1997 Asian financial crisis

Introduction

The Asian financial crisis was a period of financial crisis

that gripped much of East Asia beginning in July 1997 and ra
ised fears of a worldwide economic meltdown due to financial
contagion.
Until 1999, Asia attracted almost half of
the total capital inflow into developing
countries. The economies of Southeast
Asia in particular maintained high interest
rates attractive to foreign investors looking
for a high rate of return. As a result, the
region's economies received a large inflow
of money and experienced a dramatic run-
up in asset prices. At the same time, the
regional economies of Thailand, Malaysia,
Indonesia, Singapore and South Korea
experienced high growth rates, of 8–12%
GDP, in the late 1980s and early 1990s.
This achievement was widely acclaimed by
financial institutions including IMF and
World Bank, and was known as part of the
"Asian economic miracle.
The first stage: The financial crisi
s erupted
• On July 2, 1997, Thailand announced the abandonment of the fixed ex
change rate system and the floating exchange rate system, triggering
a financial storm in southeast Asia.
• In August 1997, Malaysia gave up its efforts to defend ringgit.
• In late October 1997, the international financial center, the internatio
nal financial center, took aim at the Hong Kong exchange rate system.
• In mid-november 1997, South Korea in east Asia also experienced fina
ncial turmoil.
• A series of Japanese Banks and securities firms went bust in the secon
d half of 1997. The southeast Asian financial crisis has become the Asi
an financial crisis.
The second stage: The financial crisis continue
s to deepen
• In early 1998, Indonesia's financial crisis resurfaced
.
• On February 11, 1998, the Indonesian government
announced that the rupiah would maintain a fixed
exchange rate with the U.S. dollar to stabilize the ru
piah.
• On February 16, 1998, the rupiah fell below 10, 000
against the dollar.
• The financial crisis in southeast Asia, which broke o
ut in 1997, has left Japan's economy in a tight spot.
The third stage:
While the us stock market is volatile and the yen
continues to fall, international speculators are l
aunching a new round of attacks against Hong Kong.

• On September 2, 1998, the ruble lost 70 percent of its value.

• In 1999, the financial crisis was over.
The main causes of crisis
Economic factors
• 1.George soros and some of the capitalist groups that support him.
• 2.The impact of funds in international financial markets.
• 3.Foreign exchange policies in some Asian countries are inappropriate.
• 4.In order to maintain a fixed exchange rate system, these countries hav
e long used their foreign exchange reserves to cover their deficits, leadin
g to an increase in external debt.
• 5.The external debt structure of these countries is not reasonable.
Internal factors
• 1.Overdraft economic growth and the expansion of non-performing
assets.
• 2.The market system is immature.
• 3.Defect of "export substitution" model.

Global factors
• 1.The negative impact of economic globalization.
• 2.The unreasonable international division of labor, trade and
monetary system is not good for the third world countries.
Consequences:
• Asia:
• The Asian financial crisis has wiped out As
ian people's assets.
• The Asian financial crisis has disrupted the
social order of Asian countries.
• The Asian financial crisis has destabilized
Asian regimes.
Consequences:

• Outside Asia ：
• After the Asian crisis, international investors were reluctant to lend to
developing countries, leading to economic slowdowns in developing c
ountries in many parts of the world.
• The reduction in oil revenue also contributed to the 1998 Russian fina
ncial crisis.
• Many nations learned from this, and quickly built up foreign exchange
reserves as a hedge against attacks, including Japan, China, South Kor
ea.
 Q&A:

Can you explain the causes by using theories that we have learned?
Asian Financial Crisis 1997

• The Asian financial crisis of 1997 refers to a macroeconomic shock experienced b
y several Asian economies  – including Thailand, Philippines, Malaysia, South Kor
ea and Indonesia. Typically countries experienced rapid devaluation and capital o
utflows as investor confidence turned from over-exuberance to contagious pessi
mism as the structural imbalances in the economy became more apparent.
• The crisis of ’97-99 followed several years of rapid economic growth, capital inflo
ws and build up of debt, which led to an unbalanced economy. In the years prece
ding the crisis, government borrowing rose, and firms overstretched themselves i
n a ‘dash for growth.’ When market sentiment changed foreign investors sought t
o reduce their stake in these Asian economies causing destabilising capital outflo
ws, which caused rapid devaluation and further loss of confidence.
• Due to the financial instability, the IMF was requested to intervene. T
he IMF implemented $40 billion of financial bailouts and also instigate
d economic reforms to tackle the economic imbalances.
• Unlike the debt crisis in Latin America, the debt crisis in East Asia stem
med from inappropriate borrowing by the private sector. Due to high r
ates of economic growth and a booming economy, private firms and c
orporations looked to finance speculative investment projects. Howev
er, firms overstretched themselves and a combination of factors cause
d a depreciation in the exchange rate as they struggled to meet the pa
yments.
Long-term causes of the Asian Financ
ial Crisis
• Foreign debt-to-GDP ratios rose from 100% to 167% in the four large AS
EAN economies in 1993-96. Foreign companies were attracting capital in
flows from the developed world. Investors in the West were seeking bett
er rates of return, and the “Asian economic miracle’ seemed to offer bett
er rates of return than lower growth economies in the West.
• Current account deficits. Countries like Thailand, Indonesia, South Korea
had large current account deficits; this meant they were importing more
goods and services than they were exporting – it was a reflection of very
high rates of economic growth and consumption. The current account de
ficits were financed by hot money flows (on capital account). Hot money
flows were accumulated because of higher interest rates in the East.
Long-term causes of the Asian Financ
ial Crisis
• Fixed or semi-fixed exchange rates. This made currencies vulnerable t
o speculation. Also, interest rates were used to maintain the value of
a currency. Causing relatively high-interest rates in S.E. Asia which cau
sed hot money flows.
• Financial deregulation encouraged more loans and helped to create a
sset bubbles. But, the regulatory framework and structure of banking
and firms meant loans were often made without sufficient scrutiny of
profitability and rates of return.
Long-term causes of the Asian Financ
ial Crisis
• Moral Hazard. With a strong political desire for rapid economic growth, go
vernments often gave implicit guarantees to private sector projects. This w
as magnified by the close relationships between large firms, banks and the
government. This closeness encouraged private firms to place less emphas
is on the costs of projects and an assumption expansion plans would be su
pported by the government
• Over-exuberance. The booming economy and booming property markets
encouraged expansive borrowing by firms. It also encouraged internationa
l investors to move the capital to these fast-growing economies. There was
an element of irrational exuberance – the idea that Asian economies were
undergoing an economic miracle where high returns were guaranteed.
Causes which precipitated the crisis

• Higher US interest rates. In the late 1990s, the US started to increase interest
rates to reduce US inflationary pressures. Higher interest rates in the US mad
e the East less attractive as a place to move hot money flows. As hot money
flows into the East slowed down, Asian currencies started to fall and govern
ments struggled to keep exchange rates at their fixed level against the US Dol
lar.
• Contagion. On 2 July 1997, due to speculative attacks, Thailand was forced to
float their currency the Thai Bhat. This caused a rapid devaluation, which trig
gered a loss of confidence throughout the Asian economies. Soon, other cou
ntries were forced to devalue as investors wanted to get out of Asian currenc
ies.  Investors realised the previous optimism was starting to look misplaced.
Causes which precipitated the crisis

• Debt default. In the run-up to the crisis, both government and private firms built up hi
gh external debt ratios. However, the devaluations caused debt repayments to become
more expensive and as a result firms and countries started to default on their debt rep
ayments.
• At this stage, the IMF intervened to try and stabilise the crisis. However, their interven
tion has proved very controversial, with many arguing that their intervention made thi
ngs worse. Higher interest rates in Indonesia and the Philippines did not stop the deval
uation of the currency – suggesting investors were not convinced such high-interest rat
es were sustainable.
• The IMF insisted on fiscal restraint – lower spending, higher taxes and privatisation. Thi
s contractionary fiscal policy caused the economic downturn to exacerbate and the ec
onomy plunged into recession. Bankruptcies increased and there was a flight of capital
.
Causes which precipitated the crisis

• Economists such as Joseph Stiglitz and Sachs emphasised the importa

nce of market sentiment in increasing the magnitude of the problem.
The initial problem was containable but because confidence evaporat
ed there was a flight of investors – like a classic bank run causing an u
nstoppable downward momentum.
Impact of Asian Financial Crisis
• Severe Recession. Hit by the loss of confidence and rise in debt repayments, firm
s cut back on investment, leading to lower growth. The large devaluations also hi
t consumer spending as the price of imports and imported raw materials rose. Th
is caused a recession in countries, such as South Korea, Indonesia, Malaysia and
Thailand. Measured in dollar terms, Indonesia experienced a catastrophic 84% fal
l in GNP between June 1997 and July 1998.
• Inflation – devaluation caused import prices to rise.
• Global effects. The Asian crisis hit investor confidence in the US, though lower in
terest rates helped to stabilise US economy. China was largely insulated from the
crisis because China had attracted physical capital investment and did not rely on
foreign flows of capital. The crisis had a negative effect on Japan’s economy and t
hey struggled with a decade of low growth.
Recovery

• To a large extent, the Asian economies have recovered from the crisis.
In particular, South Korea, Malaysia and Hong Kong have enjoyed stro
ng economic growth.
Thank You