1997 Asian Financial Crisis 255m6n

1997 Asian Financial Crisis

Piyush Kumar - 179278088

Pre Crisis Scenario • Until 1997 the countries of East Asia like Thailand, South Korea, Hong Kong, Singapore, Taiwan, Indonesia were having very high growth rates (8-12%) • Age of Liberalization in South East Asian countries • Foreign Capital Inflows: Growth was mainly funded by ‘Hot Money’ – Flow of funds from one country to another in order to earn a short-term profit on interest rate differences – Maintained High Interest rates to attract foreign investments • Rapid industrialization and huge investment in real estate sector • Maintained fixed exchange rate to attract foreign investment – Pegged to the U.S. dollar

Financial Crisis • A period of financial crisis – Beginning July 1997 • Started in Thailand – Thailand's economy developed into an economic bubble fuelled by hot money – Over exposure to foreign investment – caused by speculative attack – Resulting collapse of the Thai Baht

• Also affected Indonesia, South Korea, Malaysia, Hong Kong & Philippines • Debt-GDP Ratios went up to 180% in Asian countries • Causes – No Prudent regulation – Lack of risk management

• International Monetary Fund (IMF) stepped in to initiate a $40 billion program to stabilize the currencies • “Tiger economies" saw their stock markets and currencies lost about 70% of their value

Thailand Condition Before Crisis

Crisis

Prominent economy of South-east Asia. During 1985-96 was growing at highest rate of 9%. Real Estate sector was booming. High interest rate attracted investments from US and west. • Export growth was very high.

• US Interest rate Increases the Hot money starts to flow back to US • Fear among foreign investors – severe speculative attacks • Trigger the outflow of dollar, resulted in devaluation of baht and it reached its lowest point of 56 units per $.

• • • •

Impact  The Thai stock market dropped 75%. Finance One, the largest Thai finance company until then, collapsed  Unemployment & Political instability

Impact on other countries Indonesia • Macro economical factors were strong Initially • After Thailand floated its currency, Rupiah band widened from 8% to 12%. • In August rupiah comes under severe speculative attacks which devalued it to greater extent. • Moody's eventually downgraded Indonesia's longterm debt to "junk bond".

South Korea • The banking sector was burdened with nonperforming loans. (NPA) • No returns and Profit on these NPA’s • Stock Exchange fell drastically • Excessive debt lead to takeovers

Philippines • Stock market fell sharply from 3000 points to 1000 points • Interest rates was raised by 3.75% • Overnight jump in the interest rate from 15% to 32% • Huge outflow of money • Adverse effect due to speculative attack.