A CASE ONSOUTH EAST

ASIAN ECONOMIC

CRISISBy

Vamsi Somesh M(69)

Atin Srivastava(18)

Niranjan Rajpurohit(43)

Divya Jain(21)

Ankit Jain(12)

Purushottam Mahawar(52)

AGENDA1) Back Ground information of the crisis2) Case Study Description3) Effect on India

SOUTH EAST ASIAN ECONOMIC CRISIS

The Asian Financial Crisis was a period of financial crisis that gripped much of Asia beginning in july 1997, and raised fears of a worldwide economic meltdown due to financial contagion.

The asian financial crisis involves four basic problems or issues:

1. A shortage of foreign exchange that caused the value of currencies and equities in Thailand , Indonesia , South Korea and other Asian countries to fall dramatically.

2. Inadequately developed financial sectors and mechanisms for allocating capital in the troubled asian economies.

3. Effects of the crisis on both the United States and world and

4. The role, operations and replenishment of funds of the International Monetary Fund.

INTRODUCTION Initiated by two rounds of currency depreciation in

1997 First round was a percipitous drop in value1. Thai baht2. Malaysian ringgit3. Philippine peso4. Indonesian rupiah Second round began wit downward pressures

hitting1. Taiwan dollar2. South Korean Won3. Brazilian real4. Singaporean dollar5. Hong Kong dollar

BEFORE CRISISEconomies of south east Asia Maintained high interest rates attractive to

foreign investors looking for a high rate of return Regional economies of Thailand, Malaysia,

Indonesia, Singapore and South Korea experienced high growth rates, 8-12% GDP , in the late 1980s and early 1990s

Thailand , Indonesia and South Korea had large private current account deficit

It led to excessive exposure to foreign exchange risk in both the financial corporate sectors

In 1990’s the U.S.Economy recovered from recession

IMPACT It began to raise U.S.interest rates to

head off inflation At the sametime, South Asia’s export

growth slowed dramatically in the spring of 1996, deteriorating their current account position.

At the end of 1996, the proportion of loans with maturity of one year or less was 62% for Indonesia, 68% for South Korea , 50% for the Philippines , 65% for Thailand and 84% for Taiwan.

WAS THERE A CRISIS? Over $100billion was pulled out of the

region in 1997-98 which was 5percent of the GDP

Unemployment rose to 0.8milliom in Indonesia, 1.5 million in Thailand , 1.35million in Korea

Real wages dropped by 12.5% in korea and 6% in Thailand

CHAIN OF EVENTS Corporate failure at Korea Bank failure at Thailand Political uncertanity at Korea, Thailand,

Philippines Policy mismanagement at Thailand and

Korea – to defend their pegged exchange rated exhaust their Forex reserves

Contagion effect hit Malaysia, Philippines, Indonesia

International intervention – IMF & Moody

EVENTS FROM MACRO-ECONOMIC VIEW Exchange rates depreciates Foreign lenders concerned with the

repayment of loans, withdraw funds Domestic interest rates soar up Lack of bankruptcy laws and rising Non

Performing Loans added to the stress of the banks.

Banks become illiquid and decapitalized. To fall of Korean stick exchange.

REASONS FOR THE CRISIS Faulty macro economic poliy1. Demise of Industrial Policy:

government used to intervene and control inflow

2. End to policy of government coordinated investment allowed duplicative investment in key industries leading to excessive foreign borrowings between 1993-1997

3. Excessive risk in govt. favoured industries

4. Crony capitalism

CAUSES AND STRUCTURAL FACTORS CONTD…. Private-sector debt problems and poor loan

quality Rising external liabilities for borrowing countries The close alignment between the local currency

and the U.S.Dollar Weakening economic performance and balance-

of-payments difficulties Currency speculation Technological changes in financial markets and A lack of confidence in the ability of the

governments in question to resolve their problems successfully

Declining exports

CATEGORIZATION Macroeconomic policy included –

balance of payment crisis Financial panic – sudden withdraw from

solvent borrower by short term creditors Bubble collapse – overvaluation of

financial asset Disorderly workout – impediment to

efficient provision of working capital

IMPACTSIndonesia Drastic devaluation of rupiah from 2000

to 18000 for 1US dollar Excessive inflation Riots 16 major commercial banks were closed Governor, Bank Indonesia was sacked President Suharto was forced to step

down in may after 30 years in power

SOUTH KOREA Won: from 1000 to 1700 for 1 US dollar Credit rating of the country (moddy’s) :

A1 to B2 National debt-to-GDP ratio more than

doubled Major setback in automobile industry

PHILIPPINES

Growth dropped to virtually zero in 1998 Peso fell significantly , from 26/US$ to

even 55/ US$ President Joseph Estrada was forced to

resign

MEASURES TAKEN TO OVERCOME CRISIS High saving and investment rate Strong emphasis on education Stable macroeconomic environment Free from high inflation or major

economic slumps High share of trade in GDP

ROLE OF IMF Prevent outright default on foreign

obligation Limit the currency depreciation Limit inflation Rebuild foreign exchange reserves Reform the banking sector

US & JAPAN The Dow Jones industrial Plunged 554 points or 7.2%

amid ongoing worries about Asian economies. The New York Stock Exchange briefly suspended tradingJAPAN Japan was affected because its economy is prominent in

the region. Asian countries usually run a trade deficit with Japan because the latter’s economy was more than twice the size of the rest of Asia together; about 40% of Japan’s exports go to Asia

The Japanese yen fell to 147 as mass selling began, but Japan was the world’s largest holder of currency reserves at the time , so it was easily defended and quickly bounced back

GDP real growth rate slowed dramatically in 1997 from 5% to 1.6% and even sank into recession in 1998 , due to intense competition from cheapened rivals.

LEARNING’SThe lessons from developing country

crises are summarized as: Choosing the right exchange rate

regime The central importance of Banking The proper sequence of reform measure The importance of contagion

EFFECT ON INDIAThe effect of SEA crisis on India

intrinsically is mild for the following reasons:

Full capital convertibility is not allowed Lock in period for foreign investment in

real estate Floating exchange rate with some

influence by RBI during period of crisis Strong fundamental growth with

services sector being the prime reason External debt to GDP has been declining

for the past few years

There were two kinds of effects to the Indian Economy. The indirect effect would be the effect of the crisis on the

world economy and then the effect of the word on the Indian Economy.

IMF had forecasted a growth rate of 4% for the world economy for the period of 1997-98. Later this forecast was downgraded to 3.5 percent.

Slower rate of growth had effected the world economy would certainly effect the Indian economy and more specifically Indian Exports in a negative way.

Looking at the direct implications of the South East Asian crisis, ie, look at the direct trade links between some of the south east Asian economies and the Indian Economy and examine how they are likely to be affected due to crisis.

Thus they had essentially concentrated on the ‘real’ economy as against the financial economy.