2. The Asian Financial Crisis was a period of
financial crisis that gripped much of Asia
beginning in July 1997, and raised fears of a
worldwide
economic
meltdown
financial contagion(financial shock).
due
to

3. The
crisis
started
in
Thailand
with
the
financial collapse of the Thai baht caused by
the decision of the Thai government to float
the baht, cutting its peg to the USD, after
exhaustive efforts to support it in the face of
a severe financial overextension that was in
part real estate driven.

4. At the time, Thailand had acquired a burden
of foreign debt that made the country
effectively bankrupt even before the collapse
of its currency. As the crisis spread, most of
Southeast Asia and Japan saw slumping
currencies, devalued stock markets and other
asset prices, and a precipitous rise in private
debt

5. The debt crisis in East Asia stemmed from
inappropriate borrowing by the private sector. Due
to high rates of economic growth and a booming
economy, private firms and corporations looked to
finance speculative investment projects. However,
firms overstretched themselves and a combination
of factors caused a depreciation in the exchange
rate as they struggled to meet the payments

6. Thailand, July, 1997
 Indonesia, June to August, 1997
 Korea, July, 1997
 Japan had already been through its own
crisis earlier and was in an economic
depression
 Russia and Mexico followed a little later
with crises of their own.


7. 


Fixed exchange rate system pegged to the
USD. When the Dollar rose,consequently the
ASEAN currencies grew too, resulting in lower
exports
Decline in Export competitiveness particularly
in Electrical goods.
The decrease in exports resulted in increased
Trade and Current Account deficit.

8. 


The crisis first emerged in Thailand when as a
crisis of loan repayment. This led to fears of loan
defaults and foreign short-term creditors
withdrew funds from Thai financial institutions.
The withdrawal of ST credit led to pressure on
forex reserves and the value of Baht. The Bank of
Thailand in its attempt to save the Baht lost all its
Reserves and had to request assistance from the
IMF.
The contagion then spread to
Philippines, Malaysia and Indonesia.

9. Weakness of Macro-Economic fundamentals
 Low productivity and competitiveness
 Inadequate supervision of Financial
institutions worsened the situation.

Weak governments lacked the political
autonomy.

10. Overvalued Exchange Rate & Openness of
Capital Account
 Overvalued exchange rates tied to an
appreciating U.S. dollar led to large current
account deficits and inadequate or declining
long-term capital inflows resulted in heavy
dependence on short-term external debt and
the depletion of foreign exchange reserves

11. 
The crisis led to weaker, unstable exchange
rates and weakened Financial Institutions. To
tackle this, the Government imposed higher
domestic Interest rates, which led to a
slowdown in manufacturing and industrial
activity.
This
brought
about
huge
unemployment and an undesirable social
impact – on food, healthcare and education.

12. From 1985 to 1996, growth rate averaging almost 9%
annually - increased pressure on Thailand's currency, the
baht
From 1985 until July 1997, Baht was pegged at 25 US$
12

13. Mid-May „97: Thai Baht was hit by massive speculative
attack
Spark: End-June „97, Thai Prime Minister declared that
he would not devaluate the Baht
Thai Government failed to defend the Baht against
International speculators
Financial Crisis hits….
13

14. Booming Thai Economy ground to a halt, contracted by 1.9%
Massive lay-offs in Finance, Real Estate & Construction:
unemployment rate all-time high
Huge numbers of workers returning to their villages in the
countryside and 600,000 foreign workers sent back
Stock market dropped 75%,
“Finance One” collapsed
Baht reached 56 US$ in
Jan „98
14

15. Drastic devaluation of the rupiah: from 2,000 to
18,000 for 1 US$
Sharp price increase
Wake of widespread rioting:
500 deaths in Jakarta alone
Governor, Bank Indonesia was sacked
President Suharto was forced to step down in May
1998 after 30 years in power
15

16. Drastic devaluation of the won: from 1,000 to 1,700
for 1 US$
Credit rating of the country (Moody‟s): A1 to B2
National Debt-to-GDP ratio more than doubled
Major setback in Automobile industry
16

17. Growth dropped to virtually zero in 1998
Peso fell significantly, from 26/US$ to even
55/US$
President Joseph Estrada was forced to
resign
17

18. 40% of Japan‟s export go to Asia, so it was affected
even if the economy was strong
Japanese Yen fall to 147 as mass selling began
GDP real growth rate slowed from 5% to 1.6%
Some companies went Bankrupt
Being world‟s largest currency holder, Japan could
bounce back quickly
18

19. Markets did not collapse, but were severely hit
NYSE briefly suspended trading, for the first time
Dow Jones Industrial Average suffered as 3rd biggest
point losses ever
Relationship with Japan changed forever:
US stopped supporting the highly artificial Trade
environment and Exchange Rate
19

20. 

The countries involved usually had some
international indebtedness, and Asian
banks and borrowers used short-term
credits to finance long-term loans.
Asian borrowers (banks and firms)
borrowed in foreign currencies and
loaned in local currency. No hedging to
counter foreign exchange risk.

21. Asian bankers often did not ask to see
consolidated balance sheets. They didn’t
monitor the total assets and liabilities of
the borrowers.
The IMF paid the bills for such banks,
finance ministries and countries. Moral
hazard problems! Investors should pay for
bad decisions.

22. 

1. Stabilizing the Exchange Rate and Debt
Management- The idea here is to stabilize
the exchange rate. The firms should not be
allowed to take any further debt which would
imply Debt Standstill.
2. Dealing with the Social impact- deal with
the Social Impact the availability of food and
healthcare at affordable prices.

23. 



3. Strengthening the Financial sector
4. Adjustment of Industrial Structures
5. International Financial marketssurveillance system to monitor flow of capital.
6. Revitalizing the Financial Markets