QUICK SUMMARY FORMAT
BUBBLE SPOTTING SERIES - 2014
This short presentation on the Asia Currency and Debt Crisis forms
part of a larger series of presentations on Market Bubbles
Front page graphic - own
Between 1980’s to the mid-1990’s,
Asian economies (except for japan)
realised significant economic growth –
This was referred to as the “East Asian
Miracle” by the World Bank.
BACKGROUND
flickr emilstefanov
GDP Grow th East Asia % - ( 1980-1977)
1980
-89
1990
1991
1992
1993
1994
1995
1996
1997
China 9.5 3.8 9.2 14.2 13.5 12.6 10.5 9.7 8.8
Hong Kong 7.3 3.4 5.1 6.3 6.1 5.4 3.9 4.9 5.3
Indonesia 5.3 9 8.9 7.2 7.3 7.5 8.2 8 5
Japan 3.8 5.1 3.8 1 0.3 0.6 1.5 3.9 0.9
Malaysia 5.8 9.6 8.6 7.8 8.3 9.2 9.5 8.6 7.8
Phillipines 1.9 3 -0.6 0.3 2.1 4.4 4.8 5.7 5.1
Singapore 7.3 9 7.3 6.2 10.4 10.5 8.7 6.9 7.8
South Korea 7.8 9.5 9.1 5.1 5.8 8.6 8.9 7.1 5.5
Taiw an 8.1 5.4 7.6 6.8 6.3 6.5 6 5.7 6.9
Thailand 7.3 11.6 8.1 8.2 8.5 8.6 8.8 5.5 -0.4
Source IMF 1998a, Tables A2 & A6 (from ICEI W orking Papers, No. 10, Pablo Bustello)
flickr emilstefanov
Significant capital investment flowed
into the region – Between 1990-1995
inflows to the five main East Asian
developing economies increased from
US$ 150 billion in 1980-1989 to as
much as US$ 320 billion in 1990-1995,
according to IMF estimates.
flickr emilstefanov
This inflow was due to investors
perceiving the East as having high
productivity, low labour costs and
an environment conducive to
growth.
0%
5%
10%
15%
20%
1(http://www.wright.edu/~tdung/asiancrisis-hill.htm)
AVERAGE EXPORT GROWTH 1990-1996
Malaysia
Thailand
Singapore
hong kong
South Korea
Indonesia
However at the same time, some
countries (Thailand and Malaysia
specifically) had large current
account deficits, large foreign debts
(Indonesia, Thailand and South Korea),
and high levels of domestic credit
growth (specifically in Malaysia, The
Philippines and Thailand).
In this period local companies made
significant investments in extra
manufacturing capacity (e.g. for pc
memory & CPU chips), and
infrastructure. These investments
were frequently financed with foreign
currency loans from western banks.
In Korea, many large conglomerates
(Chaebol) over-extended themselves
by building up debt equal up to 4 x
equity.
Due to government social initiatives
and pressures, many private firms
invested in projects for broad social
benefit and not purely on a ROI basis.
Socially and politically connected
“investments” were also approved.
Continued inflows of capital pushed up
asset prices (fuelling property
speculation in office and residential
buildings, and thereby causing a
property bubble).
It also strengthened local forex rates
(increases of 25%-47% for the
Philippines specifically) , as well as
increased domestic bank lending.
During the mid 90’s the Chinese and
Japanese currencies devalued, the US
increased interest rates and this
resulted in a stronger US $.
The stronger US $ made local exports
less attractive. Also semi-conductor
prices reduced sharply just as
manufacturing capacity came online.
In Malaysia, Taiwan and Thailand,
credit to the private sector
as % of GDP increased to
Credit and investment control was
weakly regulated, and there were
many underperforming loans.
The regional financial industry was in a
rush to deregulate and started
removing restrictions on capital flows.
This was done too fast, thereby
exposing hitherto unknown weaknesses
in the system.
Foreign banks were allowed to
speculate with local and foreign
currency, supervision was weakened
and local banks loaned recklessly. No
financial and regulatory control
network was timeously put in place.
On 5 FEB 1997 Somprasong Land,
a Thai property developer,
announced that it had defaulted on a
scheduled $3.1 million
interest payment
on an $80 billion Eurobond loan.
Bad debts quickly rose, as it became
apparent the construction industry was
under water by more than
Despite government intervention, the
shares in Finance One (Thailand's
biggest Financial Institution) fell by
70% after an arranged take-over
failed, and it too was soon bankrupt.
On 14 - 15 May 1997, the Thai Baht,
which previously was pegged at 25 baht
against the US $, was hit by massive
The Thai government used up $ 5 billion
of foreign exchange but was unable to
defend the Baht. After initially
refusing, they floated the currency
within days after the attack.
The Malaysian Ringgit and Indonesian
Rupiah were “attacked” next. Indonesia
had to implement a free-floating
exchange rate on 14 August 1997.
The Hong Kong Dollar was targeted in
October 2007, but due to Hong Kong
having sufficient foreign reserves,
they successfully managed to defend
their currency.
South Korea Won
Indonesian Rupiah
Thai Baht
Source: www.tradingeconomics.com
Us $ 1 vs local currency
The sharp currency devaluations lead
to credit ratings being lowered. Many
foreign investors called in or revoked
their loans and withdrew investments
e.g. Japan (further negatively affecting
the currency in the process).
-150.00
-100.00
-50.00
0.00
50.00
100.00
150.00
200.00
1994-1995 1996 1997
BILL
ION
US$
Source: Bank of International Settlements (http://www.ifg.org/khor.html)
NET PRIVATE CAPITAL FLOWS
INFLOW
OUTFLOW
The crisis wave spilled from one
market to the next. Foreign debts sky-
rocketed with near catastrophic
consequences as local firms’ debt
repayment had become much more
expensive now.
Some tried selling assets and
inventories to generate cash, resulting
in lower prices for their assets, whilst
increasing the demand and cost of
foreign currency.
Non-performing companies faltered.
Financial institutions collapsed.
Massive lay-offs followed and the
economies grinded to a halt. Thailand
e.g. sent 600 000 foreign workers back
to their home countries. Ministers
stepped down in the wake of the crisis.
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Asia Debt and Currency Crisis – Sources and
further reading
http://www.ifg.org/khor.html
http://www.tradingeconomics.com
http://internationalinvest.about.com/od/getti
ngstarted/a/What-Was-The-Asian-Financial-
Crisis.htm
http://www.wright.edu/~tdung/asiancrisis-
hill.htm
http://www.fes.de/ipg/ipg2_98/debschulmeis
ter.html
http://en.wikipedia.org/wiki/1997_Asian_finan
cial_crisis
http://pendientedemigracion.ucm.es/info/eid
/pb/ICEIwp10.pdf
http://www.uv.es/~mperezs/intpoleco/Lectu
rcomp/Geoeconomia%20y%20Globalizacion/A
sian%20crisis%20de%20King.pdf
http://www.imf.org/external/np/pp/eng/201
2/031312.pdf
http://www.ucm.es/info/icei/asia/Bustweb1.h
tm
HTtp://www.newyorkfed.org/research/econo
mists/pesenti/whatjapwor.pdf
http://www.twnside.org.sg/title/fire-cn.htm
https://www.mtholyoke.edu/courses/sgabriel
/ilene_grabel.htm
http://www.imf.org/external/np/seminars/en
g/2006/cpem/pdf/kihwan.pdf
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