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1997 Asian Financial Crisis
Transcript of 1997 Asian Financial Crisis
Background of Asian Economic Miracle
SE Asian states - most impressive economic growth rates in the world.
Economies had expanded by 6% - 9%
This achievement was widely acclaimed and was known as part of the "Asian economic miracle".
'Asian Financial Crisis
Also called "Asian Contagion“
June 1997 - January 1998
financial crisis spread - series of currency devaluations
The currency markets first failed in Thailand
Currency declines - stock market declines, reduced import revenues
Started to settle in
- the stock markets lost 70% value, currencies depreciated.
The crisis was stemmed by financial intervention from the IMF and the World Bank.
Market declines - in the United States, Europe and Russia as the Asian economies slumped.
1985 - 1996 - Thailand's economy achieved 9%. Inflation 3.4–5.7%. The baht was pegged at 25 to the US dollar.
14 & 15 May 1997 - Thai baht was hit by massive speculative attacks.
30 June 1997 - Prime Minister would not devalue the baht - ignited the Asian financial crisis - Thai government failed to defend the baht.
Massive layoffs in finance, real estate, and construction. The baht devalued and reached lowest point of 56 units to the US dollar in January 1998. Thai stock market dropped 75%.
Thai government was forced to float the Baht, on 2 July 1997
11 August 1997 - IMF unveiled a rescue package for Thailand >$17 billion.
20 August 1997, the IMF approved another bailout package - $3.9 billion.
2001 - Thailand's economy recovered.
October 2010 - The Thai baht continued to appreciate to 29 Baht to the Dollar.
June 1997, Indonesia far from crisis
But Indonesian corporations had been borrowing in U.S. dollars.
July 1997, the authorities widened the rupiah currency trading band.
14 August 1997 - Free-floating exchange rate arrangement.
IMF - $23 billion.
February 1998 - The rate plunged (2,600 rupiah - 11,000 rupiah to 1 USD).
31 December 1998 - 8,000 to 1 USD - lost 13.5% of its GDP.
Banking sector was burdened with non-performing loans. - absorbed capital investment - excess debt led to failures and takeovers.
The South Korean won weakened > 1,700 per U.S. dollar.
Managed to triple its per capita GDP in dollar terms since 1997 - World's fastest-growing economy—since 1960, per capita GDP has grown.
National debt-to-GDP ratio more than doubled (approximately 13% to 30%) as a result of the crisis.
May 1997 - Interest rates raised by 1.75% .
- Central Bank raised the overnight rate (15% - 32%).
The peso dropped, 26 pesos per dollar to 38 pesos (mid-1999) to 54 pesos (August 2001).
GDP contracted 0.6%, but grew by 3%. The "jueteng" scandal caused the main index of the Philippine Stock Exchange, to fall. The peso's value declined.
The Philippine peso rose to 50 pesos and traded at 41 pesos to a dollar in late 2007. The stock market also reached an all-time high in 2007 and the economy was growing > 7%.
Before crisis - GDP deficit of 5%. Early of 1997, the composite index > 1,200, the ringgit >RM 2.50 to the dollar, and the overnight rate < 7%.
July 1997 - the Malaysian ringgit was "attacked" by speculators. The overnight rate jumped (8% to over 40%)
End of 1997 - ringgit lost 50% of its value (2.50 to 4.57). - introduced a 3.80 peg against the US dollar.
Fix the local currency.
In 1998, the output of the real economy declined. Overall, the country's GDP plunged 6.2% in 1998. During that year, the ringgit plunged below 4.7.
Effect on its economy - credited to the active management by the government.
The Monetary Authority of Singapore allowed 20% depreciation of the Singapore dollar.
The National Wage Council agreed to Central Provident Fund cuts to lower labor costs.
Implications of The Crisis
-Asia lost a decade of economic progress.
-The crisis has raised a series of fundamental policy questions.
In late 1997 the IMF committed over $110 billion in short term loans to South Korea, Indonesia, and Thailand.
Effects on companies with major activities and investments in the region’s troubled economies.
- Companies will not export - lead to a flood of low priced exports.
The Exchange Policy Rate
Hong Kong maintain the value of its currency - currency board
Can only issue additional domestic notes and coins when have foreign exchange reserves.
The Asian Financial Crisis
University of Washington