5th April, 2016

Financial Institutions and Markets

The Asian Crisis

The Asian financial crisis, also called the Asian Contagion, was a period of financial
crisis marked by devaluation of many East Asian currencies in the beginning in July 1997. This
raised fears of a worldwide economic meltdown due the massive depreciation of the Asian
currencies. Among the most affected countries were Indonesia, South Korea, Thailand, Hong
Kong, Malaysia and the Philippines.
The crisis started in Thailand as the result of the government's decision to no longer peg
the local currency to the U.S. dollar. There was a massive devaluation of the Thai baht due to
severe overextension which was partly real estate driven. The government spent all of its foreign
reserves to defend the peg but finally had to settle to float the baht. At the time, Thailand had
acquired a burden of foreign debt that made the country effective bankrupt even before the
collapse of its currency. This crisis sparked achain of events causing neighboring Asian
economies to slump contributing to market decline in the U.S., Europe and Russia.
As the crisis spread, most of Southeast Asian and Japan saw slumping currencies,
devalued stock market and a quick rise in private debt. What made it worst was the fact that
foreign debt-to-GDP ratios rose from 100% to 167% in four large ASEAN economies in 1993-96
and shot up beyond 180% during the peak of the crisis. Although most the governments of Asia
had a sound fiscal policy, the IMF stepped in to initiate a $40 billion program to stabilize the
currencies of South Korea, Thailand and Indonesia as they were hit hard by the crisis. However,
this did little to stabilize the domestic situation in Indonesia. The effects of the crisis were still
present in 1998 and it was then that the growth in Philippines was dropped to virtually zero.

Rachana Shrestha

Financial Institutions and Markets

5th April, 2016

During the Asian crisis, when it became clear that the underlying root was weakness in
the financial systems and not the typical high fiscal deficits that characterized the 1980s crises in
Latin America and the Philippines, the governments of Indonesia, Korea, and Malaysia
immediately established centralized AMCs to help in the disposal, collection, and restructuring
of nonperforming loans. Indonesia established the Indonesia Bank Restructuring Agency(IBRA);
Malaysia, Danaharta; and Korea, the Korea Asset Management Company (KAMCO). Thailand,
because of concern over its fiscal situation, at first did not institute a centralized AMC, but rather
left much of restructuring on banks themselves. It did, however, establish a rapid disposal
agency, the Finance Restructuring Agency to address the problems of finance companies. Three
years after Indonesia, Malaysia, and Korea established their centralized AMCs, Thailand
likewise established the Thai Asset Management Company (TAMC) in 2001.
The AMCs were tasked with relieving the banking sector of NPLs by carving out the badloans. This was to be done by purchasing problem loans from banks, repackaging/inventorying
them until they can be sold; - usually by public tender/auction.Relative to the other two
countries, Malaysias Danaharta has probably been the most effective and TAMC has been the
least effective. Lacking legislative backing, the Thai AMC was left to negotiate with banks on
voluntary terms, thereby making it much less successful. As such, inclusive of assets still held by
TAMC, the NPL ratio for Thailand is 18%. For Korea and Malaysia when assets held by their
AMCs are included, NPL ratio is 8% and 9.6% respectively. Koreas ratio being smaller due to
the much faster growth in domestic credit in the post crisis period. If expected recovery rates are
an indicator of the efficiency of an AMC, Malaysias Danaharta has outpaced the others with a
56% recovery rate. This compares to KAMCOs 47% and TAMCs 45%.12.

Rachana Shrestha