MBA 502 - Macroeconomics

EAST ASIAN FINANCIAL CRISIS

(1997)

DİLAN SÜSLÜ

GÖKHAN TUFAN

NİLÜFER SORMAZ

TANER YILDIRIM

Spring 2014 12.05.2014

Outline

1. Before the East Asia Crisis (East Asia Miracle)

2. Reasons of the East Asia Crisis

3. Countries Effected by the Crisis Most Effected Thailand

Indonesia

South Korea

Moderately Effected Singapore

China

4. East Asia Crises and IMF

5. East Asia Crises and Turkey

6. Lessons Learned

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East Asia Countries

South Korea

Indonesia

Philippines

Hong Kong

Singapore

Malaysia

Taiwan

Thailand

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Source:http://en.wikipedia.org/wiki/1997_Asian_financial_crisis

Four Asian Tigers

The Four Asian Tigers or Asian Dragons are the highly developed economies of Hong Kong, Singapore, South Korea and Taiwan.

These regions were the first newly industrialized countries, noted for maintaining exceptionally high growth rates and rapid industrialization between 1960’s and 1990’s.

All four Asian Tigers had highly educated and skilled workforce and had specialized in areas where they had a competitive advantages.

Hong Kong and Singapore World-leading international financial centers

South Korea and TaiwanWorld leaders in manufacturing information technology

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Tiger Cub Economies

Their economic success stories have served as role models for many developing countries, especially the Tiger Cub Economies. (Indonesia, Malaysia, Philippines and Thailand)

They sustained rapid growth for decades.

Each nation was non-democratic and had relatively authoritarian political systems during the early years.

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East Asia Miracle

The success of the economic growth of the east Asia nations is called East Asia Miracle.

Many factors have been identified as the cause of East Asia's relative success but the most important key is their export oriented policy.

Each focused on exports to rich industrialized nations.

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Before East Asian Crisis (1960-

1990)

Export policy High growth rate and rapid industrialization

Decrease the number of import High tariff on import

Undervalue their currency

Increase in public and private savings

Investment in physical and human capital Investment on education and rate of literate is increased

Reached industrial countries level of development

Productivity growth

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Kept budget deficit in limit

Authoritarian political systems

Low inflation Stable and real interest rates

High interest rate Attract foreign investors for high rate of return

High rate of return Increased capital investments, high per capita income

Before East Asian Crisis (1960-

1990)

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Per Capita Gross Domestic

Product

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Gross Domestic Product (GDP)

Growth

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Per Capita Gross National Product (GNP)

Growth

The growth of per capita GNP has been extraordinary high in East Asia in 1985-1995

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Avg. per capita GNP growth btw 1985-1995*

* World Bank,1997

Over this period, growth in all low-middle income economies was a mere 0.4%, while that of all high income economies was only 0.8%.

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Beginning of Crisis

At the end of 1996

0%20%40%60%80%

100%

loans with maturity <=1

loans with maturity <=1

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* World Bank,1997

Before Crisis

Decrease in bank lending caused to increase in cross border bank loans.

The rapid reversal of private capital inflows into Asia.

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Reasons of the East Asian Crisis

Panic and disorderly workout

Education

Banks

short term of liabilities of Thailand exceeded international reserves

rapid industrialization and high growth rate PA

NIC

very weak and fragile financial system and auditing system

Loans from foreign banksEast Asia Crisis

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Fixed Exchange Rate

Panic Causes to :

A lot of investors withdraw their funds from these nations.

Huge outflow was occurred.

Net private inflows dropped from $93 B to -$12.1 B.

nations cannot control their current deficit

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Banks

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Triggering Events

In early 1997 in Thailand Hanbo Steel, Sammi Steel and Kia Motors collapsed.

These bankruptcies, in turn, put several merchant banks under significant pressure.

The Bank of Thailand (BOT) lent over 200 billionbaht ($8 billion) to distressed financial institutions through Financial Institutions Development Fund (FIDF).

Usable reserve levels of Central Bank fell sharply.

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Thailand

The devaluation of the Chinese renminbi, and the Japanese yen, raising of US interest rates lost competitiveness

Huge foreign debt

Wrong investments with foreign debt: large part of the capital had been put into non-productive sectors especially real estate

May 1997: Thai Baht was hit massive speculative attack. Thegovernment failed to defend the Baht against international speculators.

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Thailand

Devaluation of Baht: 1$ became 56 Baht in Jan ’98.

The Central Bank ran out of Foreign Reserves.

58 out of 91 banks were closed.

Exports declined significantly.

Lost major customers such as U.S. and Europe.

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Baht/$

Indonesia

Large number of Indonesian corporations had been borrowing in USD.

As rupiah had strenghted respective to dollar, this strategy worked well.

Companies had decrease their effective levels of debt and financial costs as local currency value rose.

In June 1997, Indonesia seemed far from crisis.

Unlike Thailand, Indonesia has

Low inflation

Trade surplus more than $900 Million

Huge foreign exchange reserves of more than $20 Billion

Causes of the crisis

The stock of private forign debt is very large and generally short term, has created conditions for instability

Weakness in the banking system

Lack of transperancy

Lack of protection and legal certainty

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Devaluation of Rupiah

Thailand floated Baht,

Indonesia widened Rupiah

band from 8% to 12%

Speculative attacks to

rupaih began

Floating exchange regime

was placed

Signed first letter with IMF

Second letter of intent with IMF

In November, crisis intensified effects

of crisis seen on balance sheets

Third letter of intent with IMF

83,2% change

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Source: www.tradingeconomics.com/indonesia/currency

Results of the Crisis – Indonesia

Short term interest rates increasedsharply.

Corporations went bankrupcy.

Some corporations are forced stop production and forced to lay off.

For banks, lending moneydecreased, borrowing moneyincreased.

Lose more than 1/3 foreign reserves.

Stock prices decline more than 66%.

At the end of the year foreign cashflow nearly stopped.

From 239 banks 16 closed.

Reforms in banking system.

-15

-10

-5

0

5

10

15

199

0

199

1

199

2

199

3

199

4

199

5

199

6

199

7

199

8

199

9

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

GDP Growth of Indonesia

Indonesia

Years

Growth Percentage

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Source: http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG

South Korea

Less productivity and increments in wages

High interest rates increased foreign borrowing

In 1994: 14%

In 1997: 25%

Weaknesses in the balance sheet of banks and corporations

Government related

Won pegged to US dollar

Financial institutional inadequacies (Implicit government guarantees and forcing excessive lending)

Political uncertainties (coming elections in Dec 1997)

Open economy policy (price shocks and global trade volatility)

Loss of competitiveness to other countries Slowdown of exports and economic growth

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Results of the Crisis – South Korea

Jan 1997 - Corporate bankruptcies:

Hanbo Steel, Sammi Group, Dainong Corp, Ssangyoung group, Kia Motors

Drastic devaluation of the Won from 1,000 to 1,700 for 1$

The Stock Exchange Rate index fell from 1000 to 450

National debt to GDP ratio became more than doubled

Major setback in automobile industry

Credit rating of the country: A1 to B2

Unemployment rate: Increase from 2% (1995) to 7% (1998)

Decrease in Gross National Product) GNP per capita: $9,511 to $6,823

GDP Growth % of South Korea

FX Rate and Reserves in South KoreaEast Asia Crisis

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Source: http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG

Moderately Effected Countries

China

Singapore

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China

• Not affected too much because;

o high growth

o unconvertible currency

o huge amount of reserves

• Growth rate decreased because;

o Capital/Product coefficient of China had increased

o Transferring resources from seaside (where productivity and efficiency are high )

o Administrative and production costs increased

o Expected slowdown in direct foreign capital inflow via technological inflow

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Singapore

• decrease of the demand from other Asia countries

o income effect

o increase of the Singapore Dollar against other Asia currencies

• 70% rise of the labor cost

o 2/3 of the demand is foreign based

Growth rate of Singapore - decreased from 7.8% to 1.5% in 1998

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Singapore cont’d

• Government;

o Bailout packet

Long term

Short term

decreasing labor cost by 15%.

shortening the deductions from labor costs

removing variable costs

• Ministry of Finance;

o took precautionary measures

increase internal consumption

stopping the slowing down in the economy

Government expenditure had increased 6%

tax rates had been decreased

various funds are transferred to local enterprises

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IMF and The Asian Financial Crisis

Bailout packages amounted to $95 billion.

High interest rates, decrease in government spending, increase

in taxes, devaluation of currency.

Allow insolvent banks and financial institutions to fail.

Major restructuring in banking system.

Increased transparency.

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IMF Criticism on Asian Crisis

Recession

Could not manage to roll over of short term loans to long term loans

World Bank Chief Economist Joseph Stiglitz:

“Most of the policies were mistake. The problem was not government, as in Latin America; the problem was an private sector--all those bankers and borrowers, for instance, who'd gambled on the real estate bubble.”

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East Asian Crisis & Current Situation of Turkey

EAST ASIAN ECONOMIES

Rapid Growth Rate

Foreign Loan Credits – ShortTerm

Fixing Exchange Rate Policy

Weakness In Financial System

(Banking Sector, Regulations)

No Credit Risk Management

TURKEY

Rapid Growth Rate

Foreign Loan Credits – LongTerm

Floating Exchange Rate Policy

After 2001 crisis, financial systemstronger

Well Managed Credit Risk

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GDP GROWTH RATE COMPARISON

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-15

-10

-5

0

5

10

15

1990 1991 1992 1993 1994 1995 1996 1997 1998

GDP Growth (annual %)

Indonesia

Korea, Rep.

Thailand

-6

-4

-2

0

2

4

6

8

10

12

2004 2005 2006 2007 2008 2009 2010 2011 2012

Turkey GDP Growth (annual %)

CURRENT ACCOUNT TO GDP RATIO

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Lessons Learned

Superiority of a pure floating exchange rate system over a managed floating system. Maintanence of fixed exchange rates encouraged external borrowing and led to

excessive exposure to foreign exchange risk.

As economies pegged to USD, in valuation in USD caused countries’ exports to become more expensive and less competitive.

Well functioning financial system

Importance of foreign investors’ confidence. Transparency on business and goverment level is critical.

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References

http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG

www.tradingeconomics.com/indonesia/currency

http://emlak.kanald.com.tr/haber/Sektorden_Haberler/Prof_

Dr_Erinc_Yeldan_Turkiyeyi_emlak_krizi_bekliyor/54593.as

px

http://www.nber.org/chapters/c11011.pdf

http://www.un.org/esa/analysis/pastmeetings/rude.pdf

http://www.research.stlouisfed.org

http://en.wikipedia.org/wiki/1997_Asian_financial_crisis

World Bank,1997

IMF, 1998 East Asia Crisis

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Questions and Comments

THANK YOU….

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