1.

1Identify the following characteristics of the debt issuance:

I) Principal amount offered to the public SGD100 million
II) Interest rate .!" per annum
III) Payment arrears Semi#annual
I$) %umber of years the debt will be acti&e 10 years
1.'(alculate the following financial ratios:
I) (urrent ratio (urrent )sset * (urrent +iabilities
1!1,-. * ,-/-! 0 1../
ii) 2uic3 ratio (urrent assets 4 In&entory 50) * current liabilities

1!1,-. 4 0 * ,-/-! 0 1../
iii) Interest co&erage ratio 67I8 * Interest (harges
1'/-'! * '-,0 0 1..!
i&) 9eturn on e:uity 59;6) %et profit after 8a< * Shareholder=s 6:uity
-1!.! * -!!!'0 0 0.0.
1.7ased on the ratios you ha&e calculated in 1.'> discuss whether you would lend
money to the issuer.
) healthy current and :uic3 ratio indicate that the company5s) is financially sound and
we should assume going concern and that its funds are &ery li:uid. ) 1..! interest co&erage
ratio suggests that the company5s) should ha&e no problem paying interest payments and
fulfilling the loan. )lthough the 9;6 is wea3> as a lender> we are not concerned with the
profits of the shareholders> but simply if the company5s) can repay the loan and interest
charges.
'. Pro&ide a concise summary of the causes of the 1../ )sian financial crisis and the
resulting damages. Students are ad&ised to lin3 concepts taught in class to their
answer.
Strong growth was typical of economies in the South 6ast )sian region in the years
leading up to the currency crisis 5?c3innon 1../). Significant increases in stoc3 and land
prices in the region fueled foreign in&estments and lending> creating an economic boom. 8his
lasted until the mid#1..0s when growing competition and a wea3ening @apanese yen slowed
economic growth and reduced asset prices 5?oreno 1..!). 8hese e&ents triggered collapsing
currencies starting with the 8hai baht. In retrospect> the growth witnessed in 8hailand was
most li3ely caused by a large influ< of foreign capital facilitated by a pegged e<change rate.
?oreno suggests that poor credit allocation was also a factor> in which borrowers who were
well connected were also granted credit. In addition> financial intermediaries were protected
by go&ernment guarantees> creating se&ere moral haAard. 8his resulted in poor ris3
management and transformation and ga&e little incenti&e to ban3s to choose clients wisely.
8his became apparent in South Borea where companies with unhealthy debt ratios were
granted credit and had to rely on special go&ernment loans to ser&ice their debts.
Since it is common for financial intermediaries to practice siAe and maturity
transformation 5(asu '00,)> a sudden withdrawal of deposits would ma3e the system
&ulnerable to collapse and be unable to fulfill its obligations. 8his is because as li:uid
deposits> in the form of foreign in&estors> start to panic and withdraw> financial intermediaries
are left with collateral> often in the form of illi:uid and highly ris3y assets. In addition> the ris3y
lending practices that were present at that time suggests that a significant number of
borrowers would ha&e defaulted on their loans. ) wea3ening currency and slowed economic
growth would then cause these illi:uid assets to fall in &alue and be difficult to con&ert into
li:uid funds.

In )pril 1../> 8hai authorities suspended trading in finance company shares on the
7ang3o3 stoc3 e<change. 8his brought attention to the wea3ness in the economy that had
been disguised by large growth and in&estments. Cearing that if financial institutions losing
their credibility would do more harm to their currency> the 8hai authorities chose to de&alue
the 8hai baht instead. 7y %o&ember the same year> South 6ast )sian currencies dropped by
o&er fifty percent below their pegged le&els. Dowe&er> it was unli3ely that a financial crisis
could ha&e been a&oided either way as the re&aluation depreciated the currency on ban3
balance sheets. 8he e&ents in 8hailand triggered panic and speculation in the region>
affecting the ?alaysian ringgit and the Philippine peso shortly after. 8he ringgit depreciated
against the dollar by nearly fifty percent in the middle of ?ay 1../. Eee3s later> the
composite inde< of the Buala +umpur Stoc3 6<change fell by 11.. percent 5)riff 1...). In the
Philippines> the peso fell twel&e percent to the dollar when news spread that the country will
loosen controls on the peso 5Dolley 1../). 8he Singapore dollar also suffered a decline of
1!. percent against the FS dollar o&er a si< month period and the Straits 8imes Inde<
dropped appro<imately ,0 percent o&er a year. Dowe&er> because of a gradual de&aluation
and measures to reduce labour costs> the impact in Singapore was relati&ely mild 5@in '000).
In )ugust the same year> Indonesia decides to float the currency freely and resulted in
an immediate depreciation. %asa=a 51...) suggests that this is due to a lac3 of in&estor
confidence in the currency. )dditionally> go&ernment inter&entions distorted the mar3et and
frightened in&estors> pre&enting a natural rebound. Indonesia=s economy was also
fundamentally flawed> in a similar fashion to 8hailand> in which lenders were pro&iding credit
to either well connected clients or ris3y firms. 8here was also little super&ision and
accountability which fueled panic in Indonesia. Dowe&er> unli3e in 8hailand> Indonesian
authorities refused to implement the International ?onetary Cund=s 5I?C) policy
recommendations> delaying the receipt of much needed funds in face of a plummeting rupiah.
Indonesia=s president would e&entually agree to eliminate monopolies and insol&ent financial
institutions as per I?C macroeconomic policies but only after the rupiah reached 10>000 to the
F.S dollar.
In ;ctober the same year> Dong Bong=s e<change> the Dang Seng inde< fell by '
percent o&er four days 58he Fni&ersity of Dong Bong '001). Similar to Singapore> Dong
Bong=s economy was robust and well#regulated> but was still subGect to speculati&e attac3s on
its currency. Dowe&er> with support from the People=s 9epublic of (hina and their reser&es> in
addition to Dong Bong=s own e<change reser&es of FSH.0billion> it was able to defend its
currency from de&aluating. 8his outcome was not without conse:uence> as interest rates rose
to nearly '!0" and the interban3 rate reached '0" 5and subse:uently 1-" and 10"). )t its
lowest point> the stoc3 mar3et inde< was ,0" below its pea3.
Soon after the decline of the Dang Seng e<change> the South Borean won began to
decline. )t the beginning of the year> Borea was plagued by failing corporate entities.
Domestic financial intermediaries funded these local corporations using the influ< of foreign
capital> often ignoring usual business criteria. Dowe&er> as contagion spread from 8hailand>
Indonesia and Dong Bong> financial intermediaries no longer had the li:uidity to fulfill their
obligations. 8his prompted go&ernment inter&ention to guarantee the debt of local institutions>
essentially bailing them out. 7y the end of the year> the Eon had dropped by -0" against the
F.S dollar and the stoc3 mar3et had dropped by o&er 10". 8his was the result of Borean
financial intermediaries abandoning its efforts to defend the &alue of the won. Soon after>
South Borea re:uested for I?C aid.
8he crisis in )sia has effects that were felt in the rest of the world as the Dow @ones
Industrial )&erage declined /.1!" in the day of ;ctober '/> 1../. In addition> the %)SD)2
(omposite fell /" and the SIP -00 fell ,.!, percent on the same day. It is estimated that
H,, billion in mar3et capitalisation was wiped out 5F.S S6( 1..!). 8he panic caused F.S
authorities to suspend stoc3 mar3et trading temporarily. In @apan> se&eral top ran3ing firms
started to fail> including 8a3usho3u 7an3 and Jamaichi Securities> two of the largest financial
institutions in @apan. 8hese companies failed in spite of the go&ernment pledging to support
them caused consumer confidence to drop and caused widespread panic in the country 5Ito
1...). Ito states that the @apanese economy was fundamentally flawed as it was still
reco&ering from stagnation since 1..'. Eea3 e<portation from @apan was also a factor as
trade and in&estments in )sia are closely tied between countries. Sharp declines in land and
asset prices also resulted in many defaulted loans which wea3ened the ban3ing system in
addition to currency depreciation. 8he author auggests that @apan> among other countries> did
not ha&e the legal framewor3 to close insol&ent ban3s before the crisis hit in 1../. 7y @uly
1../> the @apanese Jen had depreciated by o&er 0" from pre#crisis le&els> although it
should be noted that the Jen had already been plagued by depreciation since 1..-.
)t the pea3 of the crisis> the I?C had gi&en funds to countries in the region to 3eep
affected financial intermediaries lending and increasing real output. 8hese countries most
notably included 8hailand> Borea and Indonesia. In addition to funds> the I?C also re:uired
the authorities of these countries to adopt policy changes according to I?C recommendations.
Such measures included structural reforms> in particular> the financial and corporate sectors>
in order to facilitate lending and growth. Strict monetary policies were also adopted> such as
the increasing of interest rates to stabilise e<change rates and fiscal polisies to gi&e
go&ernments ade:uate resources to finance the structural reforms. In certain countries> the
I?C had also demanded that certain conditions were met> such as in Indonesia when the
president was re:uired to close down insol&ent financial institutions or in Borea where the I?C
demanded mass lay offs to restore its financial credibility. Despite the inGection of o&er
FSH110 billion to 8hailand> Borea and Indonesia> foreign in&estments continued to pull out
from these countries and continued on into 1.... 8he e<change rate also continued to
decline in spite of I?C funds> with currencies in the region reco&ering to only ,0" of what
they were in pre#crisis le&els. 8he Indonesian rupiah was the worst hit as it only managed to
reco&er to appro<imately '0" of its pre#crises &alue after the implementation of these
programs.
In Indonesia> the crisis had se&ere ramifications politically and socially. 8he free#fall of
the rupiah triggered panic buying and soon store shel&es were empty. Prices for basic food
staples increased by as much as !0" which lead to the 1..! food riots of Indonesia. In
addition> the failing economy resulted in mass unemployment which only fueled resentment
with the ruling party. 8he &iolence was target particularly at ethnic (hinese> who were seen as
being the cause of the financial crisis. )t that point in time> /" of publicly listed companies
were owned by ethnic (hinese> despite ma3ing up only " of Indonesia=s population.
9eligious differences> historical resentment and ignorance and fear about the (hinese ser&ed
to fuel the spar3 that was the financial crisis. It is estimated that the riots caused
appro<imately trillion rupiah in damage and o&er a thousand deaths 5Purdey '00-). In the
wa3e of the riots> President Suharto resigned following the se&ere economic and political
crises in the past year. It could be suggested that the resentment of Suharto by the
Indonesian people came from the fact that Suharto was unwilling to fulfill his end of the
agreement with the I?C early in 1..!> which lead to delays in loan pac3ages.
In South Borea> as part of I?C reforms> South Borean firms ha&e been conducted
mass layoffs> a&eraging 10>000 wor3ers laid off per day. 8his led to a two#day nationwide
stri3e in protest of the unemployment in the country. In addition> high interest rates and
restricted credit caused sales to decline> pushing Borea=s largest firms to the &erge of
ban3ruptcy 5Eolfe 1..!) )lthough a H-/ billion pac3age was appro&ed for South Borea>
foreign in&estors continued to sell Borean assets and e:uities into late 1..!> causing further
damage to the won and the Borean stoc3 mar3et.
8he outcome in 9ussia was similar to South 6ast )sia> although it should be noted that
9ussia still had substantial so&ereign debt inherited from the former So&iet Fnion. Prior to the
e&ents in 1../> 9ussia=s economy was undergoing reforms and had begun to stabilise and
grow despite wages and unemployment still being a problem 5(hiodo '00'). )lthough not
directly affected by the crisis> the outcome is still significant. 7y the middle of 1..!> the ruble
had de&alued from - to the F.S dollar to almost 0 to the F.S dollar. In addition> 9ussia=s
main e<ports> oil and nonferrous metals> began to drop in price. )t this point in time> in&estor
confidence was not good> despite tal3 of I?C funds to alle&iate the situation. Internal strife
within the ruling party pro&ed to harm in&estor further> when President Jeltsin fired his entire
go&ernment. In )ugust 1..!> the 9ussian stoc3 mar3et had dropped ,-" o&er / months
amidst fears that the 9ussian go&ernment would de&alue the ruble 5which it later did) and
default on its domestic debt. )t the end of 1..!> real output for the year decreased 1.." and
the current ruling party seemed unable to successfully reform its economy. Similar to the
countries in South 6ast )sia> 9ussia also faced increased interest rates which increased its
debt rapidly as interest payments mounted. 8he panic in 9ussia spreads to +atin )merica
which causes stoc3 and bond mar3ets to plunge. Soon after> the Dow Industrial a&erage
starts to decline> dropping a total of -1' points> or ,.1" on )ugust 1 1..! 5Kang 1..!).
Conclusion
)lthough the crisis lasted for less than two years> it is li3ely that the debts created by
accepting I?C bailout pac3ages will ta3e a long time to repay. 8he crisis had a worldwide
impact starting with the decline of one currency. 8here are some traits that are shared
amongst many of the countries in&ol&ed in the crisis. Cirstly> financial intermediaries spurred
on by the large influ< of foreign depositors were eager to lend as much as possible to
generate income. 8his resulted in poor> almost non e<istent credit ris3 management often
influenced by connections or indi&iduals in positions of power. 8his was most pre&elant in
Indonesia where President Suharto would 3eep insol&ent financial institutions with family ties
running. Second> go&ernment guarantees to assume defaulted liabilities create se&ere moral
haAard on the part of financial intermediaries. +oans were often granted to companies with
unhealthy financial ratios. 8his was most pre&alent in South Borea. 8hird> e<cessi&e inflow of
capital often disguised wea3nesses in the mar3et or financial systems in these countries>
which distorted true mar3et and operational ris3. 6<amples of this can be found in 8hailand>
Indonesia and 9ussia.
(ontagion and panic played a large role in the crisis. )lthough the crisis affected the
entire region> it could be argued that certain countries with sound macroeconomic policies>
growth and ban3ing regulations would ha&e been strong had it not been for fear and
speculati&e attac3s. (ountries such as ?alaysia> Philippines> Singapore and Dong Bong only
came under attac3 because of the e&ents that occurred in 8hailand. 8his is natural as the
region is closely lin3ed by trade and in&estments. )dditionally> 9ussia> which is a country that
is relati&ely more remote to the South 6ast )sian region> should ha&e been able to fend off
the crisis. Dowe&er> it was fear and speculation that triggered a mass withdrawal of
in&estments which subse:uently re&ealed wea3nesses in a country that has Gust started to
reco&er from a recession. It is li3ely that if the contagion was isolated in 8hailand> many of the
other economies> which were robust to begin with> would not ha&e suffered such a se&ere
outcome.
8he end result of the abo&e factors was a chain reaction in &arious countries where
financial intermediaries were in a position where their assets 5de&alued by currency> decline in
prices> defaulted loans) could not co&er their liabilities and mass withdrawals. )s financial
intermediaries are the primary source of financing for the economy> a failure of these systems
caused a halt in producti&ity and growth> resulting in lower real output.
',0 words for :uestion '
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