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Asian Currency Crisis 1997-1998


Title: Asian Currency Crisis 1997-1998 Author: Allison Gott Last modified by: Allison Gott Created Date: 3/16/2005 9:02:08 PM Document presentation format – PowerPoint PPT presentation

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Title: Asian Currency Crisis 1997-1998

Asian Currency Crisis 1997-1998
  • Kaitlin Briscoe
  • Doug Durkalski
  • Allison Gott
  • Jennifer Hooks

Getting to the Root of the Problem
  • Moral hazard banking system inherently flawed ?
    incentives were skewed relationship banking
    resulted in too many nonperforming loans being
    issued (overlending)
  • Japan output slows down (exports from Asia fall)
    and consumption tax enacted
  • Appreciation in currencies that were pegged to
    dollar caused decreased price competitiveness for
    these countries exports!
  • Drop in real estate and stock markets led to
    decline in collateral values ? problematic for
    already struggling banks!

Current Account
  • Deficits deemed problematic if exceeding 5 of
    GDP ? Most Asian countries exceeded this
    threshold pre-crisis
  • Hardest-hit countries were those running
    deficits depreciation against dollar of up to
    151 (Indonesia)!
  • Solvency Deficits could persist so long as trade
    surpluses could be generated at some point in the
    future ? GDP growth rates averaged 7 to 10

Other Macro Fundamentals
  • Output Growth Large current account deficits
    were perceived to be sustainable with high
    economic growth (1980 debt crisis) Asian growth
    rates averaged more than 7 of GDP at the time.
  • However, these high rates caused
    overly-optimistic expectations, downplayed the
    riskiness of investments, and resulted in
    excessive reliance on foreign capital and current
    account imbalances.
  • Investment Rates/Profitability In the 1990s
    Asian countries had
  • High investment rates and slipping investment
  • Bankruptcy occurred
  • ROIC dropped below invested capital
  • Heavy Speculation

  • Private Public Savings
  • High savings rates
  • Excessive credit growth in the banking system
  • Growing amount of non-performing loans
  • Eventual collapse of several financial
  • Inflation Low Inflationbut people doubted these
    low levels were sustainable because of the
    banking and financial sector problems experienced
    in these Asian countries.

  • Openness the more open the economy, the more
    susceptible to external trade shocks measures of
    openness put many Asian countries above 50!
  • Real Exchange Rate Appreciation decreased cost
    competitiveness for Asian countries that were
    pegged to dollar current account imbalances
  • Political Instability/Policy Uncertainty (the
    icing on the cake) IMF struggles to ascertain
    gravity of situation and then cannot get programs
    to take hold in these countries (Indonesia
    Korea, in particular)

The Turning Point
  • A number of shocks exacerbated the problems with
    Asian currencies
  • Slow Japanese economy resulted in a decrease of
    export growth with trading partners in Asia
  • The imposition of a consumption tax created
    declines in 1997 and mitigated what seemed to be
    a Japanese recovery in 1996
  • Increasing Chinese influence on total exports led
    to increased competition in Asian countries
  • Sector-specific shocks resulted in further
    slowdown of export growth in the region from
  • Expectations of US monetary policies tightening

IMFs Response
  • Immediate goalrestore confidence
  • Around 35 billion in financial support
  • Temporary tightening of monetary policy to stem

Structural Reform Programs
  • Reopen and maintain lines of external financing
  • Remove monopolies and trade barriers
  • Increase transparency of corporate practices
  • Close unviable financial institutions
  • Supervision of weak institutions

Early Results
  • Exchange rates began to recover
  • Interest rates in Korea and Thailand fell to
    pre-crisis levels
  • Current accounts turned from deficit to surplus
  • Equity prices in Korea and Thailand rose

Lessons from the Crisis
  • Sound macroeconomic policy is critical
  • The dangers of unsustainably large current
    account deficits
  • The importance of regulation, supervision, and