group 7f - fis-asian crisis

8/8/2019 Group 7F - FIS-Asian Crisis

1/13

SOUTH EAST ASIAN

CURRENCY CRISIS


2/13

Before CrisisEconomies of South East Asia

Maintained high interest rates attractive to foreign investorslooking for a higher rate of return

Economies of South East Asia experienced high growth rates,8-12% GDP, in the late 1980s and early 1990s

Thailand, Indonesia and South Korea had large current accountdeficit

Excessive exposure to foreign currency risk in both thefinancial and corporate sector

In 1990s the U.S Economy recovered from recession


3/13

Before Crisis - Impact

U.S interest rates started increasing to head off inflation

Southeast Asian countries export growth slowed down in

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, 50% for

Philippines, 65% for Thailand and 84% for Taiwan


4/13

South East Asian Currency CrisisCauses of the financial crisis

Unsustainable Current Account Deficits

Over dependence on Short-Term Foreign Funds

Over inflated Asset Prices

Macroeconomic Policy-Fixed Exchange Rates


5/13

CHAIN OF EVENTS


6/13

The largest non-bank financial institution in Thailand becomesbankrupt. By the end of the year, fifty-six such finance houseswere closed down.

Thailand, Philippines, Indonesia and Malaysia abandon theirpegged exchange rate

Corporate failure at South East Asian Countries

Speculative attackat Thai Baht during 1996 and early 1997

Political uncertainty at Korea, Thailand and Philippines


7/13

Events from Macroeconomic point of view

Exchange rates depreciates

Foreign lenders concerned with the repayment of loans,withdrawal funds

Domestic interest rates soar up

Lack of bankruptcy laws and rising Non Performing Loansadded to the stress of the banks

Banks became illiquid


8/13

WHICH COUNTRIESWERE HIT

Hong Kong


9/13

x

Impact

THAILAND

Booming Thailand economy

ground to a halt, contracted by 1.9%. Unemployment rate all-time high

Stock market dropped 75%

Baht reached 56$ in Jan 98

INDONESIA

Drastic devaluation Rupiah-from 2000 to

18000 for 1 US$ Sharp price increases, Excessive Inflation

Governor, Bank of Indonesia was sacked

President Suharto forced to step down

in May 1998 after 30 years in power

SOUTH KOREA

Drastic devaluation of won-from

1000 to 1700 for 1 US$

Credit rating of the country(Moodys)-A1 to B2

National Debt-to-GDP more than

doubled

Major setback in Automobile

industry

JAPAN

40% of Japans exports go to Asia,

so it was effected even if the

economy of Japan was strong Japanese Yen fell to 147

GDP real growth slowed down from

5% to 1.6%

Some companies went bankrupt


10/13

Impact onUS

StockExchange got severely hit

NYSE suspended trading for the first timeever

Dow Jones suffered its 3rd Biggest pointlosses ever


11/13

Role of IMF

Financial Assistance IMF unveiled $112 billion

rescue packages for Indonesia, Malaysia and Thailand

IMF introduced structural adjustment packages

Increase interest rates

Penalize insolvent companies

Reduce government spending to reduce deficits

Fiscal Policy was tightened

Restructuring of the economy


12/13

Learning from the Fiasco

Choosing the right exchange rate regime

Central Importance ofBanking

StricterRegulations

Balanced Current Account

Timely action with respect to monetary and fiscal

policy


13/13

Anant Shroff, Arjit Pandey, Jaydeep Kavadi, Rakshit Goyal

Group 7F

group 7f - fis-asian crisis

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