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Asia Financial Crisis

Asia Financial Crisis. By: Phong Van and Sandeep Kumar. History. Before 1997, Asia was attractive By developing countries High interest rates “Asian economic miracle” Four Asian Tigers. Introduction. July 1997 Countries most affected by the Asian Financial Crisis. Introduction.

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Asia Financial Crisis

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  1. Asia Financial Crisis By: Phong Van and Sandeep Kumar

  2. History • Before 1997, Asia was attractive By developing countries High interest rates • “Asian economic miracle” Four Asian Tigers

  3. Introduction • July 1997 • Countries most affected by the Asian Financial Crisis.

  4. Introduction • Most affected: • Indonesia • South Korea • Thailand • Hong Kong • Malaysia • Lao • Philippines

  5. Introduction • Least affected • People’s Republic of China • India • Taiwan • Singapore • Vietnam

  6. Introduction • Thailand • Thai baht • Real estate • Burden of foreign debt • Southeast Asia and Japan • Slumping currencies • Devalued stock market • Steep rise in private debt.

  7. IMF Role • $40 billion program to stabilize the currencies of South Korea, Thailand, and Indonesia. • Bailouts (rescue packages) for the most affected economies to enable affected nations to avoid default. • Structural adjustment package

  8. SAP • cut back on government spending to reduce deficits, • allow insolvent banks and financial institutions to fail and aggressively raise interest rates. • The reasoning was that these steps would restore confidence in the nations’ fiscal solvency, penalize insolvent companies, and protect currency values.

  9. IMF and High Interest Rates • to attain the chain objectives of tightened money supply • discouraged currency speculation • stabilized exchange rate • curbed currency depreciation • ultimately contained inflation.

  10. Consequences • significant macro-level effects • including sharp reductions in values of currencies • stock markets • other asset prices of several Asian countries. • The nominal US dollar GDP of ASEAN fell by US$9.2 billion in 1997 and $218.2 billion in 1998.

  11. The Currency exchange rate per USDJune 1997 compare to July 1998 • Thai baht: 24.5 to 41 • Indonesian rupiah: 2,380 to 14,150 • Philippine peso: 26.3 to 42 • Malaysian ringgit: 2.5 to 4.1 • South Korean won: 850 to 1,290

  12. Thailand

  13. Thailand • from 85-96 Thailand grew 9% per year • Highest economic growth rate • Inflation was also low (3.4%-5.7%) • Baht value was 25 to the US Dollar

  14. Thailand • May 14-15, 1997 the baht faced very bad speculative attacks • In June, Prime Minister Yongchaiyudh refused to devalue the baht • Thai government failed to defend the Baht, starting the crisis • Baht lost more then half it’s value • Thai stock market dropped 75%

  15. Thailand • August 11, 1997, IMF unveiled $17 billion rescue package • August 20, 1997 IMF approved another $3.9 billion bailout package • Rumors that former Prime Minister profited from the devaluation • Finally recovered by 2001, paid off IMF debt in 2003

  16. Indonesia

  17. Indonesia • Indonesia was doing good in June 1997 • Low inflation • $900+ Million trade surplus • $20 + Billion foreign exchange reserves • Good banking sector However, many corporations were borrowing in U.S. Dollars In July 1997, Indonesia widened the rupiah tradin band from 8%-12%

  18. Indonesia • On August 14, 1997 the managed floating exchange regime was replaced by a free-floating system, causing the rupiah to drop more • IMF created a rescue package of $23 Billion, but didn’t help • In Sept they hit a all time low, Moody’s rated Indonesia’s long-term debt to “junk bond” status • More effects were felt in Nov when the summer’s hits were felt in the corporate books

  19. Indonesia • In Feb, the President got rid of the governor of the Bank of Indonesia, but this wasn’t enough and he was eventually forced to resign • Effects • Rupiah was 200 to 1 USD, afterward hit 18,000 to 1 USD • Lost 13.5% of GDP

  20. South Korea

  21. South Korea • Large corporations were funding big expansions, however failed due to excess debt • Moody’s lowered their credit rating from A1 to B2 • Seoul stock exchange dropped 4% on Nov 7, 7% on Nov 8, and 7.2% on Nov 24 • In 1998 Hyundia took over Kia Motors, Samsung was dissolved, and Daewoo was sold to American GM • Currency dropped from 800 per dollar to 1,700 • National debt-GDP ratio went from 13%-30%

  22. Hong Kong

  23. Hong Kong • After UK gave control of Hong Kong to China the Hong Kong dollar was under speculative pressure • Authorities spent more then US $1 Billion to defend local currency • Had more then US $80 billion in foreign reserves • Stock markets became volatile • In Oct the Hang Seng Index dropped 23% • In Aug 98, interest rates jumped from 8%-23% overnight, and even 500% once

  24. Hong Kong • The Hong Kong Monetary Authority (HKMA) setup a system to establish rates, however speculators were taking advantage of this by short selling shares. • HKMA wound up buying HK$120 billion worth of shares in various companies to combat this • Started selling those share in 2001, profiting HK$30 billion

  25. Malaysia

  26. Malaysia • In July 1997, the Malaysian ringgit jumped overnight from 8% to over 40% • Ratings had fallen from investment grade to junk • Lost 50% of value, from 2.50 to 3.80 to the dollar • Output of real economy declined • Construction dropped 23% • Manufacturing 9% • Agriculture 5.9% • GDP 6.2%

  27. Malaysia • IMF aid was refused • Various task forces were formed to fix economy • By 2005 had a surplus of US$14.04 billion

  28. Singapore

  29. Singapore • Singapore dipped into a short recession • Government kept very active management to ensure security • Government programs were put forward • Made no attempt to help capital markets, instead allowed a 60% drop, however within a year fully recovered and continued to grow

  30. Less Affected Countries • China, The US, and Japan were very strong economies and were able to survive • China held most of it’s foreign investments were in factories rather then securities • U.S. didn’t collapse, but on Oct 27,1997 the Dow Jones fell 554 points (7.2%) • Japan was affected because the economy is so prominent (yen fell to 147), but it was world’s largest holder of currency reserves so it bounced back quickly

  31. Conclusion • Many businesses collapsed and millions of people fell below the poverty line • Indonesia, South Korea, and Thailand were most affected • Heavy U.S. investment shifted from Thailand to Europe • Many countries pushed for corporate governing to avoid problems later • Investors were reluctant to lend to developing countries

  32. References • Kaufman, GG., Krueger, TH., Hunter, WC. (1999) The Asian Financial Crisis: Origins, Implications and Solutions. Springer. • Weisbrot, Mark (August 2007). Ten Years After: The Lasting Impact of the Asian Financial Crisis • http://en.wikipedia.org/wiki/1997_Asian_Financial_Crisis • Tecson, Marcelo L. (2009), "IMF Must Renounce Its Weapon of Mass Destruction: High Interest Rates"

  33. Any Questions?

  34. Thank You

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