SCHOOL OF FINANCE AND ECONOMICS

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1 SCHOOL OF FINANCE AND ECONOMICS UTS:BUSINESS WORKING PAPER NO. 82 NOVEMBER, 1998 Is Speculative Activity in Asia Pacific Markets Anything New? Tiffany Hutcheson ISSN:

2 IS SPECULATIVE ACTIVITY IN ASIA PACIFIC MARKETS ANYTHING NEW? This paper evaluates the role of speculative behavior in the floating of several Asian currencies in The incentive for speculators to adopt trading strategies forcing a country to float their currency is taken into account after assessing the exchange rate regimes, currency movements and economic fundamentals for countries in the Asia Pacific. The globalisation of capital markets and use of shortterm borrowing by the Asian countries affected by speculative pressures is also taken into consideration. Correspondence to Tiffany Hutcheson School of Finance and Economics University of Technology PO Box 123 Broadway, NSW 27 Tel # Fax # JEL classification: F2, F31, G15 2

3 1 INTRODUCTION Since the early 197s there has been a global trend for governments to replace the Bretton Woods system of fixed exchange rates with a system of floating exchange rates. This trend has been accompanied by a significant increase in the level of capital flows between countries as domestic capital markets were opened to foreign investors. The recent establishment of the European Monetary Union represents a divergence from this trend as by 1999 all its member countries will issue and trade in a single currency. The adoption of a single currency will eliminate the currency volatility associated with trade and capital flows between member countries. Some Asian countries, while readily accepting capital inflows, maintained an inflexible exchange rate regime until the second half of 1997 when market pressures forced them to be floated. The floating of these currencies raises questions about the ability of individual countries to maintain fixed exchange rate regimes in an environment of international capital flows. However, it also opens the debate on the factors which caused the conversion from a fixed to floating exchange rate regime. The market pressures, which forced some Asian currencies to float in 1997, have been partly attributed to speculative selling. Consequently, this paper examines the influence of speculative behaviour on exchange rate movements. Section 2 provides a brief history of exchange rate regimes while Section 3 analyses exchange rate volatility for countries in the Asia Pacific region. Section 4 investigates the impact of speculative behaviour on the exchange rate regimes chosen by governments. The ability of speculators to assist in the transmission of exchange rate changes is discussed in Section 5. The conclusions to the paper are given in Section 6. 2 EXCHANGE RATE REGIMES Floating exchange rate regimes existed in industrialised countries for periods prior to the early 197s, such as However, following the Bretton Woods Conference in 1944 the major industrialised countries pegged their currencies to either the value of gold or the United States dollar. Spot exchange rates were allowed to fluctuate within 1 percent either side of parity. Unfortunately, between 1944 and the early 197s the growth rate differential between the countries began to change and under fixed exchange rate regimes this caused interest rate instability and inflation. As 3

4 a result, their currencies, apart from the United States dollar and the Japanese yen, experienced many cases of currency devaluation and revaluation. At this point in time countries began to question whether it was appropriate to peg their currencies to the United States dollar, particularly after the United States began experiencing economic problems in the 196s, such as a growing balance of payments deficit and increasing inflation (see Lui [199]). The Bretton Woods System finally collapsed in 1973 with Japan and most European countries converting to a floating exchange rate regime. The Smithsonian Agreement in December 1971 attempted to support fixed exchange rate regimes by devaluing the United States dollar against gold and allowing spot exchange rates to fluctuate within 2.35 percent around parity. However, the Smithsonian Agreement proved to be ineffective as currencies experienced pressure from speculators due to the growing lack of confidence in the United States dollar. Australia, New Zealand and Asian countries, apart from Japan, chose not to float their currencies after the collapse of the Bretton Woods System as they felt fixed exchange rate regimes would protect their domestic economies from excessive exchange rate changes. In 1971 Australia and New Zealand replaced their historical currency peg to the pound sterling with a peg to the United States dollar. However, as movements in the United States dollar did not reflect the economic conditions in Australia and New Zealand, by 1974 both Australia and New Zealand had pegged their currencies to a trade weighted basket of currencies. These fixed pegs were soon replaced with crawling pegs so that the Australian dollar and New Zealand dollar could easily accommodate changes to the interest rate and inflation rate differentials between the countries involved. However, New Zealand reintroduced a fixed peg in June 1982 as part of a wages and price freeze. In the mid-198s the financial systems of Australia and New Zealand were deregulated in order to promote competitiveness and efficiency. As interest rates were now market determined, it became difficult to maintain a fixed exchange rate regime. Heavy speculative pressures in March and December 1983 forced the Australian dollar to be floated in December 1983 while the New Zealand dollar was floated in March As with most other countries who floated their currencies, the central banks in Australia and New Zealand still intervene when they feel the market value of their exchange rates does not reflect the true value. 4

5 Following the breakdown of the Bretton Woods System, Asian countries apart from Japan initially fixed their currencies to the United States dollar. Table 1 summarises the changing exchange rate regimes in the region. China has maintained a fixed dual exchange rate system with an official rate for the Chinese yuan renminibi and a higher swap market exchange rate on trade transactions. An illegal black market also exists where trading is at an even higher exchange rate (see Zhang and Zheng [1993]). Hong Kong and Singapore were the first Asian countries to break their direct link with the United States dollar. The Hong Kong dollar and Singapore dollar were floated in as their destabilising movements caused by a worsening United States balance of payments were incompatible with domestic stability. Nevertheless Singapore s central bank intervenes when the value of the Singapore dollar moves outside an acceptable band around a trade-weighted basket of currencies. The Hong Kong government reintroduced a fixed rate regime known as a currency board in October 1983 to offset the downward pressure being experienced by the Hong Kong dollar. The currency board fixed and has since maintained the value of the Hong Kong dollar at $7.8 to one United States dollar. The currency board arrangement requires that the amount of Hong Kong dollars issued be fully backed by United States dollar reserves. In February 1979 the New Taiwan dollar became the next Asian currency to float and it has proven to be more independently floating than the Singapore dollar (see IMF [1995]). Thailand, Indonesia, Malaysia, South Korea and the Philippines did not allow their currencies to become truly market determined until However, the floating of these currencies was not fully endorsed by their governments but rather came about as a result of market pressure (see Grenville [1998]). Prior to floating, the value of the Thai baht and Malaysian ringgit were determined by the value of a trade-weighted basket of currencies while the Philippine peso, South Korean won and Indonesian rupiah were evidently subject to a managed float. However, significant central bank intervention in the Philippines meant the Philipinne peso was more central bank determined than market determined. Furthermore Indonesia s central bank heavily monitored movements in the Indonesia rupiah in terms of its trade-weighted value. 5

6 3 EXCHANGE RATE AND VOLATILITY MOVEMENTS There is a wide variation between the exchange rate regimes adopted by countries in the Asia-Pacific region. As indicated in Table 1 the countries have modified their exchange rate regimes since 197. However, prior to 1997 only Australia, Japan, New Zealand, Singapore and Taiwan really adopted some form of floating exchange rate regime. This is reflected in Figures 1-12, which depict the movements of currency values and their volatility over the period from January to August The graph on the left-hand side of each figure shows the movement in the average daily quote for these currencies to the United States dollar as at 15. New York (Eastern) Time. Movements in unconditional volatility for these currency markets over the period are shown by the graph on the right-hand side of each figure. The data used is provided by Bankers Trust Company and accessed through Datastream International. The currency movements for the Philippines, Indonesia, Malaysia, South Korea and Thailand show exchange rate stability up until mid This is consistent with their adoption of fairly inflexible exchange rate regimes. However, this stability was removed once these currencies were floated as shown in the graphs of the movements in their currency values and volatility. The measure of unconditional currency volatility estimated in this paper is derived from the average of the squared percentage price changes over 1 observations. This measure allows an absolute measure of the size of the currency price changes to be calculated and so can reveal how extreme volatility has been historically. The mean, minimum value, maximum value and percentage spread of the currency for each of the countries are recorded in Table 2 respectively. The countries are ranked in ascending order of the size of the percentage spread between the minimum and maximum values. The mean, minimum value, maximum value and standard deviation of the volatility measures for each currency are recorded in Table 3 respectively. The countries are ranked in ascending order of the size of their standard deviation. The volatility measure will indicate how dispersed a series is around its mean. Based on their standard deviations, exchange rate volatility is found to be highest in Indonesia followed by China, South Korea, Thailand, Philippines, Malaysia, New Zealand, Taiwan, Japan, Australia, Singapore than Hong Kong. The low volatility in 6

7 Hong Kong is attributable to their use of a currency board since The countries showing the highest exchange rate volatility, Indonesia, China, South Korea, Thailand, Philippines and Malaysia were all subject to some form of fixed exchange rate regime prior to Historically, as shown in Figures 5, 7, 8, 1 and 12, Indonesia, South Korea, Thailand, the Philippines and Malaysia experienced extremely low volatility prior to 1977 as would be expected under a fixed exchange rate regime. The Philippines and Malaysia experienced isolated episodes of volatility prior to May These episodes may be due to central bank intervention under a fixed exchange rate regime to prevent a set exchange rate becoming too over valued or under valued (see Moreno [1995]). Indonesia has experienced two periods of high exchange rate volatility, in September 1996 and as expected since May The high level of volatility in September 1996 lasted only for about two weeks and was caused by speculative pressure forcing a significant devaluation under a fixed exchange rate regime (see Moreno [1996]). In order to prevent this episode being inappropriately attached to the period after May 1997, the volatility measures for this two-week period were set equal to zero. The resulting standard deviation ranked Indonesia just behind South Korea. Consequently, the volatility experienced after May 1997 was still irregular for Indonesia. Similarly the measure of China s volatility is not a true reflection of the volatility experienced after May As shown by Figure 3 significant movements in the Chinese yuan renminibi against the United States dollar occurred in 199 and These were one off movements when China allowed a significant devaluation of the Chinese yuan renminibi against the United States dollar. In order to isolate the volatility experienced since early 1977, a volatility measure for each currency was calculated over the period from January to August Table 4 records the mean, minimum value, maximum value and standard deviation of these volatility measures with the countries being ranked in ascending order of the size of their standard deviation. Exchange rate volatility was still highest in Indonesia but China now had the second lowest measure of volatility reflecting its continued use of a fixed exchange rate regime. Exchange rate volatility was still considerably higher in Indonesia, South Korea, Thailand, Malaysia and the Philippines than the other countries during the period from January to August Singapore stands out among the countries with relatively low levels of volatility as its volatility 7

8 measure more than doubles during the period January to August The lack of volatility in the Singapore dollar prior to early 1997 could be due to central bank intervention and Singapore s development as a financial centre. As part of this development the government in Singapore encouraged foreign exchange trading involving currencies other than the Singaporean dollar by promoting trade in the Asian dollar market (see Tan Chwee Huat [1997]). The Asian dollar market refers to borrowing and lending in United States dollars in Asian countries. However, in 1997 Singapore experienced significant capital outflows as investors confidence in Asian economies worsened causing their stockmarket and real estate market to collapse. The significant increase in currency volatility experienced by Asian currencies floating in 1997 is not a new phenomenon. The efficient market hypothesis argues that under efficient trading the current market price is determined by supply and demand in such a way that it will reflect all available information. Therefore, increased currency volatility following the conversion from a fixed to floating rate regime is to be expected as an overvalued currency is allowed to realign to its true value. The increase in currency volatility experienced by Asian countries in 1997 is similar to the currency volatility experienced by Australia following the float of the Australian dollar in However, as with Australia, this volatility should decrease as the Asian currencies become more reflective of their underlying fundamentals (see Grenville [1988]). The currency volatility flow over into the currency markets of other countries reflects the market efficiency required by globalisation of financial markets. 4 EXCHANGE RATE REGIMES AND MODERN SPECULATORS A common feature of most conversions to a floating exchange rate regime is that they were partly caused by market pressure from speculators. Consequently, when analysing the recent volatility experienced by several Asian currencies, the impact of speculative behaviour needs to be considered. Major changes in international markets have made it easier for speculators to exert market pressure on currencies. These changes have been in the form of the increased openness of countries to trade and capital flows and the ability of technological changes to reduce transaction costs. As a result, the level of capital flows between countries has increased notably. The recent growth in a form of managed funds known as hedged funds or leveraged funds, which 8

9 are privately subscribed funds making profit from arbitrage and speculation, has increased the amount of funds which are being used for speculative purposes. Market pressure on currencies develops when speculators consider a currency is inappropriately valued. Speculators generally judge the value of a currency by analysing the economic fundamentals of its country, such as the level of domestic credit creation, the budgetary position, output growth, inflation rate and the current account position. If speculators consider a currency is inappropriately valued, they adopt trading strategies to force the exchange rate to change if they anticipate it cannot be supported by the central bank (Moreno [1995]). Central banks support falling currencies by buying the domestic currency or increasing domestic interest rates. However, these actions may not be undertaken due to an inadequate level of foreign exchange reserves or the dampening impact they will have on domestic economic growth. Consequently, the speculators strategy can often prove to be successful. Currencies under a fixed exchange rate regime can experience sustained market pressure from speculators. Whilst governments have argued that fixed exchange rate regimes stabilise exchange rate movements, speculative pressure will develop if a currency s value does not reflect a country's economic fundamentals. Furthermore, the economic literature argues that fixed exchange rate regimes are only suitable for small open economies with few trading partners and a limited range of exports. As long as these countries are fairly isolated from foreign shocks and can easily accommodate domestic real shocks through changing price and wage levels or factor mobility, there will be little need for central bank support of exchange rates (see Wickham [1985]). Nevertheless, Moreno [1995] argues that even when a fixed exchange rate regime reflects its true value, speculative pressure may force the speculators expected exchange rate change to be self-fulfilling. The costliness of actions to support the currency may decrease the government s willingness to support the currency. As most Asian countries have increased their openness to trade and capital flows over the past decade, the appropriateness of them maintaining strictly fixed exchange rate regimes has diminished (see Garnaut [1991,p 13]). Their domestic stability may be adversely affected if global market changes require their governments to constantly 9

10 support the fixed exchange rate by changing domestic interest rates and trading foreign exchange reserves. During the 199s, however, Asian countries, that had not freely floated their currencies did not appear to have experienced domestic instability. The International Monetary Fund argues that the average real GDP growth for developing Asian countries for the years between 1992 and 1995 appears to be significantly greater than the growth occurring for any other group of economies of similar size (see IMF [1997,pp 2]). However, in the late 199s many Asian countries, in particular Thailand, began to experience slow-downs in real GDP growth and growing account deficits. This weakening of underlying fundamentals, as summarised in Table 5, allowed speculative pressure to build. The speculative pressure proved to be so significant, that governments were forced to float their currencies. The flow of private capital into Asian countries during the 199s was significant due to the recent liberalisation of capital markets by these countries (see Dean [1996]). As shown in Table 6 the level of capital inflows, as a percent of GDP, to Asian countries subjected to speculative currency pressure in 1997, increased significantly over the 199s. These capital flows were attracted by the relatively higher asset yields and output growth occurring in these countries compared to industrialised countries (see IMF [1997]). The lack of regulation and supervision of financial activities in most Asian countries allowed capital flows to significantly increase the risk exposure of financial institutions (see Grenville [1988]). By 1997 speculators felt that the capital flows were overvaluing the exchange rates in a way that was not supported by each country s underlying fundamentals. In order to profit from the overvaluation of currencies, speculators began to sell the Asian currencies they felt were overvalued, starting with the Thai baht. The speculators incentive rested in the profit they anticipated to earn by borrowing funds in the country of the overvalued currency just before they depreciated and investing the funds in another currency. This speculative selling forced the currencies to float and be significantly depreciated as governments found the cost of currency support to be excessive. Traditionally, government support for falling currencies has involved central bank buying of domestic currency using foreign exchange reserves or increasing interest rates to deter speculative action. However, the Asian countries affected by speculative selling felt their foreign exchange reserves were inadequate 1

11 for the currency support needed. Furthermore, interest rate increases would have to be significant to have any impact on currency values. This would drastically reduce domestic production and employment. However, while speculators may have had a major influence on the timing of the float for Asian currencies in 1997, the excessive currency volatility that resulted cannot be entirely blamed on their behaviour. The reliance of Indonesia, Thailand, South Korea, Malaysia and the Philippines on short-term borrowing from foreign sources was also to blame. Unlike longer-term borrowing associated with foreign direct investment, large proportions of these short-term capital flows were in the form of portfolio investment rather than being used to finance corporate expansion overseas. Unfortunately, there is a greater incentive for portfolio investors to withdraw their funds once the currency value falls. In the case of Asian countries in 1997, the reversal of capital flows was provoked by the growing unfavourable market sentiment about future profitability of firms producing in Asian regions. As depreciating currencies would decrease firm profitability, both domestic and international investors quickly liquidated their share holdings and other investments in Asian markets and invested elsewhere. As a significant percentage of firms listed on Asian stock markets had some form of exposure to foreign exchange risk, the impact of this liquidation on currency volatility was significant. Consequently, the reversal of capital flows generated by speculative behaviour on Asian currencies had a greater impact than might have been expected. 5 TRANSMISSION OF EXCHANGE RATE CHANGES It is well known that movements in one currency can affect other currencies when there are trade and financial linkages. A country experiencing currency depreciation will find it more expensive to purchase imports and meet debt repayments denominated in foreign currencies, but will earn more from export sales denominated in foreign currencies. Unfortunately, for the Asian countries forced to float their currencies in 1997, their increasing current account deficits indicate that any benefits from improved trade balances would not fully offset their higher foreign debt levels. Speculators realised that as the currencies of these countries continued to weaken, they would find it increasingly difficult to meet foreign debt repayments. Furthermore, the adverse effects on growth created by the higher foreign debt would 11

12 see import demand decline. Consequently, speculative pressure began to build on currencies that would be affected either now or at a future date by these events. This speculative pressure was not isolated to currencies with similar underlying fundamentals, as just the existence of trade or financial links was enough to encourage speculative behaviour. The speculative attacks on the Thai baht that started in 1996 and forced the Thai baht to float on July quickly shifted to the neighbouring countries of the Philippines, Malaysia and Indonesia. Economic activity was also beginning to weaken in these countries, so speculators felt the linkages between the countries would only aggravate the situation. The Philippine peso was floated on July , following a brief period of interest rate increases and government intervention. Malaysian authorities allowed the Malaysian ringgit to depreciate while Indonesian authorities permitted the Indonesian rupiah to float on August (see IMF [1997,p 18]). Korea had already devalued their currency against the United States dollar during 1996 and early 1997 to account for their growing current account deficit. Consequently, the Korean won was not really affected by speculative pressures until after August 1997 (see IMF [1997,p 16]). The Korea won was floated in December The impact of a currency depreciation on currencies supported by strong underlying fundamentals was illustrated by the depreciation of the Australian dollar, New Zealand dollar and New Taiwan dollar against the United States dollar during the second half of The underlying fundamentals supporting these currencies did not indicate they should be depreciated. For example, Australia was experiencing low levels of inflation and positive economic growth. Even the Reserve bank of Australia felt that the Australian dollar s value against the United States dollar had moved outside the range of the country s economic fundamentals. As a result it intervened in the foreign exchange market for the first time since 1993 to support the Australian dollar on January However, currency traders felt that regardless of their underlying fundamentals, these currencies would be adversely affected by any future slowdown in trade and forfeiture of loan repayments. Thus their trading placed downward pressure on these currencies. 12

13 6 CONCLUSION The recent experience of excessive exchange rate volatility for Asian currencies that converted to floating exchange rate regimes in 1997 cannot be entirely blamed on speculative behaviour. Speculators may have implemented trading strategies that took advantage of the fact that values of some of these currencies were not truly representative of their underlying fundamentals. However, their ability to do so shifts some of the blame onto the policies adopted by the governments of the affected countries. If countries want to maintain a fixed exchange rate regime as well as liberalise their capital markets, they need to ensure their currency values do not become misaligned with their underlying economic fundamentals. Unless exchange rates are adjusted to account for changing economic fundamentals, currencies will be left open to speculative attacks and the reversal of capital flows that can eventuate. However, this does not mean that government policies aimed at macroeconomic stability will ensure exchange rate stability. The existence of international capital flows has allowed market pressures and volatility of exchange rates to increase. Furthermore, the growth in short-term capital flows has meant the repercussions on exchange rate stability of capital flow reversals will be more severe than in the past. Consequently, domestic financial policies need to impose some form of prudential supervision on financial institutions to deal with the increased reliance on short-term capital flows. 13

14 REFERENCES BIS., The Maturity, Sectoral and Nationality Distribution of International Bank Lending, Bank For International Settlements, January. Bank of Korea Financial System in Korea. Lloyd K.(199) Exchange Rate Regimes And Monetary Policy. Reserve Bank Bulletin, Vol 53, No.2. Dean J.W Recent Capital Flows to Asia Pacific Countries: Trade-offs and Dilemmas. Journal of the Asia Pacific Economy, vol.1, no.3,pp Garnaut, R. 1991a. Economic stability and growth in the Pacific: an overview. The Pacific Economy: Growth and External Stability, edited by K.A. Mohamed Ariff, Allen and Unwin, Sydney. Grenville S Exchange Rates and Crises. Talk to Third Biennial Pacific Rim Allied Economic Organisations Conference Bangkok - 16 January International Monetary Fund, International Financial Statistics, June 1995,p.8. International Monetary Fund, World Economic Outlook: Interim Assessment, December Lui Y.H 199. On Fixed and Flexible Exchange Rate Regimes: A Literature Review, Working Paper Series No.17, City Polytechnic of Hong Kong. Moreno R Macroeconomic Behaviour During Periods of Speculative Pressure or Realignment: Evidence from Pacific Basin Economies. Federal Reserve Bank of San Francisco Economic Review, no 3, pp Nasution A Financial Institutions and Policies in Indonesia. Institute of SouthEast Asian Studies. Skully M.T Financial Institutions And Markets In The Far East. The Macmillan Press Ltd. Skully M.T and Viksnins G.J Financing East Asia s Success: Comparative Financial Development in Eight Asian Countries. The Macmillan Press Ltd. Tan Chwee Huat Financing Markets and Institutions in Singapore. Singapore University Press. Ninth edition. Zhang J.H and Zheng J.X Challenges and Opportunities for Foreign Banks in China. Asia Research Centre on Social, Political and Economic Change. Murdoch University, Western Australia. Wickham P. June The Choice of Exchange Rate Regime in Developing Countries. IMF, Vol.32, pp

15 TABLE 1: EXCHANGE RATE REGIMES i Australia Prior to December 1971 December 1971 to September 1974 September 1974 to November 1976 November 1976 to December 1983 Since December 1983 Fixed to sterling Fixed to USD Fixed to trade-weighted basket Flexible peg to trade-weighted basket. Free float China To present Dual fixed exchange rate system to the Hong Kong Prior to June 1972 June 1972 to November 1974 November 1974 to October 1983 October 1983 to present Indonesia Prior to November 1978 November 1978 to August 1987 Since August 1987 Japan Prior to February 1973 February 1973 to present Malaysia Since 197 New Zealand Since late 1997 Prior to July 1973 July 1973 to June 1979 July 1979 to June 1982 June 1982 to March 1985 Since March 1985 Philippines Prior to October 1984 October 1984 to July 1997 Since July 1997 Singapore Prior to June 1972 June 1972 to June 1973 Since June 1973 South Korea Prior to January 198 January 198 to March 199 March 199 to December 1997 Since December 1997 Thailand 1981 to November 1984 November 1984 to July 1997 Since July 1997 Taiwan Prior to February 1979 February 1979 to present United States Dollar. Fixed to sterling. Fixed to United States Dollar Free float Currency board introduced to fix the USD at $1USD:$7.8HKD Fixed to USD Fixed to trade-weighted basket Free/managed float Fixed to United States Dollar Free Float Fixed to trade-weighted basket. Free/managed float Fixed to USD Fixed to trade-weighted basket Crawling peg to trade-weighted basket Fixed to trade-weighted basket Free float Margins around a guiding rate set daily. Managed float Free float Fixed to sterling Fixed to United States Dollar Free float Fixed to USD Fixed to multi-currency basket (tradeweighted basket and SDR basket) Managed float ceiling based on weighted average of inter-bank transactions on previous business day Free float Fixed against USD Fixed to trade-weighted basket Free float Fixed to United States Dollar Free float i Managed float implies that the exchange rate can be fixed within a band or are subject to intervention from time to time. A free float allows for intervention to occur on a less frequent basis. 15

16 TABLE 2: EXCHANGE RATE Country Mean Minimum Maximum Spread (%) Hong Kong Australia New Zealand Singapore Taiwan Malaysia Philippines Thailand Japan China Korea Indonesia TABLE 3: EXCHANGE RATE VOLATILITY BETWEEN 2/1/86 AND 17/8/98 Country Mean Minimum Maximum Standard deviation Hong Kong Singapore Australia Japan Taiwan New Zealand Malaysia Philippines Thailand Korea China Indonesia TABLE 4: EXCHANGE RATE VOLATILITY BETWEEN 1/1/97 AND 17/9/98 Country Mean Minimum Maximum Standard deviation Hong Kong China Taiwan Australia Japan New Zealand Singapore Philippines Malaysia Thailand Korea Indonesia

17 TABLE 5: ECONOMIC FUNDAMENTALS ii China Real GDP growth Inflation General government balance Current account balance Hong Kong SAR Real GDP growth Inflation General government balance Current account balance Indonesia Real GDP growth Inflation General government balance Current account balance Japan Real GDP growth Inflation General government balance Current account balance Malaysia Real GDP growth Inflation General government balance Current account balance Philippines Real GDP growth Inflation General government balance Current account balance Singapore Real GDP growth Inflation General government balance Current account balance South Korea Real GDP growth Inflation General government balance Current account balance Taiwan Province of China Real GDP growth Inflation General government balance Current account balance Thailand Real GDP growth Inflation General government balance Current account balance Source: IMF's World Economic Outlook database. ii Real GDP growth is the annual percentage change while inflation is measured by the consumer price index and is in terms of annual percentage change. The general government balance and current account balance are measured in terms of their percentage of GDP. 17

18 TABLE 6: CAPITAL FLOWS AS A PERCENTAGE OF GDP iii China Net private capital flows Net direct investment Net portfolio investment Other net investment Net official flows Indonesia Net private capital flows Net direct investment Net portfolio investment Other net investment Net official flows Malaysia Net private capital flows Net direct investment Net portfolio investment Other net investment Net official flows Philippines Net private capital flows Net direct investment Net portfolio investment Other net investment Net official flows Singapore Net private capital flows Net direct investment Net portfolio investment Other net investment Net official flows South Korea Net private capital flows Net direct investment Net portfolio investment Other net investment Net official flows Taiwan Province of China Net private capital flows Net direct investment Net portfolio investment Other net investment Net official flows Thailand Net private capital flows Net direct investment Net portfolio investment Other net investment Net official flows Source: IMF's World Economic Outlook database. iii Annual averages 18

19 EXCHANGE RATE MOVEMENTS AND VOLATILITY FIGURE 1: Australia FIGURE 2: New Zealand FIGURE 3: China FIGURE 4: Hong Kong

20 FIGURE 5: Indonesia FIGURE 6: Japan FIGURE 7: Malaysia FIGURE 8: Philippines

21 FIGURE 9: Singapore FIGURE 1: South Korea FIGURE 11: Taiwan FIGURE 12: Thailand