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Asian Currency Crisis 1997-1998

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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


1
Asian Currency Crisis 1997-1998
  • Kaitlin Briscoe
  • Doug Durkalski
  • Allison Gott
  • Jennifer Hooks

2
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!

3
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
    annually

4
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
    efficiency
  • Bankruptcy occurred
  • ROIC dropped below invested capital
  • Heavy Speculation

5
More
  • Private Public Savings
  • High savings rates
  • Excessive credit growth in the banking system
  • Growing amount of non-performing loans
  • Eventual collapse of several financial
    institutions
  • Inflation Low Inflationbut people doubted these
    low levels were sustainable because of the
    banking and financial sector problems experienced
    in these Asian countries.

6
More
  • 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
    worsen
  • 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)

7
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
    1996-1997
  • Expectations of US monetary policies tightening

8
IMFs Response
  • Immediate goalrestore confidence
  • Around 35 billion in financial support
  • Temporary tightening of monetary policy to stem
    depreciation

9
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

10
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
    significantly

11
Lessons from the Crisis
  • Sound macroeconomic policy is critical
  • The dangers of unsustainably large current
    account deficits
  • The importance of regulation, supervision, and
    transparency
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