East Asian Financial Crisis..

1. -Lhamu Tsering East Asian Financial Crisis..

2. Agenda.. • East Asia pre crisis • Thailand • Crisis timeline • The dilemma • Asian Weaknesses • After the shock

3. Countries involved.. • Thailand • Philippines • Hong Kong • Taiwan • Singapore • South Korea • Malaysia • Indonesia • China

4. Thailand.. • May 1997: Thailand spends billions of its foreign reserves to defend the Thai baht against speculative attacks • In case of Thailand: • Allowing too many short-term capital flows to accumulate with a high degree of currency speculation, • Sustaining a fixed exchange rate when it was no longer suitable, • Lack of sufficient risk management system at the national level as well as regional level. • concerns of large current account deficits • weakness in the Thai financial system • culminating with the failure of a major finance company, Finance One • Speculative attacks brings down investor confidence causing- “capital flight” • Crisis in Thailand turned out to be a contagion

5. Crisis Timeline.. • July 1997 • Thailand is forced to devalue the baht, which drops the value of the baht by as much as 20%-- a record (had actually attempted a 15% controlled devaluation) • Malaysia’s central bank intervenes to defend the ringgit. • The Philippine peso is devalued. Indonesia widens its trading band for the rupiah in a move to discourage speculators • The Singaporedollar starts a gradual decline.

7. Crisis timeline..Contd/. • August1997 • Thailand agrees to adopt tough economic measures proposed by the IMF in return for a $17 billion loan from the international lender and Asian nations. The Thai government closes 42 ailing finance companies and imposes tax hikes as part of the IMF's insistence on austerity • Indonesia abandons the rupiah's trading band and allows the currency to float freely, triggering a plunge in the currency

8. Crisis timeline..Contd/. • October1997 • Indonesia asks the IMF and World Bank for help after the rupiah falls more than 30% in two months, despite interventions by the country's central bank to prop up the currency • Hong Kong's stock index falls 10.4% after it raises bank lending rates to 300% to fend off speculative attacks on the Hong Kong dollar. The plunge on the Hong Kong Stock Exchange wipes $29.3 billion off the value of stock shares. • The South Korean won begins to weaken • The IMF agrees to a loan package for Indonesia that eventually swells to $40 billion. In return, the government closes 16 financially insolvent banks and promises other wide-ranging reforms

9. Crisis timeline..Contd/. • November1997 • Bank of Korea allows the won to fall below 1000 against the dollar (record low) • December 1997 • IMF approves a $57 billion bailout package to the South Korea • As part of IMF economic restructuring plan, the Thai government closes 56 insolvent finance companies (30,000 white collar jobs lost) • South Korea’s first president elected from country’s opposition party. In days the won hits new low. • $3 billion emergency loan released by the world bank , part of a $10 billion support package.

10. Crisis timeline..Contd/. • January 1998: • Release of Indonesia budget plan pulls the rupiah to an all-time low • Inflation rises. Prices for basic food staples in Indonesia increase by as much as 80% • The rupiah plunges to 12,000 rupiah against the dollar • June 1998 • Japan announces that its economy is in a recession • Yen falls to levels near 144 to the dollar. US treaury and Federal reserve intervenes to prop up the yen • August 1998 • Wall Street reacts; the Dow plunges 300 points in its third biggest loss

11. Dilemma.. • Drop in currencies • Raise import prices leading to inflation threat • Threat that potentially viable banks and companies may become bankrupt • Defend the currency • would mean to raise interest rates • Threat of economic slump resulting in the failure of banks

12. Asian Weaknesses.. • Weaknesses that became apparent after the crisis: • Productivity: economic expansion before crisis later explained by the rapid growth of production inputs (capital and labor) – but relatively little increase in productivity • Banking Regulation: Ineffective government supervision • Exchange rate regimes- Mostly pegged exchange rate system • Legal Framework: lack of structured legal framework to deal with bankruptcy

13. After the Shock.. • Ties of some currencies to the dollar had to be abandoned resolving floating rate systems • Supervisory process reforms • Need for accumulation of high levels of international reserves • Evidence that excessive capital inflows to a country to take advantage of high rates can cause unwise investment decisions

14. Questions?????...