East Asian Crisis of 1997

1
East Asian Crisis of 1997
2
Background

• Prior to mid-1997, the economies of Thailand,
  Indonesia,
• Malaysia, the Philippines, Hong Kong, Singapore
  and
• South Korea were experiencing rapid growth and
• foreign investment.
• These economies were attractive to foreign
  investors due
• to their high interest rate returns.
• Credit readily available which led to increasing
  asset prices
• As a result the economies were experiencing
  growth in output,
• but growth and demand were exceeding production -
  the result -
• the economies were overheating as well as the
  expectations of
• foreign investors

3
Causes

• Rapid GPD growth attracted foreign investors
• Government spending increased govt had to
  increase
• borrowing
• Government was funding growth with increased
• foreign investment short-term debt to make to
  make
• it appear it appear more attractive
• Output was not keeping up with demand

4
Causes (contd)

• Exchange rates were pegged to the U.S. Dollar
• As the value of the U.S. Dollar increased so to
  did the
• value of the exports, thus decreasing demand for
  their
• exports
• East Asian governments were artificially propping
  up
• their exchange rates by spending their foreign
  currency
• reserves to purchase excess domestic currency

5
Causes (contd)

• Since the governments were unable to continue
• propping up the currency, they decided to allow
  the
• currency to float on the market
• This caused the currencies to devaluate as
  investors
• were selling the home currency for U.S. dollars
• Bank deregulation in the region in the early
  1990s
• lead to governments and institutions

6
Results

• Massive account deficits
• Permanent currency devaluations
• Collapse of economic sectors
• Large numbers of bankruptcies leading to
  increased
• unemployment (small businesses had difficulty
  obtaining financing to continue operations)
• Social unrest (political instability, protests,
  etc.)

7
Results (contd)

• International Monetary Fund (IMF) stepped in
  with
• bailouts and new regulations
• IMF viewed as not handling this crisis well,
  mishandling of situation caused decreased
  investment in developing nations globally
• IMF lost much influence in emerging economies

8
Lessons Learned

• The make-up of debt in East Asian countries was
  primarily short term debt as opposed long term
  debt
• The foreign capital flow (FDI) in these
  countries was in predominately portfolio
  management rather than projects
• There was a strong mismatch between the savings
  and investments
• The of foreign reserves as compared to total
  debt was low