Asian Financial Crisis

In the summer of 1997, an economic and currency crisis rocked the Asian markets. One by one, Southeast Asian countries such as Thailand, Indonesia, Korea and Japan saw their economies crash in the wake of heavy foreign investment. An economic boom had made the region an attractive investment opportunity for much of the 1990s. By 1997, however, domestic production and development had stalled, and foreign investors grew nervous. A divestment run on the Thai baht triggered the crash. Large corporations, extremely dependent upon the confidence of foreign investors failed to meet debt obligations and began to fail throughout Southeast Asia. Currencies throughout the region faltered and nosedived from their mid-1990s positions of stability. The causes of the Asian economic crisis are varied. Lax oversight of corporations had ramifications in economic downturns that were not a concern in the mid-90s boom. Macroeconomic policies of the southeast Asian countries made their economies vulnerable to the uncertain confidence of their foreign investors. Despite this, Corsetti, Pesenti and Roubini (1998) make the point that, ?market overreaction and herding caused the plunge of exchange rates, asset prices and economic activity to be more severe than warranted by the initial weak economic conditions.? Much of the crisis that began in 1997 has roots that go back further to the area?s economic growth that started in the early 1990s.

Although many economists consider the Asian economic collapse to have begun in Thailand, conditions throughout the region meant that other countries? economies were destabilized to the extent that they quickly followed Thailand.

Throughout the early 1990s, growth in Southeast Asia attracted much foreign capital. However, by 1995 and 1996, Thailand?s current account deficit had grown (from 5.7% in ?93 to 8.5% in ?96 [Pesenti et al., 1998]). When domestic production slowed, this account imbalance represented an even greater percentage, when compared to GDP. Much of the instability in Thailand?s economy was brought about by heavy short-term borrowing that required stringent debt maintenance. A boom in real estate and the Thai stock market attracted foreign speculation that could not be sustained in the face of investor doubts. The Thai government attempted to shore up shaky investor confidence by officially backing the financial in...

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...r 1997 are from the Economist Intelligence Unit Country Report, 2nd quarter 1998.

Table 2. Non-Performing Loans (as proportion of total lending in 1996)

Korea 8%

Thailand 13%

Indonesia 13%

Hong Kong 3%

Malaysia 10%

China 14%

Philippines 14%

Taiwan 4%

Singapore 4%

Source: 1997 BIS Annual Report; Jardine Fleming.

Table 3. Debt Service plus Short-Term Debt, World Bank Data (% of foreign reserves ).

1990 1991 1992 1993 1994 1995 1996

Korea 127.4 125.9 110.4 105.7 84.9 204.9 243.3

Indonesia 282.9 278.8 292.0 284.8 278.0 309.2 294.2

Malaysia 64.0 45.9 45.6 42.4 48.7 55.9 69.3

Philippines 867.6 257.0 217.1 212.6 172.0 166.6 137.1

Thailand 102.4 99.3 101.3 120.3 126.6 138.1 122.6

Hong Kong 30.5 26.9 22.8 20.6 22.0 16.8

China 55.3 43.7 108.6 113.7 54.1 49.6 38.5

Taiwan 23.9 22.3 23.1 25.2 23.7 24.2

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