ASIAN CRISES Ift Ppt Final Final Final

8/3/2019 ASIAN CRISES Ift Ppt Final Final Final

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ASIAN

CRISIS

Presented by:

Ved Prakash

Ritika Malhotra

Sudeeksha KapurNavneet

Anchal Goel

Mukesh Khurana


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History

Until 1997, Asia attracted almost half of the total capital inflow intodeveloping countries. The economies of Southeast Asia in particularmaintained high interest rates attractive to foreign investors looking for a highrate of return.

As a result the region's economies received a large inflow of money andexperienced a dramatic run-up in asset prices. At the same time, the

regional economies of Thailand, Malaysia, Indonesia, Singapore, andSouth Korea experienced high growth rates, 812% GDP, in the late1980s and early 1990s.

This achievement was widely acclaimed by financial institutions

including the IMF and World Bank, and was known as part of the "Asianeconomic miracle"


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Cont.

Thailand's economy developed into a bubble fueled by "hotmoney". More and more was required as the size of the bubblegrew. The same type of situation happened in Malaysia, andIndonesia, which had the added complication of what was called"crony capitalism".

The short-term capital flow was expensive and often highlyconditioned for quick profit.

Development money went in a largely uncontrolled manner to

certain people only, not particularly the best suited or most efficient,but those closest to the centers of power.


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Data


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Rise of problem

At the time of themid-1990s, Thailand, Indonesia and South Koreahad large private current account deficits and the maintenance of fixedexchange rates encouraged external borrowing and led to excessiveexposure to foreign exchange risk in both the financial and corporatesectors. In the mid-1990s, two factors began to change their economic environment. As the

U.S. economy recovered from a recession in the early 1990s, the U.S. FederalReserve Bankunder Alan Greenspan began to raise U.S. interest rates to head off

inflation. began to raise U.S. interest rates to head off inflation

This made the U.S. a more attractive investment destinationrelative to Southeast Asia, which had been attracting hot money flows

through high short-term interest rates, and raised the value of the U.S.dollar.

At the same time, Southeast Asia's export growth sloweddramatically in the spring of 1996, deteriorating their current accountposition


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Crisis

Foreign debt-to-GDP ratios rose from 100% to 167% in the four large

ASEAN economies in 199396, then shot up beyond 180% during theworst of the crisis. In South Korea, the ratios rose from 13 to 21% and thenas high as 40%, while the other northern newly industrialized countries fared

much better. Only in Thailand and South Korea did debt service-to-exports ratiosrise.


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EFFECT OF ASIAN CRISIS ON THE VARIOUS

COUNTRIES

THAILAND-

Thai baht hit by massive speculative attacks

Thai government fails to defend the baht

The booming economy came to a halt with layoffs in varioussectors

Government forced to float the baht


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INDONESIA-

Widened the rupiah trading band from 8%-12%

Manged floating exchange regime was replaced by free floatingexchange rate

Corporates reacted by buying dollars by selling rupiah in turn

undermining the rupiah further

SOUTH KOREA- In the wake of asian market downturn the credit rating of the

country went down

Contributed to the decline in the Seoul stock exchange which fellby 4%

Many companies got bankrupt & there were many takeovers


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Causes of Asian Crisis

Unsustainable current account Deficit


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Causes (Contd)

Overdependence on short term foreign capital

In 1996, 24% of total liabilities of all bank in Thailand wereforeign liabilities ( 6% in 1992)

Poor Regulation of the Economy

Crony Capitalization

Korean Law 1993

Failure of Microeconomic Policy


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Initial Triggers of the Events in South East Asia

Contagion or spill over effectCountries re-assessed their risk factorsCompetitive Dynamics of Devaluation

Speculation by participants in currency marketInternational investors took short positions against the Baht.

Changed Sentiments amongst investors in South East Asia

Withdrawal of smart money in 1997 Loss in investorsconfidence Break down of the Economy


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THE IMF AND ITS HANDLING OF

THE ASIAN CRISIS

IMF s policy had a number of key elements:

Financial Assistance

Austerity measures

Restructuring of the economy


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Financial Assistance

Rescue Packages for public sector was organized in second half of1997

Contribution were made available from a variety of sources such as theworld bank and the Asian Development bank(ADB).

$112 billion for Indonesia, Thailand and Malaysia twice in comparison ofthe $50.8 billion aid that was arranged for Mexican bailout in 1994.

The Austerity Programme In return of rescue packages the receiving nations invariably agree to tighten

their macroeconomic policies and structural reforms.

Such policies were considered to prevent the higher import prices beingtranslated into higher export prices and thus causing the erosion of competitivegains.

A.) Fiscal policy: Fiscal policy was tightened to limit the need for inflows of capital from

overseas.

In Indonesia, in the November 1997 IMF imposes cuts on socialspending to create a budget surplus of 1% of GDP.

Fiscal targets were relaxed to improve govt. tax revenues.


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B.) Monetary policy:

Higher interest rate policy

C.) Restructuring:

Aim was to remove the features that are impediments to the growthsuch as monopoly, trade barriers, non transparent corporatepractices.

In Thailand 56 out of 58 insolvent finance and non bank institutionswere shut down.

In Indonesia 16 private banks became bankrupt in 1997.

In Korea 17 banks were closed down immediately.

Criticism of IMF:

Due to higher interest rate policy.


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The global impacts

Falls in equity market International Trade

FDI

Economic growthPreventing the future crisis


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Falls in equity markets

Smart money withdrawal from investors

International trade

Income effect

Western manufacturers were pressurized to reduce their prices inorder to maintain their competitiveness

FDI

While depreciating the currency it gave a competitive trade advantagebut at the same time the cost of acquiring overseas assets became

costlier.

Economic Growth

The IMF forecast for the growth of world real GDP in October 1998was revised down to 2% earlier it was assumed to be 3%.

The forecast for growth in 1999 was 0.9%


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Preventing measures

Fee based system by George Soros

Improving global regulation, which would involve the IMF, theworld bank and other regulators forming a new, permanentstanding committee for global financial regulation

Creating a process of active and transparent surveillance ofborrowing nations

Creating a code of best practice on social policy issues, sothat financial crises, if they do occur, do not result indisproportionate increase in poverty within developingcountries


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How did India insulated itself from the East Asian crises

1. India shared none of the crises indicator that affected East Asian

economies (Table 1)

2. India learnt the lesson from its own external crises

External debt was tightly controlled Current account deficit was manageable Limit on exposure of financial intermediaries to stock and realestate Market determined exchange rate was managed Tight capital controls on domestic firms and individuals Key economic indicator were also stable Table 4 & 5

3. RBI played an important stabilizing role during crises:

INTERVENTION POLICY

High level of intervention by RBI succeeded the high volatility of the rupeedollar exchange rate


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MONETARY MEASURES UNDERTAKEN

Increased in interest rateIncrease in reserve requirementExport credit

Surcharge on import finance

a) Repo rate increased from 4.5% to first 5% then to 9% in Dec 1997 to Jan1998

b) Reverse repo rate increased from 9% to 11% from Dec 1997 to Jan 1998CRR increased by 1%

AFTER April 1998 CRR & REPO RATE 7% to 6%

Rupee began stabilize

RESTRICTIONS ON CAPITAL FLOW

Two kinds of capital control:

Target measurePervasive restriction

TRADE LINKAGES WITH EAST ASIAN COUNTRIES (TABLE 2)


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Whether india is equipped to avert any future crises?

Prudential norms in financing and banking sector

Reducing the financial exposure of the financial sector to speculativemarket

Keeping external debt and current account deficit at a low level

Reducing volatility in Foreign Exchange Market

Ensuring stability in capital market

CURRENT STATE OF INDIAN ECONOMY

Macroeconomic fundamentals of the economy (TABLE 4)

The exposure of the economy to foreign capital inflows (TABLE 5)AND (TABLE 6)


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SELECTED CRISES

INDICATOR(TABLE1)

country

current

account/GDP(%)1996

capital

account/GDP(%)1996 financial instalment claims On sector/GGDP(%)

1990 1996

Thailand -8 10.6 83.1 141.9

Indonesia -3.5 4.9 50.6 55.4

Malaysia -5.3 9.4 71.4 144.6

Phippines -4.3 11 19.3 48.4

Korea -4.8 4.8 56.8 65.7

India -1.6 3.1 26.8 24.7

Share of East Asian countries in Indias exports and imports(TABLE 2)

Country Export (%) Imports (%)

Thailand 1.03 0.9

Malaysia 1.12 1.79

Korea 1.77 3.25

Indonesia 1.33 2.2

Philippines 0.48 0.15


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ITEM 1996-97 1997-98 1998-99 1999-00 2000-01 2003-04 2004-05 2005-06

Trade

Balance* 18.8 18.7 18.3 19.4 22.4 24.3 29.3 32.9

Exports* 8.7 8.5 8 8.2 9.9 11 12.2 13.2

import 10.2 10.1 10.2 11.1 12.5 13.3 17.1 19.7

Current

Account

Deficit* -1.2 -1.4 -1 -1 -0.8 2.6 -0.4 -1.3

Exchange

Rate: Re/$ 35.49 37.16 42.07 43.33 47.07 45.6 44.63 45.29

Foreign

Exchange

Reserves

(billion $) 26.4 29.3 32.5 38 42.3 113 141.5 151.6

External

Debt* 23.4 22.1 21.2 21.2 20.5 19.6 18.1 15.8

Indian economy- key variables (External Factors) TABLE 3


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KEY ECONOMIC INDICATOR

Column1 1996-97 1997-98 2000-01 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Real GDP Growth 7.8 4.8 4.4 7.5 8.5 9 9.7 9.2 6.7 7.4

Saving 23.2 23.1 23.4 29.7 31.1 32.4 34.4 36.4 32.5 -

Investment 24.5 24.6 24 28 31.5 33.8 35.5 37.7 34.9 -

Fiscal Deficit( of

centre and state 6.4 7.3 9.4 8.5 7.5 7.4 5.4 4.12 8.50 9.6

inflation(cpi) 8.9 12 4.02 3.8 3.1 5.1 6.33 7.4 9.6 13.1

ITEM 1996-97 1997-98 2000-01 2003-04 2004-05 2005-06

Total Capital Inflows

(Net)(US billion $) 12 9.8 10 17.3 28.6 24.2

Composition of Capital

flows (percent to total) 1996-97 1997-98 2000-01 2003-04 2004-05 2005-06

1.Non-debt Creating Inflows 51.3 54.8 67.8 93.7 54.6 86.1

a. Foreign Direct Investment 23.7 36.2 40.2 25.8 21.4 32.7

b. Portfolio Investment 27.6 18.6 27.6 67.9 33.2 53.7

2. Debt Creating Inflows* 61.7 52.4 59.4 -6 35.2 37

3.Other Capital -13 -7.2 -27.2 12.3 10.2 -23.1

4.Total (1 to 3) 100 100 100 100 100 100

TABLE 4

Composition of Capital Inflows to India (TABLE 5)


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Year/ Month Total

2006-07 23754.05

2007-08 62583.56

2008-09 -43337.75

2009-10 114901.12

2010-11 9767.44

Net Investments by FIIs in the Indian Capital Market (TABLE 6)


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THANK YOU

ASIAN CRISES Ift Ppt Final Final Final

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