The East Asia Crisis

1
The East Asia Crisis
2
Prior to the Crisis

• The Asian Miracle
• 94.1 billion dollars flowed into East Asia
  between 1991 and 1997
• Growth was fueled by export promotion, industrial
  policy, lowered trade barriers, and the rapid
  accumulation of physical and human capital
• By 1992, income per capita averaged 11,100

3
The Collapse of the Thai Baht

• July 1996 Bangkok Bank of Commerce fails and the
  Bank of Thailand expands the money supply to
  support the financial systems, putting pressure
  on the baht.
• May 14, 1997 The stock market declines 7 percent
  amid political instability
• June 19, 1997 Finance Minister Virava resigns
  sending the stock market tumbling 11 percent
• July 2, 1997 The fixed exchange rate is
  abandoned and the Thai is floated freely,
  devaluing 25 percent

4
What Caused The Crisis?

• Factors contributing to the crisis
• Speculative attacks
• Deficits in balance of payments
• Inefficient financial systems
• Lack of capital controls
• Exchange Rate regimes
• External debt

5
Speculative Attacks

• Korea Widespread corporate bankruptcy from large
  firms that borrowed heavily caused foreign banks
  to become weary that their loans would not be
  repayed.
• Indonesia Large scale borrowing from off-shore
  banks with loose regulation made the extent of
  the firms debt understated.
• Malaysia The real estate bubble burst lead to
  foreign investors selling to sell their stocks
  causing the stock market to crash and Malaysian
  banks were left with bad loans.
• Other countries Contagion effect the crisis
  spread because of investors worrying that others
  countries in the region would face similar
  problems

6
Balance of Payment Deficits

• In Indonesia and Thailand, the current account
  deficit was above 5 of GDP.
• ASEAN countries and Korea had a combined deficit
  of 33 billion from 1995-1996 that jumped to 87
  billion in 1998-1999.
• Mostly driven by overvalued currency and over
  lending to moral hazard borrowers.

7
Inefficient Financial Systems

• Financial institutions were not especially
  concerned with over lending due to explicit and
  implicit government guarantees
• Mismatch of the maturities of financial
  institutions' assets and liabilities
• Deterioration in the quality of banks' portfolios
• Lack of ability to assess credit risk

8
Capital Flows

• The majority of the East Asian economies engaged
  in capital market liberalization.
• Hot money flowed out of the countries quickly
  when negative speculation of occurred leaving
  financial institutions liquidity strapped.
• Portfolio equity investment went from 12.4
  billion in 1996 to an outflow of 4.3 billion in
  1997 in Korea, Indonesia, Malaysia, Philippines
  and Thailand.
• Capital inflows of 73 billion turned into
  outflows of 30 billion in 1997.

9
Exchange Rate Regimes

• Pre-Crisis Hong Kong, Indonesia, Korea,
  Malaysia, Philippines, Singapore, Taiwan and
  Thailand pegged their currencies to the US
  dollar.
• Depreciation of the local currencies on the
  foreign-exchange market means an increased burden
  of external debt.
• Pegged exchange rates forced Asian banks to keep
  interest rates comparable to US rates and compete
  with US trade.

10
Exchange Rate Regimes
11
Debt

• Thailand Foreign lending expanded from 20
  billion to 98 billion between 1990 and 1996.
• Nearly 86 went to Thai institutions
• 70 of loans were short term
• Corporations borrowed in dollars and loans became
  two or three times more expensive.

12
East Asia Crisis

• 1997 - 1998 economies hit by banking and exchange
  rate crises
• Greatest economic crisis since Great Depression
• Most literature focuses on
• Japan, Hong Kong, South Korea, Singapore, Taiwan,
  Indonesia, Malaysia, Thailand
• Most affected
• Indonesia, South Korea, Thailand, Philippines,
  Malaysia

13
East Asia Crisis

• 1996 investors poured 100 billion into East
  Asian countries 20 million workers benefited
• The crisis affected other parts of the world and
  caused a global financial crisis
• Russia Brazil affected
• Economies experienced reductions in poverty,
  income inequality, increase in life expectancy

14
Policies

• Policies implemented by domestic governments
  varied across economies
• Taiwan and Singapore basically escaped the crisis
• South Korea recovered fastest
• Malaysia and China did not accept IMF policies
• Prime Minister Mahathir kept interest rates low
• Recession shorter than other countries
• Who adopted IMF policies?
• Thailand, Korea, Philippines Indonesia

15
International Monetary Fund

• Provided huge amounts of money
• Bailout packages amounted to 95 billion
• Bailout money used to repay loans of Western
  bankers
• IMF imposed
• High interest rates, decrease in government
  spending, increase in taxes, devaluation of
  currency
• Political and economic changes
• Major restructuring
• Increased transparency
• Other minor reforms

16
GDP Unemployment Rates

• GDP Dropped significantly and led to
• High rates of unemployment, under utilization of
  capital, severe economic hardship
• In 1998 GDP fell by 13.1 in Indonesia, 6.7 in
  Korea, and 10.8 in Thailand
• Unemployment Rates
• Malaysias unemployment rose to 405,000
• Hong Kongs unemployment rose to 152,000
• Thailands unemployment rose to 1.1 million
• Indonesias unemployment rose to 13.7 million
• In South Korea, urban poverty tripled
• In Indonesia, poverty doubled

17
Devaluation

• Thai authorities decided to float the Baht in
  July 1997
• Crisis spread across the region
• Thailand, Korea, and Indonesia devalued their
  currency
• Exchange rate movements had consequences
• East Asian financial institutions were bankrupt
• Foreign lenders were uncertain of repayment
• Insolvency spread across the economies

18
Deteriorating Financial Conditions

• Fuelled further withdrawal of capital
• Firms who borrowed prudently were having trouble
  obtaining credit
• Financial sector problems spilled into economic
  activity
• In Thailand lenders reduced exposure
• Creditors fled region

19
Who were the victims?

• Children were the victims of the East Asia crisis
• Gains in child mortality
• Less vaccinations
• Reduced malnutrition
• Maternal mortality, approximately 40,000 women
• Sanitation and education threatened
• 33 Million children suffered from malnutrition
• Thailands UNICEF Ambassador Anand Panyarachun
  speaks about East Asian crisis