Download 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…
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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
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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
Other Macro Fundamentals
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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
More…
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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 Inflation…but people doubted these low
levels were sustainable because of the banking and
financial sector problems experienced in these Asian
countries.
More…
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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)
The Turning Point
 A number
of shocks exacerbated
the problems with Asian currencies:
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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
IMF’s Response
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Immediate goal=restore confidence
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Around $35 billion in financial support
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Temporary tightening of monetary policy
to stem depreciation
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
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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
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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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