Deveco

ASIAN CRISIS AND RECENT

DEVELOPMENTS

• Beginning July 1997 – period of financial crisis

• Started in Thailand, followed in Malaysia, Indonesia and Philippines

• Subsequently spread to Australia, Korea, Hong Kong

• Stock Market fell by about 30%

Introduction

Why did it happen?

• The Bubble Economy

• External Sector Difficulties

• Contagion, Globalization, and Financial Integration

The Bubble Economy– all the countries in Southeast Asia grew very

rapidly during 1994 and 1995

– huge inflow of foreign capital was channeled to both fixed investment and equity portfolios

– current account deficits widened and stock markets boomed

The Bubble Economy

• Inadequate fund management system• Ineffective sterilization of capital inflows• Restrictions on foreign banks entry• Nonperforming loans• High costs of financial services• Balance Sheets

Nonperforming Loans as Percent of Total Loans1980s 1994 1995 1996

Asian Economies

Trigger economies:

Indonesia n.a 12.0% 10.4% 8.8%

Malaysia 30.5 8.1 5.5 3.9

Thailand 15.0 7.5 7.7 n.a

Other Asian economies:

Hong Kong n.a 3.4 2.8 2.7

Korea 6.7 1.0 0.9 0.8

Taiwan 5.5 2.0 3.1 3.8

Industrialized Countries

Japan n.a 3.3 3.3 3,4

United States 4.1 1.9 1.3 1.1

External Sector Difficulties– said to have been behind the outbreak

of the financial crisis. They include the following:

• Rapid growth in current-account deficits

• Overvalued exchange rates

• The collapse in exports

Exchange-Rate Depreciation, Current-Account Balance, and Merchandise Export Growth in Selected Asian Countries (Percent)

Exchange-Rate Overvaluation

Current-Account Balance (of GDP)

Merchandise Exports (of

Growth)

June 1997 1995 1996 1995 1996

Trigger Economies:

Indonesia 4.2% -3.3% -3.3% 13.4% 9.7%

Malaysia 9.3 -10.0 -4.9 20.3 6.5

Philippines 11.9 -4.4 -4.7 28.7 18.7

Thailand 6.7 -7.9 -7.9 23.1 0.5

Other Asian economies:

Hong Kong 22.0 -3.9 -1.3 14.8 4.0

Korea -7.6 -2.0 -4.9 30.3 3.7

Singapore 13.5 16.8 15.7 13.7 5.3

Taiwan -5.5 2.1 4.0 20.0 3.8

Contagion, Globalization, and Financial Integration

– enormous reversal of net private capital flows to the five crisis economies (Indonesia, Malaysia, Korea, Philippines, Thailand)

– slowdown in growth in Europe and currency appreciation when the US dollar strengthened

– globalization linked the East Asian markets for goods and assets which resulted from liberalization of trade in goods and capital

Contagion, Globalization, and Financial Integration

• Role of institutional investors– control over vast amounts of financial resources

which can introduce to volatility into the developing economies

– fund managers tend to act together to pull out individual markets

• How strong was this contagion effect?– investors bailed out of all countries without

discrimination which put pressure on the exchange rate and subsequently on the external balance and interest rates

– led to bankruptcies in the vulnerable banking and corporate sectors

– severe economic slow down

Post-Crisis Experience

• The world economy• Economic growth• Economic recovery• Emerging development divide in Asia• Social impact of the Economic Crisis

The World Economy – world output in 1998 fall, this was primarily the

result of a slowdown in the growth of the US economy

– Asia grew rapidly, registered growth of between 1% and 2%

– US economy suffered a short and shallow recession , this reduced the demand for US imports and probably also slowed the growth of Asian economies

Economic Growth– overall growth in the Asian economies

did not immediately reflect events in the financial sector and in foreign exchange markets

• Exchange Rates

• Equity Prices

• Restructuring

Growth Rates of GDP in Asia, 1997-20071997 1998 19

99200

0200

1200

2200

32004 2005 2006 2007

China 8.8%

7.8% 7.1%

8.0%

8.3%

9.1%

10.0%

10.1%

10.4%

11.7%

11.9%

Hong Kong

5.1 -5.0 3.4 10.2 0.6 1.8 3.2 8.6 7.1 7.0 6.4

Indonesia 4.7 -13.1 0.8 4.8 3.8 4.3 5.0 4.9 5.7 5.5 6.3

Korea 5.0 -6.7 10.9

9.3 3.8 7.0 3.1 4.6 4.2 5.1 5.0

Malaysia 7.3 -7.4 6.1 8.3 0.3 4.4 5.4 7.1 5.3 5.8 6.3

Philippines

5.2 -0.6 3.4 4.4 1.8 4.4 4.5 6.0 5.0 5.4 7.2

Singapore 8.5 -0.1 6.4 9.4 -2.3 4.0 2.9 8.7 7.3 8.2 7.7

Taiwan 6.7 4.6 5.4 5.9 -2.2 4.2 3.4 6.1 4.2 4.9 5.7

Thailand -1.4 -10.5 4.4 4.6 2.2 5.3 7.0 6.2 4.5 5.1 4.8

Stock Market RecoveryDec 1998-Dec 1999 Dec 1999-Dec 2000 Dec 2000-Dec 2001

LocalCurrency

U.S.Dollars

LocalCurrency

U.S.Dollars

LocalCurrency

U.S.Dollars

China 21.7 21.6 49.4 49.4 19.9 19.9

Hong Kong 61.7 61.2 10.5 -10.8 -23.9 -23.9

Indonesia 65.0 84.9 -38.1 -52.9 -10.0 -14.3

Korea 70.5 80.7 -48.4 -51.6 27.6 25.4

Malaysia 35.0 35.0 -12.5 -12.5 -2.3 -2.3

Philippines 3.4 -.08 -34.0 -47.0 -24.8 -27.0

Singapore 69.6 67.6 -20.9 -24.1 -17.8 -22.4

Taiwan 23.6 26.0 -40.3 -43.4 12.3 7.2

Thailand 25.0 19.7 -43.7 -50.8 8.8 7.7

Stock Market Indices, Beginning of 2008 and November 21, 2008

Stock Market Average

January 2008 November 2008 Percentage Decline

China 5,500 1,969 64%

Hong Kong 27,00 12.659 53

India 20,000 8,915 55

Indonesia 2,700 1,146 57

Korea 1,900 1,003 47

Malaysia 1,500 866 42

Singapore 3,500 1,662 52

Taiwan 8,200 4,171 49

Economic Recovery– revival of domestic demand supported

by exports and a restoration of investor confidence

– softer budget deficits and lower interest rates

– sustained growth

Current-Account Balance for Asia Economies as Percent of GDP, 1997-2007

1997 1998 1999 2000 2001 2002 2005 2006 2007

China 4.1% 3.1% 1.6% 1.5% 1,2% 1.9% 7.2% 9.4% 11.3%

Hong Kong

-3.1 2.7 7.5 5.5 7.5 10.7 11.4 12.1 13.5

Indonesia

0.7 -0.3 -1.7 -4.6 -5.0 4.1 0.1 2.9 2.4

Korea -1.7 12.7 6.0 2.4 1.9 1.3 1.9 0.6 0.6

Malaysia

-5.9 3.1 15.9 8.8 5.5 7.6 14.5 16.3 15.5

Philippines

-5.3 2.4 9.4 11.5 8.0 1.6 2.0 4.5 4.4

Singapore

19.0 24.8 25.9 23.6 24.0 21.5 18.6 21.8 24.3

Taiwan 2.4 1.8 2.9 2.4 2.5 9.2 4.9 7.2 8.6

Thailand 2.1 12.7 10.2 8.2 6.5 6.0 -4.3 1.1 6.1

Emerging Development in Asia

– putting China together with Taiwan, Korea, and Hong Kong as East Asia

– grouping the five major Southeast Asian countries together (excluding the Mekong countries)

Social Impact of the Economic Crisis– put extreme pressure on many sectors of the

economies of the five crisis countries– credit crunch made banks reluctant to lend and

firms were starved of working capital– currency depreciation made it difficult for firms

to service external debt– inflation accelerated – purchasing power fell as the price of import s

increased– government revenues came under strain when

the tax base contracted and incomes fell

Lessons and Prospects For the Future

An Agenda for reform– the reform agenda prescribed by

international banks and aid agencies after the crisis. They include the following:

• Debt restructuring• Private-sector credit lines• Reform exchange-rate regime• Capital Account reform• International Portfolio Controls

• Establish minimum international standards of financial crisis

• Information and transparency• Global Surveillance• Reform of financial Markets• Greater Competition• Consolidation• Supervision and regulation• Accounting and disclosure• Stock markets• Trade policies• Foreign direct investment

• Human Capital• Better understanding of the crisis process• New data• New analysis

Some Policy Implications

• they could have cut back on growth

• they could have loosened the attachment of their currency to the US dollar

• they could have put a tax on short-term capital inflows if there was a reluctance to loosen the exchange-rate peg

Summary and Developments in the New Millennium

2 reasons for the possible slow growth of the countries that already recovered

1. More difficult to maintain rapid growth as incomes continue to approach the levels of the OECD countries

2. The rapid growth of the early 1990s reflected overheating to some extent.

Indonesia• Have taken longer to recover but are now

on a stronger trajectory• Has averaged GDP growth of more than

5% since 2002

Hong Kong and China• Suffering from a reduction in export

competitiveness vis-à-vis the result of Asia because of exchange-rate realignment

• Growth in China has remained strong, partly as a result of a very strong expansionary fiscal and monetary policy in the last part of 1998 and in 1999.

• Hong Kong suffered a loss due to:– its currency is still pegged to the U.S. dollar.– China’s export sector has begun to feel the

pinch of relative currency appreciation

• China adopted a more flexible exchange-rate regime in 2007; continues to grow rapidly

Reasons for East Asian region to grow rapidly:• embraces macroeconomic policies• promotes competition• predisposed to invest in its people• welcome the technology and ideas

embodied in new goods and equipment