The 1997 Asian Financial Crisis

The 1997 Asian Financial Crisis

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The Asia turmoil begun in the middle of summer of 1997. The problem started in Thailand when Bath(known as Thai''''s

curencey) was geting weaker and weaker against US dollars. At that point, the rest of the world started to see that Thai''''s

economy was starting to fall apart. Some pople predicted that the problem would not stay longer than a few months. However,

it was wrong. As manner of fact, the problem spread amongs some of Asian Countries. Even the mighty Japan was effected by

this problem. United stated of America was also effected by this problem. That was a time that the US stock market was going

down due to the fact that Many American cooporation invested in this some of Aisan countries.

Even today, the problem has not been fully recovered and who knows when.


The main problem of the turmoil is the lack of management. Each countries has all similar problem. As we found out in our

research, we noticed that banking holds the main role and the key player to the turmoil. Many privates and Government

banking loaned too many credit for a big and similar project at the same time without checking the creditor''''s solvency. Of

course among the creditor also, the money supposedly . And this is, of course, the second problem of the cause of the turmoil.

Third, many creditors believe that their project will become successful without a proper preparation and planing.


Malaysia''''s National Economic Recovery Plan

Causes of the Turmoil in the Region

In today''''s world, large sums of money move across borders and provide more countries with access to international finance.

The daily currency turnover in the foreign exchange market in 1995 is about US$1.2 trillion, compared with an average of

US$190 billion a decade ago. The early 1990s saw the dramatic increase in the flows of private capital from the industrial

countries to the emerging countries. This was partly contributed by pension funds from the United States and Europe in search

for higher returns overseas. The amount of private capital flowing into emerging markets was US$50 billion in 1990; the figure

was US$336 billion in 1996. With greater international capital flows, financial markets become more volatile as money moves

across borders with a mere keystroke of a computer. The unusual successful economic performance in the region attracted

large inflows of foreign portfolio funds into the Asia Pacific region, which became a root cause for the currency crisis. During

the early to mid-1990s, China recorded growth rates between 9-14 per cent per annum, while Indonesia, Malaysia, and

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Thailand experienced high annual growth rates that ranged between 7-12 per cent. Rapid growth rates were also recorded in

Singapore, South Korea, and Taiwan.

While there were sizeable current account deficits for some countries, especially for Malaysia and Thailand, these were the

outcome of the shortfalls of private savings to match private investment, not public sector dissaving. Foreign capital inflows

made up for the shortfall in national savings to meet the very high national investment. While the net private inflows for China

and Vietnam were foreign, direct investment (FDI) dominated, short-term inflows were substantial for Indonesia, South Korea,

Malaysia, and the Philippines. Thailand had a high level of short-term inflows of around 7-10 per cent of GDP. During

1995-96, Malaysia''''s short-term capital was 4-4.5 per cent of GDP, while its FDI was at 5 per cent of GDP.

The decline in asset yields in the industrial economies prompted fund managers to invest into the Asian emerging assets, which

gave higher returns. The ASEAN countries suffered losses in competitiveness when the U.S. dollar, against which their

currencies were closely linked, appreciated against the yen beginning in mid-1995. The rapid economic growth of the

Southeast Asian economies was accompanied by rapid credit growth to the private sector and asset price inflation, including in

real estate markets and in equity markets, rising the concern that their exchange rates were not sustainable.

Weakness in the financial sector compounded the problem. The financial institutions in Thailand, Indonesia, and South Korea

were weakened by large-scale exposure to the property sector, high non-performing loans, and short-term loans that were

unhedged against currency movements. Inadequate disclosure of information and data deficiencies increased uncertainty and

adversely affected confidence. There was also the lack of transparency in policy implementation.

A brief explanation about IMF

IMF is not a charitable institution, nor does it carry out its operations at taxpayers'''' expense. It operates much like a credit

union. On joining the IMF, each member country subscribes a sum of money called its quota. Members normally pay 25

percent of their quota subscriptions out of their foreign reserves, the rest in their national currencies. The quota is like a deposit

in the credit union, and the country continues to own it. The size of the quota determines the country''''s voting rights, and the

United States, with over 18 percent of the share, is the largest shareholder. Many essential issues require an 85 percent

majority, so that the United States effectively has a veto over major Fund decisions. When a member borrows from the Fund,

it exchanges a certain amount of its own national currency for the use of an equivalent amount of currency of a country in a

strong external position. The borrowing country pays interest at a floating market rate on the amount it has borrowed, while the

country whose currency is being used receives interest. Since the interest received from the IMF is broadly in line with market

rates, the provision of financial resources to the Fund has involved little cost, to the creditor countries, including the United


MF- Supported Programs in Asia

IMF-supported program to countries like Thailand, Indonesia and Korea have called for a substantial rise in interest rates to

attempt to halt the downward spiral of currency depreciation. Over US$100 billion has been committed to the region under the

IMF auspices since the crisis began. Conditions attached to the loans parallel those of the Latin America crisis of the 1980''''s.

These programs have called for forceful, up-front action to put the financial system on a sounder footing as soon as possible.

The fiscal programs vary from country to country. In each case, the IMF asked for a fiscal adjustment that would cover the

carrying costs of financial sector restructuring--the full cost of which is being spread over many years--and to help restore a

sustainable balance of payments. In Thailand, this translated into an initial fiscal adjustment of 3 percent of GDP; in Korea, 1

1/2 percent of GDP; and in Indonesia, 1 percent of GDP, much of which will be achieved by reducing public investment in

project with low economic returns.

World Bank''''s Agenda to Restructuring the East Asian Economy

These are long-term issues and fixing the problems in these respective areas will take many years. Restructuring the industrial

sector, changing the governance of the banking and the corporate sector and the relationship to the States, and adjusting the

globalization process to the level and capacities of the economy is not something than can done easily.

Since the beginning of this crisis, about $110 billion have fled out the five major crisis countries - Korea, Thailand, Indonesia,

Malaysia, Philippines. This is about 10 per cent of the GDP of these countries. In addition to that, credits banking credits have

also been reduced by about $88 billion which is approximately another 8 per cent of the GDP. It means that about worth 18

per cent of the GDP of these countries has just vanished in terms of funding of the economies. This withdrawal of funds has had

the tremendous impact on the stock market and the exchange rate. Automatic corrections should come from the depreciation

of the exchange rates and from the booming of exports. Japan is in recession and is extremely sensitive to the region. The total

amount of credits that the Japanese bank banking sector has allocated or distributed to the region is worth about 40 per cent of

its total, still in these five countries - it is worth about 40 per cent of its capital. Given the vulnerability of the economies it is a

major additional problem for the Japanese financial sector. Japan is exporting about 20 per cent - is making about 20 per cent

of its exports in these countries, and the collapse of the economies there is impacting its performance. These countries are

making between 15 and 25 per cent of their trade with Japan, and the recession in Japan is a major blow for all of them and is

a major reason for this low demand that they are met with.

In order to get out of the crisis, World Bank addressed the issue of clarifying the environment. One has to have a dynamic

Japanese economy since Japan is an engine of growth in the region. The potential of the exports in Europe and in the US,

provided these economies remain in an acceptable shape, or dynamic as is the case in the US, the potential for export cannot

compensate in the short run for the decline in the markets in the regional and Japanese markets. Another issue is within the

region itself within the countries. However, the question is how to move an entire region up at the same time, given the fact that

there is no possibility of success for an isolated country in such a depressing regional environment. There is no alternative to

more expansionary micro policies right now. Inflating the domestic demand is the only way in which we can break the vicious

circle of transmission of contagion from one country to the other.

Another important thing is that there is room for major social programs in the region. These countries will not get through the

crisis without a very strong, very dynamic, very well thought social agenda. These agenda may be worth two, three, or four

points of GDP worth of public money. This is money, which is well invested and will pay off over the years especially as these

countries have not right now social safety net they have developed. There is also a third use of the money, which is the

recapitalization of the banking sector. Recapitalization by public funds of the banking sector makes sense only if in order to

have successful privatization process when the situation of the economy improves.

IMF Bailout - Rescuing the Rich

Oxfam International Briefing, April 1998

Oxfam International is concerned that IMF programs have been designed primarily with a view to bailing out reckless

international investors, whose activities have contributed to the present crisis. The implication of the poor has been left

unconsidered. There is clear evidence of increasing poverty and hardship among the vulnerable communities, which Oxfam

works. There is now a real danger that a combination of deflationary policies and cuts in social sector funding will erode the

significant advances made in poverty reduction over recent decades.

In Indonesia, Oxfam estimates that the number of people living below the poverty line could quadruple over the next 6 months

to affect 40 per cent of the population- the same incidence as in 1977. The number of people living in poverty will rise from 23

million to 100 million this year, with devastating implications for human welfare and social stability. Long-standing development

problems in Indonesia such as high maternal mortality rate, lack of access to safe water for 80 million people, widening

disparities in income- are bound to worsen. Recent field visits from Oxfam staff already point to distressing expansion of

poverty in Indonesia, because of economic crisis and a prolonged draught. There are huge number of people out of work, a

sharp rise in the price of essential food and non-food items, the breakdown of the distribution of basic goods and services and

the increasing violations of human rights. In West Timor, 75 per cent of families are eating one meal a day that often includes

Aputak, @ the bark of a tree normally used as cattle feed. Million of Indonesian households can no longer afford basic care, to

send their children to school, or to buy enough food. Many are meeting immediate needs by selling assets, thus risking plunging

further into poverty as the crisis continues.

In Thailand, a recent World Bank report highlights the impact on the poor increased unemployment; price rises in basic

foodstuffs and cuts in basic services. In particular, the report emphasizes the impact of the crises on children. As family incomes

fall, growing numbers have been forced to work, beg or enter prostitution. School drop out rates has risen and some families

can no longer affords education or transport. In Thailand, unemployment is expected to rise to 1.7 million in the coming year.

IMF insufficient attention has been paid to the specific circumstance of East Asia. Conditions attached to the loans parallel

those of the Latin America crises of the 1980''''s, demands massive deflation, with cuts in public spending and high interest rates

as the main policy instruments. The bias towards deflation and fiscal austerity is not only inappropriate, given the underlying

economic conditions, but threatens to turn recession into a full blown depression, with its attendant problems in terms of mass

unemployment and rising poverty. Monetary and fiscal policy has been tightened to the point of strangulation, threatening to kill

or disable the patient during the first phase of treatment. For instance in South Korea, the IMF wants to see interest rates

doubled to more than 15 per cent. This will inevitable lead to the early collapse of many companies, resulting in a loss of

production and employment opportunities. Intense fiscal pressure are also being applied to Thailand, where public spending is

to be reduced by the equivalent of 3 per cent of GDP. In Indonesia, public spending is scheduled to fall by around 10 per cent.

According to Indonesian Government sources, as many as 1.6 million primary and junior secondary school students may be

forced to withdraw from school. In real terms, government budgets for health and education have fallen dramatically.

Reduction in public spending could act as a further driving force for poverty, reducing basic services to the poor at precisely

the time when the need for them is increasing. The immediate consequences will be registered in the form of reduced

opportunities for education and health. In the longer term, public spending cuts could sever the link, which has been establish

between growth and equity, to the detriment of both. For instance, Thailand''''s economic problems are related to a deepening

skill shortage in sectors vital for the transition to a more diverse and technologically sophisticated economy. Deteriorating

educational performance will undermine prospects for such a transition.


Based on the analysis given by various sources that we gathered, we conclude that the root cause of the currency crisis in

South East Asia is due to large inflows in the form of credits and portfolio investment as well as capital through multinational

corporations, largely came from investors in the United States and Western Europe. The unusual successful economic

performance in the region attracted these inflows into the region. Most of our sources stated that, while these inflows had

permitted faster growth, they had allowed domestic banks to expand lending rapidly, fueling imprudent investments and

unrealistic increases in asset prices. According to Jeff Sachs, the Director of the Harvard Institute for International

Development, Thailand, in 1997, overvaluation of the real exchange rate, coupled with booming bank lending, heavily directed

at real estate. The overvaluation tended to push new investment towards non-tradable sectors-notably construction - away

from the tradable sectors that are necessary to provide the wherewithal for future servicing of foreign debts. Several sources

mentioned that most economies pegged their currencies to the dollar in recent years, even though their trade with the

advance countries was roughly equally divided between the US, Europe and Japan. When the dollar appreciated sharply

against the yen and the European currencies after 1995, emerging-markets currencies were pulled

along in its wake made their exports less competitive. Another source, IMF, stated that the key domestic factors that led to the

economic crisis appeared to have been: First, the failure to dampen overheating pressure

that had become increasingly evident in Thailand and many other countries in the region and were manifested in large external

deficits and property and stock market bubbles; second, the maintenance of pegged exchange rate regimes for too long, which

encourage external borrowing and led to excessive exposure to foreign risk in both the financial and corporate

sectors; and third, according to them, lax prudential rules and financial oversight, which led to a sharp deterioration in the

quality of banks'''' loan portfolios.

IMF further stated that political uncertainties and doubt about the authorities'''' commitment and ability to implement the

necessary adjustment and reforms exacerbated pressures on currencies and stock markets. They also blamed the emerging

countries'''' reluctance to tighten monetary conditions and to close insolvent financial institutions as an addition to the turbulence in

the financial markets. Countries like Thailand and Indonesia turned to IMF, the World Bank and other countries for financial

assistance but insufficient attention, especially by IMF has

been paid to the specific circumstances of East Asia. Their programs have been designed primarily with a view to bailing out

reckless international investors and implication of the poor has been left unconsidered. The bias towards deflation and fiscal

austerity is not only inappropriate, but also threatens to turn recession into full-blown depression. IMF applied

intense fiscal pressure to those countries such as Thailand and Indonesia where public spending was to be reduced by the

equivalent 3 per cent of GDP and 10 per cent of GDP consecutively. Reduction in public spending,

for example, was in the form of reduced opportunities for education and health. In Indonesia, for example, according to

Indonesia Government source, as many as 1.6 million primary and junior secondary school students may be forced to

withdraw from school.

George Soros, in his testimony to the U.S. House of Representatives on September 15, 1998, IMF imposed tough conditions

on the country concerned but did not imposed tough penalties on the lenders and the treatment on on lenders and borrowers

needed to to be corrected.

Chairman Alan Greenspan, in his testimonies before the Committee on Banking and Financial Services, U.S. House of

Representatives on November 13, 1997, stated that the recent crises would arguably have been better contained if

long-maturities properties loans had not accentuated the usual mismatch between maturities of assets and liabilities of domestic

financial systems that were far from robust to begin with. Greenspan advised economic policy makers in Asia to fend off

domestic presures that seek disengagement from the world trading and financial system.

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