Asian Economic Crisis

By: Saurabh Damani & Vishwesharaya

• BEFORE THE CRISIS• Thailand• Events• CAUSES• Effects of the Crisis on Economies

in the Region• IMF• The Global Impact of the Asian

Crisis• Preventing Future Crises• Placement time :!!!

Tiger economies – Export oriented and Pegged

CurrenciesWorld bank endorses their

spectacular growth storyGrowth rates of 7% in 1970s to 9% in

1990sChinese devalue Yuan by 50%,US

Dollar appreciate 40% against Yen.

Capital Inflows0% export growth in 1996Current Account DeficitsCarry TradeAsset BubbleCurrency speculation-role of hedge

funds.

Thai stock market dropped 75% in 1997By the end of the year, fifty-six Thailand

finance houses are closed down.Led to first ever devaluation of an Asian

Crisis currencyDevaluations vis-à-vis the dollar average

20% to 30% in Thailand, Indonesia, Malaysia and the Philippines

• Seven high-profile bankruptcies of Korean conglomerates, such as Hanbo Steel and Kia Motors

• The Philippines abandons its dollar-peg Overnight interest rates are raised to 32%

• Indonesian authorities close 16 insolvent banks

• Malaysia also abandons its pegged exchange rate

Hong Kong overnight interest rates rise to 280%,

Hang Seng index fall 23% in three days

The largest investment bank in Hong Kong, Peregrine Securities, goes bankrupt

The IMF organises a $58.2 billion rescue for Korea

The IMF puts together a $17.2 billion Thai rescue

Indonesia finalises a deal with the IMF for funding that could total up to $42.3 billion

Poor Regulation of the EconomyOver-Inflated Asset PricesMacroeconomic Policy: Fixed

Exchange Rates

Fall in equity markets, foreign exchange markets and rises in interest rates

Equity Markets

• Interest rates --- Indonesia 300% … Thailand : tightens

monetary policy interest rates peaked at 20%

• Real economy--severe contraction in real economic

activities--increase in corporate bankruptcies--devaluation & exports

Financial Assistance : World bank ,ADB

Fiscal & Monetary policy revisionRestructuring

What did it do wrongly?

• negative ‘wealth effect’ on investors across the world Falls in Equity Markets

• International Trade :brake on the growth of exports from the major economies . 5% of GDP in Japan, 1½% of GDP in Europe and 3% in the US .

• Import side : prices slashed• Foreign Direct Investment : cut back

severely• Economic Growth :constant downward

revision of economic growth forecasts

• universal tax on currency transactions to deter speculation by the markets

• Improve global regulation, which would involve the IMF, the World Bank and other regulators

• Creating a process of active and transparent surveillance of borrowing nations

• Creating a Code of Best Practice on social policy issues, so that financial crises, if they do occur, do not result in disproportionate increases in poverty within developing countries.

• enhancing regional surveillance :ASEAN• the provision of fuller economic and financial

information to the public by governments, financial institutions, and corporations

• Financial contagion• How does financial contagion

occur?• why is it important, and is there

anything that can be done about it?

• What do you think caused the Asian crisis? Do you think the affected countries are now on the right track for recovery?

• Following the Asian crisis I would like to ask you whether there are any ways foreign investors/risk managers are able to predict instances of political instability?

• Are the hedging of currencies and the use of credit derivatives viable options to avoid losses in the event of currency crises?

• Asian crisis v/s subprime : similarities and dissimilarities ?