonŴwlde flnanclal
crlsls and Lhe economlc dlsrupLlon LhaL followedŦ
O An alLernaLlve vlew ls LhaL weaknesses ln Aslan flnanclal sysLems were aL Lhe rooL of Lhe
crlslsŦ 1hese weaknesses were caused largely by Lhe lack of lncenLlves for effecLlve rlsk
managemenL creaLed by lmpllclL or expllclL governmenL guaranLees agalnsL fallure
(Morenoţ Þasadlllaţ and 8emolona 1998 and oLhers clLed below)Ŧ 1he weaknesses of Lhe
flnanclal secLor were masked by rapld growLh and accenLuaLed by large caplLal lnflowsţ
whlch were parLly encouraged by pegged exchange raLesŦ

V|ew 1ť 8oom and 8ust |n As|a
CperaLlng ln an envlronmenL of flscal and moneLary resLralnLţ mosL of LasL Asla en[oyed hlgh
savlngs and lnvesLmenL raLesţ robusL growLhţ and moderaLe lnflaLlon for several decadesŦ
SLarLlng ln Lhe second half of Lhe 1980sţ rapld growLh was accompanled by sharp lncreases ln
asseL valuesţ noLably sLock and land prlcesţ and ln some cases by rapld lncreases ln shorLŴLerm
borrowlng from abroadŦ
1he economlc shocks affecLlng LasL Asla were noL followed by a normal cycllcal downLurnţ buL
whaL some descrlbe as ƍrunsƍ on flnanclal sysLems and currenclesŦ Some argue LhaL Lhese runs
reflecLed a classlc flnanclal panlc LhaL dld noL reflecL poor economlc pollcles or lnsLlLuLlonal
arrangemenLsŦ As ls well knownţ even wellŴmanaged banks or flnanclal lnLermedlarles are
vulnerable Lo panlcsţ because Lhey LradlLlonally engage ln maLurlLy LransformaLlonŦ 1haL lsţ
banks accepL deposlLs wlLh shorL maLurlLles (sayţ Lhree monLhs) Lo flnance loans wlLh longer
maLurlLles (sayţ a year or longer)Ŧ MaLurlLy LransformaLlon ls beneflclal because lL can make
more funds avallable Lo producLlve longŴLerm lnvesLors Lhan Lhey would oLherwlse recelveŦ
under normal condlLlonsţ banks have no problem managlng Lhelr porLfollos Lo meeL expecLed
wlLhdrawalsŦ Poweverţ lf all deposlLors declded Lo wlLhdraw Lhelr funds from a glven bank aL
Lhe same Llmeţ as ln Lhe case of a panlcţ Lhe bank would noL have enough llquld asseLs Lo meeL
lLs obllgaLlonsţ LhreaLenlng Lhe vlablllLy of an oLherwlse solvenL flnanclal lnsLlLuLlonŦ
LasL Aslan flnanclal lnsLlLuLlons had lncurred a slgnlflcanL amounL of exLernal llquld llablllLles
LhaL were noL enLlrely backed by llquld asseLsţ maklng Lhem vulnerable Lo panlcsŦ As a resulL of
Lhls maLurlLy LransformaLlonţ some oLherwlse solvenL flnanclal lnsLlLuLlons may lndeed have
been rendered lnsolvenL because Lhey were unable Lo deal wlLh Lhe sudden lnLerrupLlon ln Lhe
lnLernaLlonal flow of fundsŦ
AfLer Lhe mldŴ1990s a serles of exLernal shocks (Lhe devaluaLlon of Lhe Chlnese remnlmbl and
Lhe !apanese yen and Lhe sharp decllne ln semlconducLor prlces) adversely affecLed exporL
revenues and conLrlbuLed Lo slowlng economlc acLlvlLy and decllnlng asseL prlces ln a number
of Aslan economlesŦ ln 1hallandţ Lhese evenLs were accompanled by pressures ln Lhe forelgn
exchange markeL and Lhe collapse of Lhe 1hal bahL ln !uly 1997Ŧ
1he evenLs ln 1halland prompLed lnvesLors Lo reassess and LesL Lhe robusLness of currency pegs
and flnanclal sysLems ln Lhe reglonŦ 1he resulL was a wave of currency depreclaLlons and sLock
markeL decllnesţ flrsL affecLlng SouLheasL Aslaţ Lhen spreadlng Lo Lhe resL of Lhe reglonŦ ln Lhe
year afLer collapse of Lhe bahL pegţ Lhe value of Lhe mosL affecLed LasL Aslan currencles fell 33Ŵ
83Ʒ agalnsL Lhe uŦSŦ dollar (measured ln dollars per unlL of Lhe Aslan currency)ţ and Lhe mosL
serlous sLock decllnes were as greaL as 40Ŵ60ƷŦ
ulsrupLlons ln bank and borrower balance sheeLs led Lo wldespread bankrupLcles and an
lnLerrupLlon ln credlL flows ln Lhe mosL severely affecLed economlesŦ As a resulLţ shorLŴLerm
economlc acLlvlLy slowed or conLracLed severely ln Lhe mosL affecLed economlesŦ

V|ew 2ť Lack of |ncent|ves for r|sk management
1wo characLerlsLlcs common ln counLrles LhaL have experlenced flnanclal crlses were presenL ln
a number of LasL Aslan economlesŦ llrsLţ flnanclal lnLermedlarles were noL always free Lo use
buslness crlLerla ln allocaLlng credlLŦ ln some casesţ wellŴconnecLed borrowers could noL be
refused credlLŤ ln oLhersţ poorly managed flrms could obLaln loans Lo meeL some governmenL
pollcy ob[ecLlveŦ PlndslghL reveals LhaL Lhe cumulaLlve effecL of Lhls Lype of credlL allocaLlon can
produce masslve lossesŦ Secondţ flnanclal lnLermedlarles or Lhelr owners were noL expecLed Lo
bear Lhe full cosLs of fallureţ reduclng Lhe lncenLlve Lo manage rlsk effecLlvelyŦ ln parLlcularţ
flnanclal lnLermedlarles were proLecLed by lmpllclL or expllclL governmenL guaranLees agalnsL
lossesţ because governmenLs could noL bear Lhe cosLs of large shocks Lo Lhe paymenLs sysLem
or because Lhe lnLermedlarles were owned by ƍMlnlsLersƌ nephewsƍŦ Such guaranLees can
Lrlgger asseL prlce lnflaLlonţ reduce economlc welfareţ and ulLlmaLely make Lhe flnanclal sysLem
vulnerable Lo collapseŦ
1he lmporLance of lmpllclL governmenL guaranLees ln Lhe mosL affecLed economles ls
hlghllghLed by Lhe generous supporL glven Lo flnanclal lnsLlLuLlons experlenclng dlfflculLlesŦ lor
exampleţ ln SouLh koreaţ Lhe very hlgh overall debL raLlos of corporaLe conglomeraLes (400Ʒ or
hlgher) suggesL LhaL Lhese borrowers were ulLlmaLely counLlng on governmenL supporL ln case
of adverse ouLcomesŦ 1hls was conflrmed by evenLs ln 1997ţ when Lhe governmenL encouraged
banks Lo exLend emergency loans Lo some Lroubled conglomeraLes whlch were havlng
dlfflculLles servlclng Lhelr debLs and supplled speclal loans Lo weak banksŦ 1hese responses
furLher weakened Lhe flnanclal poslLlon of lenders and conLrlbuLed Lo Lhe uncerLalnLy LhaL
Lrlggered Lhe flnanclal crlsls Lowards Lhe end of 1997Ŧ

Cther factors affect|ng the cr|s|s
Slnce weaknesses ln LasL Aslan flnanclal sysLems had exlsLed for decades and were noL unlque
Lo Lhe reglonţ why dld Asla noL experlence crlses of Lhls magnlLude before? 1wo explanaLlons
are llkelyŦ llrsLţ rapld growLh dlsgulsed Lhe exLenL of rlsky lendlngŦ lor many yearsţ such growLh
allowed flnanclal pollcles LhaL shlelded flrms LhaL lncurred losses from Lhe adverse effecLs of
Lhelr declslonsŦ Poweverţ such pollcles would make economles hlghly vulnerable durlng perlods
of uncerLalnLyŦ Secondţ lnnovaLlons ln lnformaLlon and LransacLlons Lechnologles have llnked
Lhese counLrles more closely Lo world flnanclal markeLs ln Lhe 1990sţ Lhus lncreaslng Lhelr
vulnerablllLy Lo changes ln markeL senLlmenLŦ
Closer lnLegraLlon wlLh world flnanclal markeLs adds dlmenslons of vulnerablllLy LhaL are noL
presenL ln a closed economyŦ ln a closed economyţ bad loans caused by rlsky lendlng may noL
lead Lo a run because deposlLors know LhaL Lhe governmenL can supply enough llquldlLy Lo
flnanclal lnsLlLuLlons Lo prevenL any losses Lo deposlLorsŦ ln an open economyţ LhaL same
ln[ecLlon of llquldlLy can desLablllze Lhe exchange raLeŦ As a resulLţ durlng perlods of
uncerLalnLyţ runs or speculaLlve aLLacks on a currency can be avolded only lf Lhe holders of
domesLlc asseLs are assured LhaL Lhe governmenL can meeL Lhe demand for forelgn currencyŦ
1hose LasL Aslan economles where forelgn exchange reserves were large relaLlve Lo Lhelr shorLŴ
Lerm borrowlng (Þhlllpplnesţ Malayslaţ and 1alwan) were ln a beLLer poslLlon Lo provlde such
assurances Lhan Lhose economles where such reserves were relaLlvely low (SouLh koreaţ
lndoneslaţ and 1halland)Ŧ (Slngapore and Pong kong are excluded from Lhls comparlson
because Lhelr role as offshore flnanclal cenLers clouds lnLerpreLaLlon of Lhe daLaŦ
llnanclal secLor vulnerablllLy was accenLuaLed by a Lendency noL Lo hedge forelgn currency
borrowlng ln counLrles wlLh pegged exchange raLesŦ MarkeL parLlclpanLs may have lnLerpreLed
currency pegs as lmpllclL governmenL guaranLees agalnsL Lhe rlsk of currency volaLlllLyţ backed
by forelgn reserves LhaL would be made avallable Lhrough cenLral bank currency lnLervenLlonŦ
Whlle Lhe absence of hedglng slgnlflcanLly lowered Lhe cosL of funds (ln Lhe shorL run) for Lhose
flrms wlLh access Lo forelgn credlLţ Lhe consequenL mlsprlclng of forelgn credlL conLrlbuLed Lo
excesslve caplLal lnflows and Lhe vulnerablllLy of borrowers wlLh heavy exposure Lo forelgn
currency loansŦ
1he lack of hedglng also added Lo Lhe lnsLablllLy ln Aslan flnanclal markeLs once Lhe crlsls hlLŦ
1he hlgh cosL of abandonlng currency pegs lnduced pollcymakers Lo adopL harsh conLracLlonary
measures (lnvolvlng skyrockeLlng lnLeresL raLes) Lo defend Lhe exchange raLeţ even when Lhe
pegs were unsusLalnable ln Lhe face of adverse markeL senLlmenLŦ 1he efforLs of markeL
parLlclpanLs Lo cover prevlously unhedged forelgn currency exposure afLer Lhe onseL of Lhe
crlsls furLher weakened Aslan currenclesŦ AfLer Lhe pegs collapsedţ borrowers who had noL
hedged Lhelr forelgn currency borrowlng had dlfflculLy servlclng Lhelr debLs andţ ln some casesţ
wenL bankrupLţ Lhus worsenlng Lhe crlslsŦ

Why was Ind|a ke|at|ve|y Unaffected by the I|nanc|a| Cr|s|s?
CuLpuL growLh ln lndla slowed from 7Ʒ Ŵ 8Ʒ ln 1994Ŵ96 Lo 3Ŧ3Ʒ ln 1997Ŵ98Ŧ 1he slowdown
reflecLed malnly domesLlc facLorsţ parLlcularly Lhe sLalllng of Lhe sLrucLural reform process and
Lhe deLerloraLlon ln governmenL flnancesţ raLher Lhan Lhe reglonal crlslsŦ lndla was a relaLlvely
closed economy Ŵ exporLs comprlse only abouL 8Ʒ of CuÞţ wlLh only abouL 13Ʒ of exporLs
dlrecLed Lo Lhe resL of Asla (excludlng !apan) Ŵ so LhaL Lhe adverse effecL of Lhe crlsls on Lhe
balance of paymenLs and domesLlc acLlvlLy had been relaLlvely modesLŦ CaplLal conLrolsţ whlle
enLalllng longerŴLerm cosLsţ appear Lo have helped Lo llmlL lndla's vulnerablllLy Lo abrupL
movemenLs ln shorLŴLerm caplLalŦ neL lnflows of prlvaLe caplLal durlng 1992Ŵ96 averaged only
1Ŧ3Ʒ of CuÞ ln lndlaţ compared wlLh 8Ŧ8Ʒ ln 1hallandţ 10Ŧ3Ʒ ln Malayslaţ and 4Ŧ8Ʒ ln
lndoneslaŦ AlLhough longerŴLerm lnflows were adversely affecLed by Lhe reglonal Lurmollţ as
well as Lhe sancLlons LhaL followed nuclear LesLs ln May 1998ţ lndla's llmlLed dependence on
forelgn caplLalţ as well as Lhe $4Ŧ2 bllllon lssue of 8esurgenL lndla 8onds Lo nonresldenL lndlans
ln laLe 1998ţ helped Lo cushlon Lhe lmpacLŦ As a resulLţ durlng Lhe perlodţ lndla's forelgn
exchange reserves remalned aL Lhe equlvalenL of a comforLable 6Ŧ3 monLhs of lmporLsŦ

keferences
O wwwŦadbŦorg
O wwwŦLlmesoflndlaŦlndlaLlmesŦcom
O wwwŦlnvesLopedlaŦcom
O wwwŦredlffŦcom
O wwwŦfrbsfŦorg

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