1997

THE ASIAN ECONOMIC CRISIS

 ABOUT ASIAN ECONOMIC CRISIS
• Started in the early summer of 1997.
• Was initiated by 2 rounds of currency depreciation.
• Affected the following countries: Thailand, Malaysia,
Philippines, Indonesia, Taiwan, South Korea, Singapore and
Hong Kong.
• 4 basic reasons for the economic crisis to occur:
• Shortage of foreign currencies
• Inadequately developed financial sectors
• Effect of crisis on USA and other parts of the world
• Role of International Monetary Fund (IMF)
 FACTORS BEHIND ASIAN ECONOMIC CRISIS

• Underlying causes of Asian Economic Crisis

• Unsustainable current account deficits
• Over dependence on short term foreign funds
• Poor regulation of the economy
• Over inflated asset prices
• Macro-economic Policy: Fixed Exchange rates
• Initial triggers of the events in South East Asia
• Changed sentiment amongst investors in South East Asia
• Speculation by participants in the currency markets.
• Contagion
 EFFECTS OF ASIAN ECONOMIC CRISIS

• Equity markets
• Competitive currency devaluations
• Interest rates
• The real economy
 THE ROLE OF IMF AND ITS HANDLING

• Financial assistance
• The austerity programme
• Fiscal policy
• Monetary Policy
• Restructuring
• Criticisms
 GLOBAL IMPACT OF ASIAN ECONOMIC CRISIS

• The wealth effect: Falls in equity market

• International Trade
• Foreign direct investment
• Economic growth
ASIAN ECONOMIC
CRISIS, 1997 IN
THAILAND
 GLIMPSE OF THAILAND ON AEC

• From 1985-1996, Thai economy had an impressive growth rate of 9% and

current account deficit barely exceeded 5%.
• Referred to as “Bubble Economy”.
• At the same time, massive capital inflows were accumulated progressively
along with a high interest rate differential and under fixed exchange rate
regime, including a higher degree od deregulation.
• But the favorable time didn’t last long.
• Foreign funds were poured into the country to take the advantage of high
interest rate differential and to gain from Baht depreciation.
• Circumstances worsened through short term borrowing abroad, primarily
to finance the long term projects, leading to currency mismatches.
• As a result, balance sheet crisis occurred due to sudden capital outflows.
• Foreign short term liabilities had exceeded international reserves in 1996.
• As soon as the Baht was floated, foreign debt in local currency overshot.
 WEAKNESSES IN THAILAND ECONOMY

• Sustaining a fixed exchange rate when it was no longer suitable,

• Allowing too many short-term capital flows to accumulate with a
high degree of currency speculation,
• Lacking a sufficient risk management system at the national level as
well as regional level.