ASIAN ECONOMIC CRISIS

Ayush

Jalan(10BEC0126)
Vishrut Sharma(10BEC0173) Kshitij

Dhakar(10BEC0232)

Contents
Introduction Beginning of Crisis The role of financial panic as an essential element of the Asian crisis. Impact of Crisis Role of IMF

Introduction
The term financial crisis is applied broadly to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value. Financial crisis are associated with: Banking panics Stock market crashes Recessions Bubbles, currency crisis It is a testament to the shortcomings of the international capital markets and their vulnerability to sudden reversals of market confidence.

Asian Countries
China India South Korea Indonesia Philippines Thailand Hong kong Singapore Malaysia Taiwan

Four Asian Tigers

The Four Asian Tigers or Asian Dragons are the highly developed economies of Hong Kong, Singapore, South Korea and Taiwan (Republic of China) These regions were the first newly industrialized countries, noted for maintaining exceptionally high growth rates and rapid industrialization between the early 1960s and 1990s. All four Asian Tigers have a highly educated and skilled workforce and have specialized in areas where they had a competitive advantage

Events in 97
Time
Early 1997 Early 1997 July 20 August Mid-October

Events
The Thai baht is under speculative attack. There are seven high-profile bankruptcies of Korean conglomerates, such as Hanbo Steel and Kia Motors.

The Philippines abandons dollar-peg and imposes certain foreign exchange controls. Malaysia also abandons its pegged exchange rate.
The IMF puts together a $17.2 billion Thai rescue. Devaluations to the dollar average 20% to 30% in Thailand, Indonesia, Malaysia and the Philippines. Indonesia finalizes a deal with the IMF for funding that could total up to $42.3 billion. The IMF organizes a $58.2 billion rescue for Korea

5 November 4 December

Events in 98
Time Event The second phase of the crisis, 'Asia II', begins with another speculative attack on the Hong Kong dollar. The Hong Kong dollar peg is defended by the authorities with market intervention. The United States begins to intervene in the foreign exchange markets, attempting to support the Japanese yen. The Hong Kong dollar is attacked again and $8.8 billion is spent defending it. Malaysia imposes more capital controls; the ringgit is fixed at RM3.80 to the dollar. As real economic activity contracts, Korea lowers short term interest rates.

June
June

17 June August September 1 September

GDP growth rate of Asian Countries

Before Crisis
Received large inflow of money High growth rate (8-12%GDP) Dramatic run up in asset prices Increase capital investment High per Capita Income Thailand, Indonesia and South Korea had large private current account deficit It led to excessive exposure to foreign exchange risk in both the financial and corporate sectors.

Beginning of Crisis
The rapid reversal of private capital inflows into Asia. Net private inflows dropped from $93 billion to -$12.1 billion. The sudden drop in bank lending followed a sustained period of large increases in cross border bank loans. 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.

Per Capita GDP

Triggering Events
In early 1997 in Thailand Hanbo Steel, Sammi Steel and Kia Motors collapsed. These bankruptcies, in turn, put several merchant banks under significant pressure. The Bank of Thailand lent over Bt 200 billion ($8 billion) to distressed financial institutions through Financial Institutions Development Fund (FIDF). The BOT committed almost all of its liquid foreign exchange reserves in forward contracts, Usable reserve levels of Central Bank fell sharply since much of the foreign borrowing of these companies had been, in effect, channeled through (and in some cases guaranteed by) the merchant banks

Other Events
In late June 1997, the Thai Government removed support from a major finance company, Finance One. This shock accelerated the withdrawal of foreign funds, and prompted the currency depreciation on July 2, 1997. The Thai baht devaluation triggered the capital outflows from the rest of East Asia.

Effects on Countries
What happened in Indonesia : Drastic devaluation of the rupiah: from 2,000 to 18000 for 1 us$ Sharp price increase Widespread rioting. What happened in S. Korea : Drastic devaluation of the won: from 1,000 to 1,700 per us$ National debt to GDP ratio more than doubled. Major setback in automobile industry.

Effects on Countries
What happened in Philippines : Growth dropped to virtually zero in 1998. Peso fell significantly, from 26/us$ to 55/us$ . What happened in Japan : 40% of Japans export go to Asia, so it was affected even if the economy was strong GDP real growth rate slowed from 5% to 1.6% . Some companies went bankrupt The Japanese yen fell to 147 Japan was the world's largest holder of currency reserves at the time, so it was easily defended, and quickly bounced back.

Effects on Countries
What happened in Hong Kong : Hong Kong dollar came under attack in November as a result of currency depreciations. Hong Kong banks faced steeply rising interest rates on liabilities. What happened in Taiwan: New Taiwan dollar also came under pressure and fell sharply, despite Taiwan's huge stock of reserves.

Effects on Countries
What happened in US Markets did not collapse, NYSE severely hit Dow Jones industrial average suffered as 3rd biggest point losses Relationship with JAPAN changed forever:

Effect on China
The Chinese currency, the renminbi (RMB), had been pegged to the US dollar at a ratio of 8.3 RMB to the dollar, in 1994. Heavy speculation that China would soon be forced to devalue its currency to protect the competitiveness of its exports. RMB's non-convertibility protected its value from currency speculators, and the decision was made to maintain the peg of the currency, thereby improving the country's standing within Asia. China was unaffected by the crisis compared to Southeast Asia and South Korea.

Effect on GDP of India and East Asia

Effect on India
India was two large countries where GDP growth was relatively unaffected by the East Asian crisis Indias balance of payments (BoP) was also spared the effects of the East Asian turmoil. Indian rupee depreciated by 15% against the US dollar, compared to declines of between 25 and 35% in the Thai, Malaysian, and South Korean currencies and a 70% fall in the Indonesian rupiah

Why was India not affected much?

Floating exchange rate with some influence by the RBI during periods of crisis Strong fundamental growth with services sector being the prime reason External debt to GDP has been declining for the past few years India does not have capital account convertibility so capital outflows through a contagion effect could not destabilize the economy. Banks in India are discouraged from making investments in real estate and the stock markets, while corporate exposure to external debt has been controlled.

IMF role
Provided $120 billion as bailout package. Imposed restrictive condition IMF programs up till the end of 1997 apparently added to the panic. The IMF programs generally called for six key actions: 1. immediate bank closures; 2. quick restoration of minimum capital adequacy standards; 3. tight domestic credit; 4. high interest rates on central bank discount facilities; 5. fiscal contraction; 6. non-financial sector structural changes. Domestic bank lending stopped abruptly in countries with Fund programs.

IMF role
The de-capitalized banks restricted their lending in order to move towards capital-adequacy ratios required by bank supervisors and by the IMF. Currency depreciation and stock market collapse continued long after the programs were signed More bankruptcies

Local called the financial crisis the IMF crisis due to its controversial role.

Criticism of the IMF

Largely controlled by developed nations New Colonialism austerity measures inhibit long term economic growth Western style economic reforms and greater ownership by foreign firms Monetarist priorities overlook public health, environment, and poverty Repayment policies do not foster long-term growth