ECONOMIC ENVIRONMENT

OF BUSINESS

SOUTHEAS
T ASIAN
CURRENC
Y CRISIS
 HISTORY
Political instability
Increasing capital investment
Crony capitalism
Exposure to foreign exchange risk
Very high interest rates
 CAUSES
Weakness of Macro-Economic
fundamentals
Overvalued Exchange Rate & Openness
of Capital Account
Dependence on Potentially Short-Term
Foreign Capital
Inadequacy of Foreign Exchange Reserves
 ONSET OF THE CRISIS & IT’s
EVOLUTION
4 PHASES
 PHASE I- Lead-Up to the Crisis in
Thailand
 PHASE II- The Thai Crisis
 PHASE III- Crisis Engulfs the ASEAN-4
 PHASE IV- Spillovers Across Global
Financial Markets
 PHASE I(January–April 1997):
Lead-Up to the Crisis in Thailand

 Indonesia and the Philippines had been less

seriously affected by the export
 Situation in Thailand deteriorated
 A downturn in equity prices, particularly in
Malaysia and the Philippines
 Equity prices continued to fall in Korea
 PHASE II (May–Beginning of July 1997):
The Thai Crisis

 Capital and exchange controls

 Spot and forward markets

 Thailand on July 2 abandoned its exchange

rate
 Phase III (Beginning of July–Mid-October
1997): Crisis Engulfs the ASEAN-4

 By mid-October, the cumulative declines of the

ASEAN-4 currencies against the dollar exceeded
 30 percent for Indonesia and Thailand
 20 percent for Malaysia and the Philippines
 Equity markets-heavy losses in August
 Spillover effects beyond the Asian region
remained fairly limited
 Downward pressure in July
 Phase IV (Mid-October–Mid-
December1997):
Spillovers Across Global Financial
Markets

 Thailand-56/58 finance companies closed

 Philippines- Comprehensive tax reform legislation
 Indonesia- 16 insolvent banks closed
 Korea-14 merchant banks suspended
 Malaysia-Emergency economic package
 Speculative Attacks
 Korea: Widespread corporate bankruptcy from large
firms that borrowed heavily caused foreign banks to
become weary that their loans would not be repayed.
 Indonesia: Large scale borrowing from off-shore
banks with loose regulation made the extent of the
firms’ debt understated.
 Malaysia: The real estate bubble burst lead to foreign
investors selling to sell their stocks causing the stock
market to crash and Malaysian banks were left with
bad loans.
 Other countries: Contagion effect – the crisis spread
because of investors worrying that others countries in
the region would face similar problems
Source: Goldman Sachs, "International Economics Analyst", February/March 1998 p xii
Sources: IMF, "World Economic Outlook", May 1998 table 10 & October 1998 table 2.11
 CONSEQUENCES
 Over $100 Billion was pulled out of the
region in 1997-98 which was 5% of the GDP
 Unemployment rose to .8 million in
Indonesia , 1.5 million in Thailand,
1.35million in Korea
 Real wages dropped by 12.5% in Korea and
6% in Thailand
 Why was India not Affected
 Full Capital convertibility was not allowed
 Lock in period for foreign investment in
real estate
 Floating exchange rate with some influence
of the RBI during periods of crisis
 Strong fundamental growth with service
sector being the prime reason
 External debt to GDP has been declining for
the past few years
 UNFOLDING
 Lower exports
 Decline in Export competitiveness
 Increase in Trade and Current Account deficit.
 The crisis emerged in Thailand due to crisis of loan
repayment - fears of loan defaults -withdrawal of ST funds
 Led to pressure on Forex reserves and the value of Baht,
therefore it lost all its Reserves
 The contagion then spread to Philippines, Malaysia and
Indonesia
MISTAKES OF ASIAN LENDERS

 Countries already were in debt, even then

short-term credits financed long-term loans.

 borrowers borrowed in FC and loaned in LC.

No hedging to counter FX risk

 Inadequate supervision of consolidated

balance sheets of the borrowers

 Inadequate disclosure by the corporate

 IMPACT
 Slowdown in manufacturing and industrial activity

 Huge unemployment

 Social impact

 Coincided with the worst drought conditions

The IMF's Immediate Response To
the Crisis
Approved US$35 billion as financial
support for reform program
Arranged programs of economic stabilization :
o close supervision of weak institutions
o closure of unviable financial institutions
o recapitalization of undercapitalized
institutions
 PROPOSED SOLUTIONS
 Stabilizing the Exchange Rate and
Debt Management
Dealing with the Social impact
Strengthening the Financial sector
 Adjustment of Industrial Structures
International Financial markets
 Revitalizing the Financial Markets
STEPS TO HANDLE THE CRISIS

I. The progressive openness of ASEAN

economies 
II. Sound Financial measures
III. The growing integration of the
ASEAN economy
IV. The expansion and diversification of
ASEAN
 INITIATIVES TAKEN

1. The Manila Framework

– ASEAN Surveillance Process
– Peer Review

2. The Chiang Mai Initiative

 LESSONS
 The Hazards of Short-Term Foreign Capital

 Reducing Dependence on Short-Term Foreign Capital

 Foreign Exchange Reserves

 Real Exchange Rate Appreciation

 Excessive Leverage Should be Discouraged

 Webliography

http://www.aseansec.org

http://www.wikipidea.com