Meaning of Currency Crisis East Asian Countries East Asia before the crisis Asian Miracle Introduction to East

Asian Financial Crisis Causes of financial crisis Impact of crisis Role of IMF Why was India not affected Reference

A situation in which the value of financial institutions or assets drops rapidly. A financial crisis is often associated with a panic or a run on the banks, in which investors sell off assets or withdraw money from savings accounts with the expectation that the value of those assets will drop if they remain at a financial institution.

What Is an Exchange Rate? An exchange rate is the rate at which one currency can be exchanged for another. In other words, it is the value of another country's currency compared to that of your own

Exchange Rate

Fixed

Floating

Thailand South Korea Taiwan Indonesia Philippines Hong Kong Malaysia Singapore

The Asian Tigers or Asian Dragons Blue print for Emulation by developing economies Maintaining exceptionally high growth rates between 8 to 12% Rapid industrialization between the early 1960s and 1990s Hong Kong and Singapore - world-leading international financial centers South Korea and Taiwan - world leaders in manufacturing information technology Sources for the Asian miracle: factor accumulation and macroeconomic management.

Malaysian authorities closed 16 insolvent banks Largest investment bank in Hong Kong goes bankrupt Interest rates sore up

Country
Indonesia Korea Thailand

Total Banks
40 30 91

Banks Closed
16 14 58

Maintained high interest rates to attract foreign investment Rapid Industrialization Government policies supporting exports Low interest rates for export industry High exports- Driving rapid economic growth Export to GDP ratio 35 to 55% US was in recession = low interest rates Dramatic run up in asset prices Encourages external borrowings

The Financial crisis in Asia is one the most significant event of the 1990s The crisis started in Thailand Rapid reversal of capital inflows In early 1997 Thailand Hanadbo steel, Sammi Steel and Kia Motors collapsed 100 million $ was pulled out of the region Unemployment numbers rose in Indonesia by 800000, Thailand 1.5 million, Korea 1.35 million Devaluation of currency Thailand stock market dropped by 75%

Foreign debt-to-GDP ratios rose from 100% to 167% in the four large ASEAN economies in 1993-96 Countries like Thailand, Indonesia, South Korea had large current account deficits. Financed by hot money flows (on capital account). Financial deregulation encouraged more loans and helped to create asset bubbles. Booming economy and booming property markets encouraged expansive borrowing by firms. Hot money flows were accumulated because of higher interest rates in the East. US increased interest rates to reduce inflationary pressures Openess of capital account

Thailand was the first to have to float the Thai Bhat, this caused a rapid devaluation, which triggered a loss of confidence throughout the Asian economies The devaluation caused debt to be even more difficult to repay and countries started to default. Technological changes in financial market

Unstable and week exchange rate

Undesirable Social change

Weekened financial Institution

Huge unemployment

Govt Imposed higher interest rate

Slowdown in manufacturing and industrial activity


1) 2) 3)

Structural adjustment package Provided 120$ billion as a bailout package Locals called financial crisis as IMF Crisis due to controversial role Reform the banking sector Rebuild exchange reserve Imposed restrictive conditions Keep interest rates high Restrictive Bank loans Severe liquidity problem

Full capital convertibility is not allowed Lock in period for foreign investment in real estate Floating exchange rate with some influence by the RBI during the period of crisis Strong fundamental growth in service setor