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Asian Financial Crisis of 1997

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Prateek Batra

on 30 September 2012

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Transcript of Asian Financial Crisis of 1997

1997 Asian Financial Crisis Before 1997, Asia attracted almost half of the total capital inflow into developing countries
High interest rates attractive to foreign investors
Asian economic miracle : 8% –12% GDP in the late 1980s and early 1990s
Dramatic run-up in asset prices - A bubble fueled by "hot money"

Early 1990s, U.S. economy recovered from a recession
Fed raised U.S. interest rates to head off inflation
This made the U.S. a more attractive investment destination relative to Southeast Asia

Thailand, Indonesia and South Korea had large private current account deficits
Excessive exposure to foreign exchange risk in both the financial and corporate sectors
Domino effect started from Malaysia Backdrop to the Crisis
Highest economic growth rate
Inflation was also low (3.4%-5.7%)
Baht value was 25 to the US Dollar (Fixed Exchange rate)
May 14-15 1997, the Baht faced speculative attacks
June 30 1997, Prime Minister Yongchaiyudh refused to devalue the baht
Thai government failed to defend the Baht, starting the crisis
2 July 1997, Thai government was eventually forced to float the Baht
Baht lost more then half it’s value
Thai stock market dropped 75%
August 11, 1997, IMF unveiled $17 billion rescue package
August 20, 1997 IMF approved another $3.9 billion bailout package
Finally recovered by 2001, paid off IMF debt in 2003
Despite Strong fundamentals of Indonesia
Low inflation
Trade surplus of 900 million dollars
Huge foreign exchange reserves in excess of 20 billion dollars
Robust banking sector Indonesian Crisis Banking sector burdened with non-performing loans
Aggressive expansions by corporates but not enough returns and profitability
Conglomerates controlled by the govt. absorbed more and more capital investments
Downgrading of credit rating of South Korea
From A1 to A3 on 28th Nov’97
From A3 to B2 on 11th Dec’97
Negative Investor sentiments in stock markets
Seoul stock exchange fell by 4% on 7th Nov’97
Plunged by 7% on 8th Nov’97 (biggest one-day drop to that date)
Another fall of 7.2% on 24th Nov’97 due to anticipation of tough reform demands by IMF
Automobile sector in dire straits
Kia motors on the verge of bankruptcy later taken over by Hyundai motors
Daewoo motors sold to American giant General Motors 10 year timeline 1985 - Plaza Accord - Yen moves from 240 to 120 against dollar
1989-90 - Japanese markets peak
1994 - Mexican crisis
1995 - Japanese yen peaks to 80
1996 - Japan introduces VAT, first signs of bank failure
1997 - Baht crisis, Indonesia, South Korea
1998 - Yen drops to 137, Malaysia, Hong Kong, Russia, Brazil, LCTM
1999 - Recovery in South Korea followed by others Causes 1. Domestic banks seeking foreign funds from the West to finance the lending. Motivated by profit
2. Took advantage of fixed exchange rates in order to reduce the cost of this borrowing.
3.Short-term nature of the foreign debts - need for the bank’s accounts always to be liquid.

4. Existing loans collateralised with stock/property assets were already failing.
5. Banks financed (sometimes with official guidance) corporate investments, focused on increasing market share. Inadequate attention to the returns generated Over-Dependence on Short-Term Foreign Funds Why did it happen ? 1. Absence of an adequate regulatory framework for businesses, especially the banks - Chaebol
2. Crony capitalism
3. Politically influenced lending encouraged the channelization of international borrowing to corporations Poor Regulation of the Economy Over-Inflated Asset Prices Unrealistically high asset values in most of the South East Asian countries.
Excess credit - fueled speculative booms in real estate, factories and the stock market Decision to unofficially fix the value of their currencies to the dollar
Indirect currency appreciation post 1995 – Decrease in exports Macroeconomic Policy: Fixed Exchange Rates
Indonesian Plight After floating of Thailand’s Baht, Indonesian Rupiah floating band increased from 8% to 12%
On 14th Aug’97, managed float changed to free floating exchange rate mechanism which led to drop in Indonesian rupiah
IMF rescue package of 23 billion dollars didn’t really help
The Indonesian Rupiah and Jakarta Stock Exchange touched a historic low in Sep’97
Moody’s downgraded Indonesian long term debt to junk bond
In Nov’97, devaluation effects started showing in corporate books with huge dollar loans
Many corporates started buying dollars by selling of Rupiah which further contributed in undermining of Rupiah
President Suharto sacked Bank Indonesia Governor J. Soedradjad Djiwandono in Feb’98
Suharto resigned under public pressure and Vice President B. J. Habibie was elevated in his place in May’98
Rupiah was 2600 to 1 USD(before the crisis), afterward hit 14,000+ levels to 1 USD
Indonesia lost 13.5% of GDP Economies Affected Mohit Agarwal
Prateek Batra
Sanjeev Marwah
Anupam Mukherjee
Yogesh Sharma
Anshul Verdia
N. Sandeep
Bharath H. Presented By Role of IMF IMF stepped in to initiate a $40 billion program to stabilize the currencies of South Korea, Thailand, and Indonesia

Structural Adjustment Package (SAP)
Crisis-struck nations to reduce government spending and deficits
Allow insolvent banks and financial institutions to fail
Aggressively raise interest rates
The reasoning was that these steps would restore confidence in the nations’ fiscal solvency, penalize insolvent companies and protect currency values. High Interest rates
To attain the chain objectives of tightened money supply,
Discouraged currency speculation
Stabilized exchange rate
Curbed currency depreciation
Contained inflation Criticism of the IMF Largely controlled by developed nations
"New Colonialism” austerity measures inhibit long term economic growth
Western style economic reforms and greater ownership by foreign firms
Monetarist priorities overlook public health, environment, and poverty
Repayment policies do not foster long-term growth Pre crisis trends Current account deficit to GDP ratio was 5%
Very popular investment destination
Kuala Lumpur Stock exchange most active stock exchange
KLSE composite index at over 1200
Ringgit trading at over 2.50 per dollar
Overnight rate was at 7% After devaluation of Thailand’s Baht KLSE composite index lost more than 50% and came down to below 600 levels from 1200
Ringgit fell from over 2.50 per dollar to 4.57 per dollar
Overnight rate rose from 8% to 40%
Ratings fell several notches from investment grade to junk status

Measures taken by Mahathir Mohammad
Introduced the peg at 3.80 ringgit per dollar(by Bank Negara)
Stopping overseas trading of ringgit and other ringgit assets
Foreign portfolio funds with a minimum one year “stay period”
Thank You
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