Asian Financial Crisis Jianing Li/Wei Ye/Jingyan Zhang 2018/11/29
Causes--Current account deficit 1. Liberalization of capital markets. 2. Large capital inflow due to the interest rates fall in developed countries. Investment rates were above 30% of GDP in most Asian countries. 3. Persistent and sizable current account deficit should raise a concern. In Thailand, the current account deficit increased from 5.7% in 1993 to 8.5% of GDP in 1996. A country s current account deficit becomes unsustainable if it is unable to secure the necessary financing. 4. Whether current account deficit is good or bad depends on if the country spends its borrowed foreign funds on investments that can increase the productive capacity in the tradable sectors, otherwise its external solvency comes into question. 5. Over investment in non-tradable sectors like land and real estate. In Thailand, 40% of the financial intermediaries loans were in the real estate sector.
Current account deficit as % of GDP Causes--Current account deficit
Causes--Fixed exchange rate regime 1. Exchange rate policy in Southeast Asian countries was aimed at reducing volatility of the domestic currency in terms of the US dollar, lowering the risk premium on dollar-denominated debt. 2. It s unsustainable for a government with money-financed budget deficits to use a limited foreign reserves to peg its exchange rate. Whether to defend a pegged exchange rate depends on the tradeoff between short-run macroeconomic flexibility and longer-term credibility. 3. The market s anticipation of the inevitable collapse will generate a speculative attack on the currency. Defending a parity is more expensive, the crisis occurs through the self-fulfilling prophecy.
Causes--Over-guaranteed and under-regulated financial intermediaries 1. Moral hazard: Financial institutions are perceived to have implicit government guarantee and are unregulated. 2. Crony capitalism : There are close links between public and private institutions. 3. Investment in excessively risky and poorly-performing projects. The pre-crisis share of non-performing loans accounted for 13% of total lending in Thailand, 14% in the Philippines. 4. International dimension of moral hazard problems comes from the lack of sound risk assessment. Most of foreign debts were short-term, unhedged foreign-currency denominated liabilities. By the end of 1996, short-term liabilities account for over 50% of the total liabilities in the region.
Causes--Over-guaranteed and under-regulated financial intermediaries Foreign debt as % of GDP
Causes--Asset bubble 1. Excessively risky lending created inflation of asset prices. The overpricing of assets was sustained by a circular process--the proliferation of risky lending drove up the prices of risky assets. 2. When the bubble burst, the crisis involved the same circular process in reverse, falling asset prices made the intermediaries insolvent and led to further asset deflation. 3. The boom-bust cycle in the asset markets preceded the currency crisis.
Major Areas
1997.2-1997.3 Crisis in Thailand (Assets Bubble & Unregulated Financial Institution) The speculators rushed into market to sell Baht Thailand government took out $23 billion to defend the Baht Thai government raised interest rates to defend the Baht 1997.7-1997.8 (Crisis started) Thailand switch from Dollar pegged to Floating Exchange Rate, Thai Baht depreciated 17% within one day Thai government spent $10 billion of its $38 billion foreign reserves to save the Thai currency but failed Thai Central Bank closed 42 financial institutions because they borrowed for short term and lent in long term End of 1997 Thai stock market had declined by 41% Thai Baht depreciated by 56% Thailand's 15 banks and 91 finance institutions (holding large non-performing real estate loans) were on the edge of solvency
Crisis in Thailand (Assets Bubble & Unregulated Financial Institution) In the 1997 fiscal year, the government had a budget deficit of 44 billion baht the first deficit after nine consecutive years of surpluses. In 1998, Thailand s GDP shrunk by 10.5%, and unemployment rate rose to 8.5 percent (2 million workers). Inflation rose to 10% in 1998 compared to 6% in 1997 Before the crisis, the interest rate in Thailand was 7.5% but the rate skyrocketed to 58% at the beginning of 1998 because of the attempt to attract capital. GDP shrunk 2% further in 1999 and unemployment rose to 9.5 percent (3 million workers) Foreign reserves remained low at 25 billion Thai Baht.
Crisis in Indonesia (Confidence Crisis & Unregulated Financial Institution) 1997.7 Bank Indonesia increased the floating range which the Rupiah could float from 8% to 12%. But the 12% range was not enough for the devaluation of the Rupiah 1997.10-11 Because government lacked sufficient foreign reserves, it forced Bank Indonesia to allow the currency to float freely Indonesian companies rushed to buy dollars, putting more downward pressure on the rupiah The Government liquidated 16 private domestic banks (borrowed short term, lent long term) 1998.1 Indonesia Rupiah devalued by 75% compared to July 1997 Stock markets had also reduced to half of their previous value
Crisis in Indonesia (Confidence Crisis & Unregulated Financial Institution) 75% of the firms were in distress during the crisis in 1997 In 1998, Indonesia s GDP fell by 13.1% and three years after the crisis the GDP was still 7.5% lower than what it was before the crisis Before the crisis, inflation is 6.2%. In 1998 inflation really boomed to 58% 15% of male workers lost their jobs by August 1998. The number of people living under the poverty line increased from 27 million to over a hundred million, which was about half of the total population May 1998, President of Indonesia Suharto announced his resignation
Crisis in Malaysia (Confident Crisis) 1997.7 Malaysia s central bank tried to defend the foreign exchange rate but lack of reserves, and finally was forced to float the Ringgit Bank lost about $1.5 billion in the floating exchange rate 1997.12 Malaysia s capital outflows almost doubled to 4.1% from pre-crisis levels of 2.2% because of the loss of confidence by investors. 1998.1 Ringgit depreciated from 2.42 per US dollar in April 1997 to all-time low 4.7 per US dollar. 1998.8 Government pegged the exchange rate at 3.8 ringgit to the US dollar to avoid further panic and loss
Crisis in Malaysia (Confidence Crisis) 30% of the businesses went bankrupt The financial crisis also affected the stock markets: between July 1997 and January 1998, approximately $225 billion in share values was lost. Local stock index fell from approximately 1300 to nearly 263 points in September 1998, losing $600 billion value. Malaysia's GDP to shrink from US$100.8 billion in 1996 to US$72.2 billion in 1998. The Malaysian GDP did not recover to 1996 levels until 2003. Malaysia s GDP growth levels before the crisis were fluctuating at 9%. In 1997, the growth rate was 7%, but in 1998 it declined by 7.4%, turning to negative growth. Malaysia s inflation was around 4% before the crisis. In 1998 inflation rose to over 5 percent and reached high at 6.2% in June 1998. The poverty line remained high at 8% of the total population
Crisis in Philippines 1997.7 In the beginning of the July, Philippines central bank raised the overnight borrowing rate from 15% to 32% Central bank also spent $1 billion foreign reserves to intervene the market but no effect on the outside pressure Within a week, Philippines announced its floating exchange rate plan. Philippines peso devalued 11.5% in a single day 1997.8-1998.12 A month after the crisis, Philippine stock market fell by 9.3% The interest rate on 90 day Treasury bills was 19.1% in January 1998 By the end of 1998, the Philippine stock market was down by 48% of value. (least affected country)
GDP of major areas in Crisis period
GDP per Capita % of major areas in Crisis period
Currencies of major areas in Crisis period
Unemployment rate of major areas in Crisis period
Results--Thailand The Asian Financial Crisis produced the worst economic slump in Thailand since World War II. The financial sector was left holding $31 billion in bad debts Unemployment increased by 23 percent to 1.3 million people Stocks fell to their lowest levels in recent memory, banks collapsed, construction stopped, offices buildings were empty, hotels lacked guests. There were suicides. Metal health hotlines were opened.
Results--Thailand
Policy Responses---Thailand IMF Bailout Thailand received $17.2 billion from the IMF. The IMF demanded an end to the political patronage system in Thailand and reforms to system that encouraged cronyism and corruption. Financial restructuring The practice of borrowing from abroad in the short term has been curtailed. The government closed two thirds of Thailand s financial houses and forced the sale of most of its 15 major commercial banks. Thailand created bankruptcy court in 1999.
Results--Indonesia It became the hardest-hit country because the crisis not only had economic but also significant and far-reaching political and social impact. The currency was set to float freely starting from August 1997. Soon it began depreciating significantly. In the years prior to 1997 many private Indonesian companies had obtained unhedged, short-term offshore loans in US dollars. Indonesian companies (including banks; some of which were known to be very weak) suffered huge losses. The economy collapsed.
Results--Indonesia
Policy Responses---Indonesia
Results--Malaysia
Policy Responses---Malaysia
Results--The Philippines
Policy Responses---The Philippines
Lessons