Asia Financial Crisis 1997

Short research paper in my International finance class (FINA 318) 

About Asia Financial Crisis 1997

An introduction : An overview about the history of the Asian financial crisis 

– write about how it started, what was the countries that got effected by the crisis

– How the crisis started in ( Thailand, South Korea, and Indonesia) which was the most effected countries 

– what was the result (how its effected the Asian country socially and economy)

– Recovery

– conclusion 

3-5 pages (not including title and reference page), double-spaced, 12 pt font, page numbers, in-text referencing using APA style, and separate reference page.  At least 5 references – 3 from the library (books, journals, etc.) and 2 from the open internet (websites). 

 Asia Financial Crisis 1997

In July 1997, the Asian financial crisis swept most of the eastern half of Asia and raised concerns for a significant financial crisis throughout the world. The relatively young economies of the Asian “tigers” collapsed on July 2, 1997, as a house of cards, in which the interdependence of world capital markets and their impact on foreign exchange markets manifested itself. The reason for the collapse was significant factors: an opaque credit system, inflated trade deficits and undeveloped capital markets (Wade, 1998). The financial crisis of 1997-98 clearly displayed the interdependence of economies and their massive influence on world currency markets. In addition, it showed the inability of central banks to effectively regulate exchange rates, when powerful market forces entered into action and exchange rates were not backed up by key economic indicators. With the support of the IMF and with the introduction of stricter requirements, four Asian “dragons” began to revive again. South-East Asia regained the former status of one of the most developed regions of the world. However, the Asian “economic tigers”, taught by bitter experience, took active measures so that their central banks could have sufficient reserves to protect against possible attacks of currency trader (Climent and Meneu, 2003).

The crisis began in Thailand (it is known as the crisis of Tom Yum Goong) and its origin was the crumbling of Thai baht. Resultantly, the government was forced to take extreme steps and introduced a “floating rate” due to diminishing reserves of foreign currency. The country was able to maintain a fixed exchange rate with the help of it. In this timeframe, the country gathered massive chunk of external debt which subsequently paved way to bankruptcy of the country even before the fall of the currency inland. With the spread of the crisis, almost all the countries of Southeast Asia including Japan suffered from a fall in their respective national currencies, alongside the deflation of stock markets and an increase in the private debt, adjunct with a fall in the value of assets. International speculators launched a massive attack on Thai Bhat in May 1997. Under such circumstances, the national government decided to announce the changed methods in June 30 1997 regarding the massive devaluation of the currency (Holden et al., 2005). It is to be noted that previously the value of Bhat was closely linked with the value of American dollar . Resultantly, the value of the national currency i.e. Bhat was reduced to half and in the stock markets by three quarters.

During this crisis, the countries which faced the brunt included Thailand, South Korea, Indonesia, Malaysia, Hong Kong, Philippines and Laos. Apart from these, other countries like China, Taiwan, Brunei, Vietnam and Singapore were also affected by the financial crisis. For all the economies mentioned, during the period 1997-1998, the depreciation of the national currency was characteristic (for example, the currency of Thailand – baht – depreciated first by 48%, and by the end of 1997 by almost 100%, the Indonesian rupee depreciated by 228%, a drop in stock indices, an increase in inflation , an increase in the volume of corporate debt, and loud bankruptcies of corporations (Hunter et al.,2012). .

The crisis affected not only the economically weak Thailand and the heavily “overheated” Malaysia, but also the apparently very stable Indonesia. In mid-1997, this country had a trade surplus, huge foreign exchange reserves, low inflation and a strong banking system. In the Indonesian economy there was, perhaps, only one weak link – a large amount of dollar loans received by local companies (Haggard, 2000).

In Thailand, the powerful speculative attacks of global hedge funds in the market of forward foreign exchange contracts, which led to the depletion of the international reserves of the Central Bank and made the devaluation of the Thai battens essentially inevitable, became the reason for the crisis in May 1997. The deficit of the current balance of payments on the eve of the crisis reached 8% of GDP. In addition to the external factor, the financial support of such institutions as Finance One, whose value exceeded $ 3.8 billion, played an important role in reducing the country’s foreign exchange reserves (Goldstein, 1998).

In Indonesia, the speculation of foreign investors has not played a decisive role, as in Thailand. The crisis was triggered by the behavior of depositors of local banks, which massively closed their accounts. Indonesia, the IMF issued loans for 23 billion dollars. However, these funds did not save the country’s economic situation. The Indonesian government complained that the reforms proposed by the IMF are not working; they are too tough and moreover create an advantage to foreign capital. After most of the Asian countries sounded a fiscal policy, IMF (International Monetary Fund) was instrumental in introducing a 40 billion US dollars aid program to help in stabilizing the economies of the countries which were hit hard by the impacts of the financial crisis like Thailand, Indonesia and South Korea.

Western financial managers and experts pointed to problems and abuses in NIS opaque financial systems: for example, that the South Korean government sold or distributed most of the Central Bank’s reserve fund ($ 25 billion) to loans to Korean commercial banks that used them for questionable operations (Haggard, 2000).

One of the most pronounce conclusion of the financial crisis of 1997-98 was the understanding that how the economies of different countries are interlinked with each other. Moreover, how financial crisis in a particular region can have impact on the global markets. Another impact highlighted by him was the powerlessness of various central banks to effectively handle the crisis by regulating the exchange rates.

The Asian currency crisis pushed the ruling elite of the countries of the region to establish a dialogue between the government, the private sector and civil society. As a result, civil society has strengthened in Thailand, the Philippines, Indonesia and South Korea. Unemployment and the lack of social protection due to the crisis have become a powerful impetus in upholding their civil and social rights by the population. Furthermore, the Asian crisis, liberalizing the economy, largely contributed to the political changes in East Asia and gave them a largely irreversible character (Mitton, 2002).

In most countries that have survived the crisis, there is currently a steady real growth in output, driven by exports, individual consumption, and private investment initiatives to some extent. The economic revival of Korea kicked off in the latter half of 1998 and within less than a year of the crisis, it is expected boost the economic activity by a handsome 8 % in year 2000, and it was expected that this forecast might be exceeded. The economic growth of Thailand this year should be 5 percent. In Indonesia, where political unrest and poor implementation of economic policy prevented the resumption of growth, economic growth began again in 1999, and it is expected that this year the real GDP will increase by 4 percent (Mitton, 2002). In most of the cases the nominal and real interest rates on the money market are below the level that existed before the crisis. The interest rates started to reduce in Thailand and Korea in the first half of year 1998. Moreover, in Indonesia during the middle of year 1999 the interest rates started to reduce with easing pressure on the national currency.

The Asian crisis of 1998 led to negative consequences in the economic development of a number of countries and the instability of modern international economic relations. In particular, in the countries of South-East Asia in 1998-1999, there was a reduction in production, unemployment grew, bankruptcies of enterprises and credit. The International Monetary Fund, which was accused by national governments of provoking the crisis by thoughtlessly encouraging the growth of the economies of the “Asian tigers,” allocated $ 40 billion to overcome its consequences. Signals of recovery of the main economies of South-East Asia began to arrive in early 1999. Political and economic restructuring of national economies allowed overcoming the consequences of the crisis by 2001 and resuming dynamic growth.

References

Goldstein, M. (1998). The Asian financial crisis: Causes, cures, and systemic implications (Vol.

55). Peterson Institute.

Haggard, S. (2000). The political economy of the Asian financial crisis. Peterson Institute.

Hunter, W. C., Kaufman, G. G., & Krueger, T. H. (Eds.). (2012). The Asian financial crisis:

origins, implications, and solutions. Springer Science & Business Media.

Wade, R. (1998). The Asian debt-and-development crisis of 1997-?: Causes and

consequences. World development,26(8), 1535-1553.

Climent, F., &Meneu, V. (2003). Has 1997 Asian crisis increased information flows between

international markets .International Review of Economics & Finance, 12(1), 111-143.

Holden, K., Thompson, J., &Ruangrit, Y. (2005).The Asian crisis and calendar effects on stock

returns in Thailand. European Journal of Operational Research, 163(1), 242-252.

Goldstein, M. (1998).The Asian financial crisis.

Mitton, T. (2002).A cross-firm analysis of the impact of corporate governance on the East Asian

financial crisis. Journal of financial economics, 64(2), 215-241.