Download I - El Camino College

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The Asian Crisis
I. Introduction:
The main goal my Asian Crisis research paper is to identify the causes, the outcomes
and the IMF responses to the crisis using articles provide by Nouriel Roubini's
Global Macroeconomic and Financial Policy Website. The topic of the Asian Crisis was
interesting to me because I wanted to learn more about what is currently going on in Asian,
especially Thailand, since I am part Thai. It is amazing how one tine country can play a major
part in the Asian Crisis. My approach to writing this paper is to research articles from the
Nouriel Roubini’s website use them as sources identify the causes, the outcomes, and the IMF
responses to the Asian Crisis. My reasons for using articles from the Nouriel Roubini’s website
is to get reliable sources to help me learn and understand the whole picture of the Asian Crisis.
The overall outcome of this research paper is to identify and understand the causes or the
origins, results, and IMF responses to the Asian Crisis. The outline of this research paper
includes: (I) introduction, (II) the causes and the origins of the Asian Crisis, (III) the IMF
responses to the crisis, (IV) Thailand in the Asian Crisis, (V) The results of the crisis, (VI)
conclusion.
II. The causes and the origins of the Asian Crisis:
The Asian Crisis was a financial crisis that exploded in Asia in the 1997-1998 that led
to the sharp decline in the currencies, stock markets, and other asset prices of Asian countries
(The IMF’s Response to the Asian Crisis, 1999). What threatened these Asia countries were the
financial systems, disrupted real economics and human crisis. According to Nananukool there
were three major causes of the crisis that expanded over 10 years. The three causes were: (1)
the bubble economy, (2) the excessive overseas borrowing, and (3) the fixed or non-flexible
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exchange rate policy. However, there are more events that led to the financial or currency crisis
such as: (1) a withdrawal of foreign capital, (2) a massive depreciation of the exchange rate, (3)
a stock market crash due to the increase in interest rates, (4) a sharp increase in interest rates,
and (5) a decline in expend.
The origins of the crisis stemmed from the weaknesses in financial systems and poor
government. A combination of inadequate financial sector supervision, poor assessment and
management of financial risk, and the maintenance of relatively fixed exchange rates led banks
and corporations to borrow large amounts of international capital, in the value of foreign
currency (The IMF’s Response to the Asian Crisis, 1999). Not only were private sector
expenditures and financing decisions caused the crisis, but also government issues. The
government made it worse by getting involved with the private sector, lacking transparency in
corporate and fiscal accounting and the provision of financial and economic data. After the
crisis erupted in Thailand with a series of speculative attacks on the Thai money, Baht, the
contagion spread rapidly to other economics in the region that were vulnerable to a erosion of
competitiveness after the devaluation of the bath or that were perceived by investors to have
similar financial or macroeconomic problems (The IMF’s Response to the Asian Crisis, 1999).
III. The IMF responses to the crisis:
The IMF main concern was to help restore confidence to the economics affected by the
crisis. The IMF immediate response to restore confidence in Asia by, first, helping the three
most affects countries, Indonesia, Korea, and Thailand to arrange programs of economic
stabilization and reform it so that it could restore confidence and be supported by the IMF (The
IMF’s Response to the Asian Crisis, 1999). Second, in 1997 approve $35 billion of IMF
financial support for reform programs in Indonesia, Korea, and Thailand. The IMF provided
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additional $77 billion for other finances from multilateral and bilateral sources in support of
these reform programs. In July 1998, the committed assistance for Indonesia was augmented
by an additional $1.3 billion from the IMF and $5 billion from the multilateral and bilateral
sources, as showed on figure 1 (The IMF’s Response to the Asian Crisis, 1999).
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Figure 1
Commitments of the International Community and Disbursements of the IMF in Response
to the Asian Crisis (in billion U.S. dollars)
----------------------------------------------------------------------------------------Commitments
Country
IMF
Indonesia
Korea
Thailand
Total
11.2
21.1
4.0
36.3
Multilateral
10.0
14.2
2.7
26.9
Bilateral
21.1
23.1
10.5
54.7
IMF
Disbursements
Total
As of
1/17/99
42.3
8.8
58.4
19.0
17.2
3.1
117.9
30.9
(The IMF’s Response to the Asian Crisis, 1999)
========================================================================
Third, IMF intensified its conference with other members in both inside and outside region that
were affected by the crisis and needed to take policy steps toward off contagion effects (The
IMF’s Response to the Asian Crisis, 1999).
The IMF programs have nine main declared goals. The goals were: (1) to prevent
outright default on foreign obligations, (2) to limit the extent of currency depreciation, (3) to
preserve a fiscal balance, (3) to limit the rise in inflation, (4) to rebuild foreign exchange
reserves, (5) to restructure and reform the banking sector, (6) to remove monopolies and
otherwise reform the domestic non-financial economy, (7) to preserve confidence and
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creditworthiness and (8) to limit the decline of output (Radelet & Sachs, 1998). To achieve
these goals, the IMF had made programs that were based on six major policies. The policies
were: (1) Fiscal policy, (2) bank closures, (3) enforcement of capital adequacy standards, (4)
tight domestic credit, (5) debt repayment, and (6) non-financial structural changes (Radelet &
Sachs, 1998). The main objective of fiscal policy was to support the monetary policy and
defend the exchange rate, and to provide for funds necessary to inject into the financial system.
Bank closures forced Thailand’s 58 out of 91 finance companies to immediately be suspended,
and 56 of these were eventually liquidated. The goals of the bank closures were to limit the
losses being accumulated by these institutions, and to send a strong signal that governments
were serious about implementing reforms in order to restore confidence in the banking system.
Due to the enforcement of capital adequacy standards, initial Fund programs pushed for a rapid
recapitalization. The goal of this was to return the banking system to solid footing as quickly as
possible. The tight domestic credit purpose was to defend the exchange rate because IMF
programs raised interest rates and reduced domestic credit availability. Debt repayment
resulted from foreign exchange targets in programs provided for the full payment of foreign
debt, and backed by “bailout funds” mobilized by the IMF (Radelet & Sachs, 1998). Nonfinancial structural changes aimed at reducing tariff, opening up sectors for foreign investment,
and reducing monopoly powers.
IMF address the government issues dealing with crisis by reforming the financial
systems that is designed to improve the efficiency of markets, break the close links between
business and government, and ensure that the integration of the national economy with
international financial markets is properly segmented. The initial program of Thailand
economic reform were (The IMF’s Response to the Asian Crisis, 1999):
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• Financial sector restructuring, initially focusing on the identification and closure of
unviable financial institutions, intervention in the weakest banks, and the
recapitalization of the banking system;
• Fiscal measures equivalent to about 3 percent of GDP to correct the public sector
deficit to a surplus of 1 percent of GDP in 1997 - 1998, support the necessary
improvement in the current account position, and provide for the costs of financial
restructuring, including an increase in the VAT tax rate from 7 percent to 10 percent;
• A new framework for monetary policy, in line with the new managed float for the
baht; and
• Structural initiatives to increase efficiency, deepen the role of the private sector in the
Thai economy, and reinforce its outward orientation, including civil service reform,
privatization, and initiatives to attract foreign capital.
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Figure 2
Selected Economic Indicators
Real GDP growth
Consumer prices
(Period average)
1996
1997
(Percent change)
5.5
-0.4
5.9
5.6
1998*
1999**
-7 to - 8
8.0
1.0
2.5 to 3.0
(Percent of GDP; a minus signifies a deficit)
Central government balance
1.9
-1.4
-2.4
Current account balance
-7.9
-2.0
11.5
(Billion U.S. dollars)
External debt
90.5
93.4
73
-3.0
8.5
...
(The IMF’s Response to the Asian Crisis, 1999)
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IV. Thailand in the Asian Crisis:
Since late 1980s Thailand was a high economic growth country, which became the
showcase of the Asian economics. In the late 1980s Thailand’s growth rate exceeded ten
percent, and averaged eight percent in 1990s (Ito, 1999). However, in 1996 Thailand fell in a
growth recession and the growth rate dropped below seven percent (Ito, 1999). A decline in
export growth contributed to the fall in economic growth. By the beginning of 1997 the
Thailand’s growth rate drop to zero (Ito, 1999). Due to Thailand’s plunged of export growth,
now Thailand is at low growth rate, meaning that their debt will accumulate very quickly.
Therefore, Thailand is most likely to be attacked in the currency market by speculators.
Thailand’s decline growth rate problem were further complicated by the loss of
competitiveness in less difficult manufactured goods. Its textile exports decline by 16.8
percent in 1996 compared to 1995 textile exports (Ito, 1999).
Nananukool believe that one of the causes that led Thailand to the crisis was the
Bubble economy. The bubble economy is referred to the process of gaining weight
(Nananukool, 1998). In other words, bubbles are inefficiencies. Bursting or reducing the
bubbles is the task of productivity (Nananukool, 1998). A Bubble occurs when someone is
able to sell something at a price well beyond the realm of making a reasonable profit
(Nananukool, 1998). Bubbles are usually abundance in land speculation, in the price of
housing, condominiums, office spaces, real estate, and golf courses (Nananukool, 1998).
Many financial institutions in Asia term of bubbles are to borrow money from overseas at
low interest rates with an automatic protection from the rigid exchange rate policy of their
governments, and lending it at an unreasonable rate to the domestic market. The rule of the
game in a bubble economy is to pass on the bubbles at an unfair higher profit, to the next
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person or country buyer at the right time (Nananukool, 1998). The game ends when the last
buyer get caught with the largest bubbles possible, or when the inefficiency is manifest, and
the competitiveness is gone, thus the bubbles are bursts (Nananukool, 1998).
The solution to Thailand’s problem with the investment saving gap is to slow down
investment or slow down borrowing, and increase or extend the terms of saving. A floatation
of Thai money, bath would have slowed down investment and borrowing, but was not
practiced by the Bank of Thailand (Nananukool, 1998). For over five years, Thailand had an
abundant of tax revenue due to the bubble economic; therefore, the Thai Government was
able to reduce its own borrowing greatly. Thailand’s private saving had increase from the
corporations, due to the profit from real export and from inflation profit of bubble business,
and government saving were due to tax collection from the bubble economy (Nananukool,
1998). Since Thailand’s borrowings were mostly short-term, Thai Government must have a
system of extending the terms of the borrowing. Instead of redeeming all bonds, the Thai
Government should have a program of long-term borrowings for several reasons: (1) borrow
long-term an amount at least to cover its own debt, (2) borrowed an amount to create longterm stability in the financial system, and (3) borrow long-term an amount to create a
benchmark for long-term interest rate, so that the private sector, who has been trying to set
up a long-term corporate bond market, would be able to start issuing long-term bonds or
perpetual bonds (Nananukool, 1998).
V. The results of the crisis:
In 1998 Korea, Thailand and later Indonesia financial markets began to stabilize
(Recovery from the Asian Crisis and the Role of the IMF, 2000). By mid-1998, exchange
rates began to recover, and interest rates had declined to below pre-crisis levels. Beginning in
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mid-1998, economic activity then began to turn around in Korea and later in the other
countries (Recovery from the Asian Crisis and the Role of the IMF, 2000). Once the
economic turn around began, the recoveries were unexpectedly robust. The recoveries
reflected a revival of private domestic demand, and the collapse of the recessions. There
were many lessons learned from the Asian Crisis, however, the main key lesson learned by
the IMF was the need for stronger efforts at crisis prevention.
The main goal of this paper is to identify the origin, the effect and the IMF responses to
the crisis using articles provide by Nouriel Roubini's Global Macroeconomic and Financial
Policy Website. From all theses researched article I learned many thing, however, I was mostly
interested in learning about Thailand. The most surprising fact learned was that Thailand was
one of the key elements that caused the crisis. I was also amazed at how such a small country
can play a major role in the Asian Crisis. The approach I used to write this paper was to get
sources from the Nouriel Roubini’s website. Reasons for using the articles from the Nouriel
Roubini’s website was to get reliable sources to help me learned and understand the whole
image of the Asian Crisis. The overall outcome of this research paper is to identify and
understand: (1) the causes and the origins of the Asian Crisis, (2) the IMF responses to the
crisis, (3) Thailand in the Asian Crisis, and (4) The results of the crisis.
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BIBLIOGRAPHY
Ito, T. (1999, April 22). The Development of the Thailand Currency Crisis: A
Chronological Review. Nouriel Roubini's Global Macroeconomic and Financial Policy Site, 1.
Retrieved June 24, 2004, from the World Wide Web:
http://www.nber.org/~confer/99/thai99/thai1.pdf
Nananukool, S. (1998, July). Learning from the Asian Currency Crisis – An insider
view from Thailand. Nouriel Roubini's Global Macroeconomic and Financial Policy Site, 1.
Retrieved June 24, 2004, from the World Wide Web:
http://www.stern.nyu.edu/globalmacro/thai.doc
Radelet, S., & Sachs, J. (1998, March 30). The Onset of the East Asian Financial Crisis.
Nouriel Roubini's Global Macroeconomic and Financial Policy Site, 1. Retrieved June 24,
2004, from the World Wide Web: http://www2.cid.harvard.edu/hiidpapers/eaonset2.pdf
(2000, June). Recovery from the Asian Crisis and the Role of the IMF. International
Monetary Fund Site, 1. Retrieved June 25, 2004, from the World Wide Web:
http://www.imf.org/external/np/exr/ib/2000/062300.htm#V
(1999, January 17). The IMF’s Response to the Asian Crisis. Nouriel Roubini's Global
Macroeconomic and Financial Policy Site, 1. Retrieved June 24, 2004, from the World Wide
Web: http://www.imf.org/External/np/exr/facts/asia.HTM