THE ASIAN

FINANCIAL
CRISIS

OVERVIEW

The Asian financial crisis resulted from the

sudden flight of large amounts of capital
from Asian countries that lacked adequate
systems of prudential regulation, and whose
foreign exchange rate proved disastrously
brittle.

The seeds of the 1997-98 Asian financial

crisis were sown when these countries were
experiencing unprecedented economic
growth

The crisis started in Thailand with the

financial collapse of the Thai Baht.

OVERVIEW

Indonesia, South Korea and Thailand were

the countries most affected by the crisis.
Japan, Malaysia, and the Philippines were
also hurt by the slump.

Until 1997, Asia attracted almost half of total

capital inflow to developing countries. The
economies of Southeast Asia in particular
maintained high interest rates attractive to
foreign investors looking for a high rate of
return.

OVERVIEW

May 14-15, 1997: the Thai baht was hit by

massive speculative attacks.

June 30, 1997: Prime Minister Chavalit

Yongchaiyudh said he would not devalue the
baht. However, Thailand lacked the foreign
reserves to support the USD-Baht currency
peg and the Thai government was forced to
float the Baht, on July 2, 1997 allowing the
value of the Baht to be set by the currency
market.

This was the spark that ignited the Asian

financial crisis

THE INTERNATIONAL
MONETARY FUND
(IMF)

Since the countries melting down were

among the richest in their region and
hundreds of billions of dollars were at stake,
any response to the crisis was likely to be
cooperative and international through the
IMF

The IMF created a series of bailouts ("rescue

packages") for the most-affected economies
to enable affected nations to avoid default,
tying the packages to currency, banking and
financial system reforms.

EFFECTS

(Major)

Thailand

Massive layoffs in finance, real estate, and

construction resulted in huge numbers of
workers returning to their villages in the
countryside and 600,000 foreign workers
being sent back to their home countries.

The baht devalued swiftly and lost more

than half of its value. It reached its lowest
point of 56 units to the U.S. dollar in January
1998.

EFFECTS

(Major)

South Korea

On November 24, the Seoul stock exchange

fell a further 7.2% on fears that the IMF
would demand tough reforms.

The South Korean won weakened to more

than 1,700/US$ from around 800.

Chaebols expanded into unrelated

businesses without a proper rationale and
Korean banks provided unchecked loans to
chaebols considered "too big to fail."

EFFECTS
Indonesia

(Major)

The rupiah suddenly came under severe

attack in August.

The IMF came forward with a rescue

package of $23 billion, but the rupiah was
sinking further amid fears over corporate
debts, massive selling of rupiah, and strong
demand for dollars.

The rupiah and the Jakarta Stock Exchange

touched a historic low in September.

Moody's eventually downgraded Indonesia's

long- term debt to "junk bond".

EFFECTS

(Minor)

Philippines: Growth dropped to

virtually zero in 1998 and Peso fell
significantly, from 26/US$ to 55/US$.

Malaysia: In 1998, the output of the real

economy declined plunging the country into
its first recession for many years.

Japan: Sanyo Securities (the 7th largest

stock brokerage firm in the country),
Hokkaido Takushoku, (its 10th largest bank)
and Yamaichi Securities (the 4th largest
stock-broker in Japan) all filed for bankruptcy

Factors that
led to the
Asian Financial
Crisis

WHAT WENT
WRONG?

FACTORS

Problems of governance and political

uncertainties fuelled the reluctance of
foreign creditors to roll over short-term loans

International investors had underestimated

the risks as they searched for higher yields

Several exchange rates in East Asia were

pegged to the US$ so wide swings in the
exchange rate contributed to the build-up in
the crisis through shifts in international
competitiveness that proved to be
unsustainable

FACTORS

The prolonged maintenance of pegged

exchange rates encouraged external
borrowing and led to excessive exposure to
foreign exchange risk

Lack of enforcement of prudential rules and

inadequate supervision of financial systems
coupled with government-directed lending
practices

Limited availability of data and a lack of

transparency

FACTORS

No Prudent Regulations
Firms with notorious/unprecedented records
were allowed to borrow money

Lack of Risk Management

Crony Capitalism
- business depends relationships between
business people and government officials.

Domestic firms and banks relied on

government:
- financial intermediaries expected not to
bear the full cost of failure believing the
government would pay for them