nations financial situation largely reflects its level of development. Finance lowers costs by assisting in the effective operation of the economy. Because of this significance, government organizations constantly give stable and healthy finances considerable attention. Governmental macroeconomic policies can be regulated by their budgetary policies. The basic law of development, however, nevertheless applies to the governments actions and has an impact on the countrys finances. However, the crisis period is among the most challenging times in the financial world. Specifically, the 1997 Asian Financial Crisis is one of the most devastating financial crises in the world. Prior to 1997, economies in East Asian countries continued to grow after a long period of spectacular growth, but the economy suddenly underwent severe changes that led to a recession. First, the Baht lost its price dramatically in Thailand, then quickly spread to South Korea, Indonesia, Hong Kong, Malaysia, and the Philippines. Not to stop, just a few months later, the crisis became global, drawing Russia and Brazil into a spiral. Fortunately, along with China, Taiwan, Singapore, and Vietnam, Vietnam is among the least affected countries in Asia. Since more than 20 years have passed, there have been thousands of pages written about this case, which encourage our team to learn more in detail about the causes, developments, and consequences of the 1997–1998 Asian economic and financial crisis. “What are the risks of such a crisis? Is Vietnam at risk or not? If so, will the Vietnamese economy fall into a crisis in the near future? These concerns have occurred to us and in order to address these questions, our team will describe the nature of a financial crisis from various perspectives. The main objective of this study is to learn from one of the biggest financial crises in history: the Asian financial crisis (19971998) by analyzing causes and consequences in order to avoid and quickly overcome similar crises in the future.
FOREIGN TRADE UNIVERSITY FACULTY OF BANKING AND FINANCE …… ***…… INTERNATIONAL FINANCE Lessons acquired through the study of the 1997 asian financial crises Class: TCHE414 Lecturer: Assoc Prof., PhD Mai Thu Hien Name: Group Hanoi, June 2023 TABLE OF CONTENT INTRODUCTION .3 LITERATURE REVIEW CHAPTER 1: FINANCIAL CONDUCT THEORY .5 1.1 Definition of Financial Crisis .5 1.2 Types of Financial Crisis .5 1.2.1 Currency crisis 1.2.2 Banking Crisis 1.2.3 Debt Crisis 1.3 Symptoms of a Financial Crisis: A Comprehensive Analysis DISCUSSION .13 CHAPTER 2: The 1997 Financial Crisis .13 2.1 The cause of the 1997 Financial Crisis 13 2.1.1 Subjective reasons .13 2.1.2 Objective reasons 14 2.2 What happened during the 1997 Asian financial crisis 15 2.2.1 Thailand 16 2.2.2 Indonesia 17 2.2.3 South Korea .18 2.2.4 Philippines .19 2.2.5 Hong Kong .20 2.2.6 Malaysia 20 2.3 Consequences of the 1997 Asian financial crisis 21 CHAPTER 3: Lessons for Vietnam .22 3.1 Some solutions the government used to limit the impact of the financial crisis on the Vietnamese economy .22 3.2 Lessons learned from the financial crisis on the Vietnamese economy 24 CONCLUSION 25 REFERENCE .26 I Rationale of the research INTRODUCTION The national economy of a nation places a great deal of importance on the financial sector A nation's financial situation largely reflects its level of development Finance lowers costs by assisting in the effective operation of the economy Because of this significance, government organizations constantly give stable and healthy finances considerable attention Governmental macroeconomic policies can be regulated by their budgetary policies The basic law of development, however, nevertheless applies to the government's actions and has an impact on the country's finances However, the crisis period is among the most challenging times in the financial world Specifically, the 1997 Asian Financial Crisis is one of the most devastating financial crises in the world Prior to 1997, economies in East Asian countries continued to grow after a long period of spectacular growth, but the economy suddenly underwent severe changes that led to a recession First, the Baht lost its price dramatically in Thailand, then quickly spread to South Korea, Indonesia, Hong Kong, Malaysia, and the Philippines Not to stop, just a few months later, the crisis became global, drawing Russia and Brazil into a spiral Fortunately, along with China, Taiwan, Singapore, and Vietnam, Vietnam is among the least affected countries in Asia Since more than 20 years have passed, there have been thousands of pages written about this case, which encourage our team to learn more in detail about the causes, developments, and consequences of the 1997–1998 Asian economic and financial crisis “What are the risks of such a crisis? Is Vietnam at risk or not? If so, will the Vietnamese economy fall into a crisis in the near future?" These concerns have occurred to us and in order to address these questions, our team will describe the nature of a financial crisis from various perspectives The main objective of this study is to learn from one of the biggest financial crises in history: the Asian financial crisis (1997-1998) by analyzing causes and consequences in order to avoid and quickly overcome similar crises in the future II Objective of the research The objective of this study is to explore the lessons learned from the analysis of the 1997 Asian financial crisis Examining the causes, impacts, and responses to this crisis is crucial for policymakers and stakeholders in order to enhance financial stability and prevent similar crises in the future By delving into the various aspects of the crisis, including its triggers, economic consequences, and policy interventions, valuable insights can be gleaned to inform decisionmaking and risk management strategies Understanding the key takeaways from the study of the 1997 Asian financial crisis is vital for shaping effective measures and safeguards in the global financial system II Scope of The Research To fulfill the aforementioned objective, our study aims to examine and analyze data derived from the Asian region The dataset sourced from the World Bank will encompass a time frame of 21 years, spanning from 2000 to 2020 By encompassing the entire Asian population, we aim to achieve a comprehensive outcome that enables us to draw definitive conclusions This approach will facilitate the acquisition of valuable insights and lessons derived from the study of the 1997 Asian financial crisis, thereby contributing to a deeper understanding of its causes, impacts, and effective response strategies III Research Methodology The primary methodology employed in this paper is qualitative research accompanied by theoretical analysis To extract lessons for Vietnam from the study of the 1997 Asian financial crisis, we adopt a case study approach This approach enables us to analyze the symptoms, effects, and responses of the crisis in a chronological order, thus facilitating a comprehensive understanding of how the economy reacts to such crises Moreover, the case study approach allows for in-depth exploration of intricate issues within Vietnam's economic context, providing valuable insights and lessons derived from real-life settings IV Structure of the research This research has main sections as follows (not to mention the introduction and conclusion): Chap 1: Financial conduct theory Chap 2: The 1997 financial crisis Chap 3: Lessons for Vietnam LITERATURE REVIEW CHAPTER 1: FINANCIAL CONDUCT THEORY 1.1 Definition of Financial Crisis When financial institutions or financial assets lose the majority of their value, this is referred to as a financial crisis In the late 19th and early 20th centuries, banking panics were linked to numerous financial crises and economic downturns Financial crises are a term used to describe a number of extraordinary events, including monetary crises, national debt bankruptcy, and the collapse of the stock market and the bursting of bad asset price bubbles A short-term drop in the value of financial assets and institutions, as well as the failure of the financial system, is known as a financial crisis 1.2 Types of Financial Crisis 1.2.1 Currency crisis When monetary speculative activity causes a sharp decline in the value of the domestic currency or when the responsible authorities are compelled to defend their currency by increasing interest rates or using a significant portion of their foreign exchange reserves, a monetary crisis, also known as an exchange rate crisis or a balance of payments crisis, occurs a The First Monetary Crisis Model P Krugman (1979) developed The First Monetary Crisis Model, which describes futures balance crises under fixed exchange rate circumstances that are attacked by speculative activity This pattern appears in some nations with too weak macroeconomic foundations, large budget deficits, an excessive money supply (perhaps created by the government to cover the deficit), and higher inflation, which results in a severe deficit balance The government was compelled to regularly interfere by selling foreign currencies to the market to maintain a fixed exchange rate due to the threat of a drop in the native currency Speculative attacks start to happen when foreign exchange reserves fall below a particular threshold, accompanied with too-weak macroeconomic base circumstances and even an increase in political and social unrest Speculative attacks start to happen as soon as foreign exchange reserves fall below a particular threshold, accompanied with too weak macroeconomic base conditions and even an uptick in political and social tensions At some point, the government is compelled to abandon the fixed exchange rate system and switch to floating exchange rates, which result in a continuous depreciation of the domestic currency and a monetary crisis The crises in a few Latin American nations in the 1980s were when this tendency was most obvious b The Second Monetary Crisis Model Obstfeld (1994 and 1995) created the second model of a financial crisis This kind of crisis, also referred to as a "self-fulfilling crisis," can happen in nations with moderate financial and macroeconomic weaknesses, but the adherence to a fixed exchange rate regime is undermined by excessively expensive exchange protection measures (such as tightening currencies, high interest rates, and detrimental effects on economic growth and job creation) Speculators could sell their domestic currency and acquire foreign currency prior to the signal In response to widespread attacks by monetary speculators, the government was compelled by these forces to abandon a fixed exchange rate regime in order to enforce an extended monetary policy, which led to the onset of a crisis The state of incomplete information and lack of symmetry gives rise to another variation of the second model of the monetary crisis If one or more banks have "problems," this circumstance causes "group" behavior, which in turn triggers financial panic and eventually results in a financial and monetary crisis The European Monetary System crisis of 1992–1993 provides an example of this approach in action c The Third Monetary Crisis Model Yoshitomi and Ohno (1999) developed the Third Monetary Crisis Model to explain capital account crises in international balance of payments (Payment Balance).Financial and banking crises, often known as double crises, frequently follow capital account crises.Without a correct sequence, the liberalization of capital accounts has resulted in two outcomes that set up a double crisis: the vast inflow of capital surpasses the future balance sheet deficit, and the amount of short- term capital is too high Excessive capital inflows that far outpace the hybrid balance sheet deficit (CA) have led to a rise in foreign currency reserves and an excess balance of payments (BOP) Credit, investment, and domestic consumption all increased as a result Increased fiscal deficits, a "bubble economy," and surplus supply are the results of excessive investment (excess production capacity) and wasteful investment (in industries like real estate ) Investors withdraw money from the economy when they are aware of other indicators of unpredictability, such as declining real estate and stock prices as well as currency speculative attacks As a result, the foreign exchange reserves gradually ran out and the balance of payments suffered a significant deficit, signifying a monetary crisis Under the conditions of capital balance liberalization, a quantity of short-term capital with an overweight proportion (larger than many foreign reserves) was poured into the economy As the native currency declined and significant sums of cash from foreign investors were abruptly withheld, the balance sheet of assets for both businesses and the banking-financial system rapidly declined Credit became tighter as a result of the decline in bank net assets, and bank balance sheets deteriorated This cycle and resonance process speeds up the onset of crises and drags economies into a protracted period of recession The Asian currency crisis of 1997– 1998 is seen as a representative illustration of the Third Monetary Crisis paradigm d The Fourth Monetary Crisis Model Because it is the longest and most severe recession since the Great Depression of the 1930s, the global economic crisis of 2008–2009 is historic The biggest bankruptcy in history occurred on September 15, 2008, when the investment bank Lehman Brothers collapsed The U.S government acquired up to 80% of the massive global insurance corporation AIG the following day, making it the largest private sector bailout in history A number of fundamental macroeconomics issues were brought up by the crisis, including the significance of global economic imbalances, the nature of financial markets, the ability of monetary policy to prevent asset price bubbles, the effects of easing financial regulations, and the issue of "too big" financial institutions that are unable to go under 1.2.2 Banking Crisis When customers make large bank withdrawals, this is what occurs Since banks lend the majority of the deposits, it will be challenging for banks to pay off obligations when clients withdraw Massive withdrawals may result in bankruptcy, which could result in the loss of many clients' accounts unless they are covered by deposit insurance A pervasive pattern of large-scale withdrawals will result in a systemic financial collapse Another possibility is that the stock is not widely used, but the credit rate has been increased (to raise money) because of worries about budget deficits By this time, the banks will actually be the cause of the current financial disaster 1.2.3 Debt Crisis Debt Crisis is a circumstance where a nation is unable to repay its national debt When a government's tax income is less than its spending for an extended period of time, a country may experience a debt crisis In any nation, tax revenue is the main source of funding for the government's expenses The government can issue debt to cover the shortfall when tax receipts are insufficient This is mostly accomplished by offering investors government treasury bills on the open market Many countries have experienced debt crises Examples include the Latin American debt crisis of the 1980s, which resulted in a “lost decade” for the region, and the European sovereign debt crisis beginning in 2009 1.3 Symptoms of a Financial Crisis: A Comprehensive Analysis A financial crisis represents a severe disruption in the functioning of a financial system, often leading to significant economic downturns Understanding the symptoms associated with a financial crisis is crucial for policymakers, economists, and investors in identifying and addressing potential vulnerabilities Here are some symptoms of a financial crisis, explaining their significance and interconnections ● Stock market volatility: During a financial crisis, stock markets exhibit high levels of volatility characterized by sharp declines and increased uncertainty Investors experience panic selling, leading to substantial market downturns This symptom reflects the loss of confidence in the financial system and can trigger a chain reaction of economic challenges ● Bank failures and liquidity problems: Bank failures and liquidity shortages are common symptoms of a financial crisis Insolvency or inadequate liquidity can lead to a loss of public trust in the banking sector It becomes challenging for banks to meet their obligations and lend to businesses and consumers, exacerbating the economic downturn ● Credit crunch: A credit crunch occurs when there is a sudden reduction in the availability of credit Lenders become cautious and tighten lending standards, making it difficult for individuals and businesses to obtain loans This symptom amplifies the economic impact as businesses struggle to secure financing for operations and investments ● Asset price bubbles: Financial crises are often preceded by the formation of asset price bubbles, where the prices of certain assets, such as real estate or stocks, become significantly inflated When these bubbles burst, it results in a rapid decline in asset values, leading to substantial losses for investors and financial institutions ● Currency depreciation: A significant depreciation in the value of a country's currency relative to others is another symptom of a financial crisis Currency devaluation can result from a loss of confidence in the economy, capital flight, or excessive government debt It leads to higher inflation, increased import costs, and reduced purchasing power for individuals and businesses ● Rising unemployment: During a financial crisis, job losses increase, and unemployment rates rise Businesses face difficulties in sustaining operations, leading to layoffs Rising unemployment has a detrimental effect on consumer spending and confidence, further dampening economic activity ● Government debt crisis: Mounting levels of government debt can contribute to a financial crisis If a government struggles to service its debt obligations, it creates concerns about its financial stability Investors may lose confidence, leading to increased borrowing costs for the government and potential sovereign defaults ● Reduced consumer and business confidence: A decline in consumer and business confidence is a key symptom of a financial crisis Individuals and businesses become cautious and reduce their spending and investment activities This decrease in confidence further weakens the economy and exacerbates the crisis ● Declining economic growth: A significant slowdown or contraction in economic growth is a common symptom of a financial crisis Reduced consumer spending, business investments, and export activity contribute to the economic downturn GDP declines, leading to job losses and decreased income levels ● Increased financial stress: During a financial crisis, financial stress escalates across households, businesses, and financial institutions Debt burdens become unsustainable, leading to defaults and bankruptcies The banking system experiences heightened instability, further impairing the flow of credit Recognizing and understanding the symptoms of a financial crisis is crucial for effective crisis management and prevention The interplay between these symptoms creates a complex web of challenges that can have far-reaching economic consequences Policymakers and economists must remain vigilant, implementing appropriate measures to address vulnerabilities and mitigate the impact of financial crises By learning from past crises, we can develop more resilient financial systems and foster sustainable economic growth 1.4 The Consequences of the Financial Crisis 1.4.1 Under the impact of the financial crisis and global economic downturn, the trade, investment, and consumption activities of each country have sharply declined, leading to the risk of economic recession in each nation Furthermore, many countries have faced state-level bankruptcy The manifestations of the financial crisis and global economic downturn often result in severe macroeconomic impacts Macroeconomic balances are disrupted, currencies depreciate, exchange rates fluctuate dramatically in a depreciating direction, high inflation and hyperinflation emerge, public debt burdens increase rapidly, stock markets collapse, assets in various countries experience sharp devaluation, many businesses, banks, and financial institutions fail, unemployment rates soar, millions of people fall into poverty and hunger, social disorder and conflicts arise, and riots and wars occur It can be seen that financial crises and global economic downturns have caused devastating consequences The global financial crisis and economic downturn of 1929-1933 gave rise to the rise of fascism in the 1930s and were the main causes of the brutal World War II The aftermath of this crisis and the Second World War led to the collapse of many regimes and the disintegration of several economies The Asian financial crisis of 1997-1998, starting from Thailand, resulted in the collapse of some economies and political systems The most severely affected countries from this financial crisis were Indonesia, South Korea, and Thailand In addition to the destructive impacts on the economies of these countries, the economic crisis of 1997-1998 led to social conflicts and political instability in some nations, culminating in the fall of President Suharto in Indonesia and Prime Minister Chavalit Yongchaiyudh in Thailand Radical Islamic organizations and separatist movements gained strength in Indonesia as the central government weakened The global economic crisis of 2008, originating from the subprime mortgage crisis in the United States in 2007, was caused by loose credit policies of banks and real estate investment institutions, through the intricate business relationships of the globalized banking system This crisis emerged as a series of major financial institutions collapsed, notably the bankruptcy of Lehman Brothers This bank, just a year prior, was considered the best real estate investment bank in the United States Following Lehman Brothers, other major banks such as Bradford and Bingley (UK), Hypo Real Estate (Germany), Fortis (Belgium), Dexia (France), and Yamamoto Life (Japan) also faced significant difficulties In 2008, 22 commercial banks in the US went bankrupt (with Washington Mutual being the largest, with total assets of $307 billion) In the third quarter of 2008 alone, 171 banks were listed as "problematic," the highest level since 1995 The nature of financial crises has been systematized by economists For example, the Structural Crisis (1929-1933) manifested in excessive investment focused on real estate and stock markets The Commodity Crisis (1973-1975) was characterized by energy and food crises The Institutional Crisis reflected the gradual reduction of state regulation and weak state management in economic and financial matters The fundamental causes leading to these crisis situations include financial and non-bank financial institutions' activities exceeding state control, the establishment and operation of uncontrolled intermediary institutions in market economies, unregulated international speculative activities, encouragement of absolute free markets, and the relaxation of state oversight and regulation of the market 1.4.2 Financial crises and global economic downturns have complex implications for security, defense, and national protection Firstly, economic resources are diminished, leading to a reduction in the capabilities of national security and defense for many countries When a global financial crisis and economic downturn occur, countries are difficult to avoid being affected by their impact, and many countries fall into crisis and suffer severe losses In times of crisis, nations often experience capital outflows, significant declines in investment, and their economies nearly paralyzed Economic organizations lack the ability and conditions to obtain financing for production and business development Market confidence is lost, and the value of assets for individuals, organizations, and even the state drastically declines The consequences include the collapse and bankruptcy of financial institutions and businesses, requiring the state to allocate financial resources to intervene in the economy Complex social problems arise that need to be addressed, while debts suddenly increase, all while the economy experiences low or no growth, depleting the economic strength of these countries When economic resources are depleted, resources for defense and security also decrease The demands for military equipment cannot be met, resources for sustaining the military are cut, and defense and security activities are constrained In addition to the aforementioned consequences, many countries also face a sudden increase in public debt, which redirects resources towards debt repayment and addressing emerging issues, leaving little capacity to allocate for defense and security From this point, the ability to ensure security, defense, and protect the country becomes clearly difficult and will diminish When financial resources and security capabilities are reduced, the risk of territorial integrity being threatened by external aggression becomes evident Furthermore, a global financial crisis and economic downturn will affect countries with economies dependent on foreign aid and low domestic economic strength, as they have to accept constraints imposed by stronger nations and international financial institutions 10 Terrorist activities are spreading, and the wave of refugees from Syria appears to be a major disaster for Europe and has negative implications for the world as a whole When financial crises and economic downturns escalate, criminal behavior becomes more extreme, terrorist organizations become more ruthless, and the influx of refugees intensifies, leading to increasingly complex situations in countries affected by refugee flows and terrorist activities Consequently, the costs for ensuring security and national defense in these countries must significantly increase in order to maintain order 12 DISCUSSION CHAPTER 2: The 1997 Financial Crisis 2.1 The cause of the 1997 Financial Crisis 2.1.1 Subjective reasons The weak macroeconomic fundamentals led to an explosion of credit and widening current account deficits The East Asian region, which experienced significant success in the 1970s and 1980s, became an attractive destination due to factors such as rapid growth, low debt ratios, and sound macroeconomic management, attracting foreign investment like a magnet The rapid growth in the absence of strong financial and capital markets, coupled with extensive government involvement, led to financial sectors and corporations relying on short-term foreign borrowing This resulted in the accumulation of short-term foreign debt obligations In response to this situation, governments implemented monetary tightening policies to curb the influx of capital and credit expansion, which raised domestic interest rates and created interest rate differentials between domestic and foreign markets Unintentionally, this encouraged investors to borrow from abroad and invest domestically, contributing to a domestic credit boom and increasing the vulnerability of current account deficits Necessary regulations to manage global financial integration failed to keep up with the capital flows Most foreign investments were short-term, but companies used them for long-term projects with low profitability and high risk Moreover, due to a belief in implicit government support, banks continued to lend, disregarding the need for risk insurance during this period Another direct cause of the crisis was the weak handling of the crisis itself Many economists argue that when currencies were first attacked, Asian countries should have immediately floated their currencies instead of trying to defend the exchange rate, which eventually depleted their foreign exchange reserves and prolonged the speculative attacks Inappropriate exchange rate regimes between regional currencies and the US dollar, creating a forced exchange rate system, were the primary causes of the depreciation of numerous regional currencies Although the crisis originated from the Thai baht's float, leading to a contagion effect on the peso, ringgit, and rupiah, in reality, these currencies had already been devalued against the increasing trend of the US dollar Thailand and some Southeast Asian countries attempted to implement what economists call an impossible trinity of policies They fixed their currencies to the US dollar while allowing capital freedom (capital account liberalization) The rapid economic growth of Southeast Asia in the 1980s and early 1990s created upward pressure on domestic currencies To maintain the fixed exchange rate, Southeast Asian central banks implemented loose monetary policies As a result, money supply increased, leading to inflationary pressures Sterilization policies were applied to counter invisible inflation, which further boosted capital flows into the economy In the mid-1990s, South Korea had relatively strong macroeconomic fundamentals except for the continuously appreciating Korean won against the US dollar since 1987 This weakened South 13 Korea's current account as the export prices of Korean goods increased in the international market In that context, South Korea pursued a loosely managed exchange rate regime and capital account liberalization Consequently, the widening current account deficit was offset by the country's banks borrowing from abroad, mostly in the form of short-term and non-hedged foreign debt 2.1.2 Objective reasons The increase in foreign capital inflows Driven by the loose monetary policies and financial liberalization in the United States, Europe, and Japan in the late 1980s, led to excessive global liquidity Investors in these global financial centers sought to diversify their asset portfolios by investing capital abroad Meanwhile, Asian countries implemented capital account liberalization policies Interest rates in Asian countries were higher compared to developed nations As a result, there was a significant surge of international capital flowing into Asian countries Additionally, government investment promotion and implicit government guarantees for financial institutions contributed to Asian companies taking on excessive risks by borrowing heavily from banks, while banks engaged in risky borrowing from abroad, mostly in the form of short-term and non-hedged foreign debt (the phenomenon of asymmetric information leading to adverse selection and moral hazard) From 1994 to 1997, private capital inflows into developing countries increased more than sixfold, from $42 billion to $256 billion East Asia attracted a significant portion of these capital flows, accounting for around 60% during the first half of the 1990s Net private capital Net FDI Securities investment Other investments ODA 1991 24,8 6,2 3,2 15,4 4,4 1992 29,0 7,3 6,4 15,3 2,0 1993 1994 1995 1996 31,8 36,1 74,2 65,8 7,6 8,8 7,5 8,4 17,2 9,9 17,4 20,3 7,0 17,4 49,2 37,1 0,6 0,3 0,7 -0,4 Source: World banking (5/1998 and 3/2000 Psychological dependence on foreign capital also emerged Foreign investors, when lending to domestic financial institutions, implicitly assumed that their loans would be guaranteed by the host government, based on the close relationship between the government and domestic banks When the economy was experiencing significant growth and a large influx of foreign capital, no one believed that it would be impossible to repay or refinance existing loans when they came due The inflow of capital created a credit boom in the region, with numerous short-term foreign loans being invested in long-term projects Thailand mainly borrowed from foreign banks and financial companies, while even the Bank of Korea borrowed from abroad In the case of Indonesia, companies directly borrowed from the offshore capital market (World Bank, 1998) The table below presents the situation of short-term external debt compared 14 to foreign reserves in East Asian countries before the crisis occurred Among the five crisisaffected countries, only Malaysia and the Philippines had higher foreign reserves than short-term debt A higher short-term external debt than foreign reserves implies that in the short term, the economy would not have the ability to make repayments Korea Thailand Indonesia Malaysia Philippines Short-term external debt Foreign exchange reserves (billion USD) (billion USD) 70,18 34,07 45,57 31,36 34,66 20,34 16,27 26,59 8,29 9,78 Short-term debt ratio to reserves (%) 2,06 1,45 1,70 0,61 0,85 Source: ADB(1999) The global market experienced a decline and unfavorable changes in the world economy Since 1995, the economic growth rate of developing industrial countries has declined, leading to a decrease in demand These countries, primarily export-oriented, are significant partners that stimulate the overheated growth process towards exports of Southeast Asian countries In 1999, the growth rate of Southeast Asian countries began to stagnate, and their export growth rapidly declined, weakening the current account The reasons for this include: ● Decline in global trade growth ● Depreciation of the yen ● The effective exchange rates of East Asian countries increased, affecting prices ● The demand and prices of exported goods decreased Speculative attacks and massive capital withdrawals The direct causes of the 1997 Asian financial crisis were speculative attacks and simultaneous capital outflows from Asian countries The underlying deep-rooted causes mentioned earlier then became apparent The real estate market in Thailand collapsed, and some financial institutions went bankrupt Confidence in the ability of governments to maintain fixed exchange rates eroded When alarming signs of economic distress emerged in Asian countries, certain macroeconomic speculators launched attacks on Asian currencies Foreign investors also withdrew their capital en masse In 1997 alone, over $20 billion net capital outflows occurred from East Asia due to the crisis 2.2 What happened during the 1997 Asian financial crisis At the end of the 1990s, the Asian Financial Crisis, a significant worldwide financial crisis, destabilized both the Asian and global economies It began in Thailand in July 1997 and quickly spread throughout East and Southeast Asia In numerous East and Southeast Asian nations, the 15 financial crisis severely devalued national currencies, destabilized stock markets, and lowered the value of other assets The Asian Financial Crisis of 1997 affected many Asian countries Some of these "tiger economies" included South Korea, Thailand, Malaysia, Indonesia, Singapore and the Philippines Market participants and governments were generally unprepared for the events that led to the Asian Financial Crisis Even though these countries' economies were seen as having numerous strengths prior to the crisis, several vulnerabilities, particularly in Thailand, were well known In fact, the economies that were most negatively impacted were among the most prosperous in the decade before the crisis 2.2.1 Thailand Thailand's GDP expanded at a 9% average yearly rate between 1985 and 1995 Thailand's economic development was overheating, and the economic bubble might not persist for very long, according to the World Economic Outlook report published by the IMF in late 1996 The Thai stock market started to change at the end of 1996 Both the capital market capitalization and the stock market index declined Early in 1997, as supply outpaced demand, the boom in residential and commercial building reached its pinnacle Bangkok's anticipated 365,000 vacant flats at the end of 1996, together with an additional 100,000 apartments scheduled to be occupied in 1997, have pushed supply well past the limit in the housing market At that time, Thailand had an extraordinary rise in imports as a result of its massive investment in infrastructure, industrial parks, commercial areas, etc Thailand had to import costly machinery and building supplies from the US, Europe, and Japan in order to complete the project The mid-1990s saw a significant balance of payments deficit as a result of the futures account Exports rose during this time, while imports climbed more quickly 16 The deficit in the balance of payments was 8.1% of GDP in 1995 At this point, the government has decided to increase interest rates The current Thai economy's issue is that investors currently expect domestic currency dumping due to the country's balance of payments deficit In other words, the fixed exchange rate will no longer be enforceable (the Baht will fall quickly), leading many businesses to purchase dollars in order to settle debt when it is due, while investors would take out loans in order to purchase USD in order to recoup losses Large-scale speculation launched an assault on the Thai Baht on May 14 and 15, 1997 The baht was eventually devalued on July 2, despite Thai Prime Minister Chavalit Yongchaiyudh's declaration on June 30 that he would not Almost 50% of the baht was lost immediately The exchange rate fell to 56 baht to the dollar in January 1998 In late 1995, the Thai stock market index was 1,280; by late 1997, it had dropped to 372 Market capitalization decreased concurrently, going from $141.5 billion to $23.5 billion Thailand's largest financial institution, Finance One, is in bankruptcy Thailand will get a $16 billion rescue package, the IMF stated on August 11 The IMF approved a new $3.9 billion bailout plan on August 20 However, Malaysia, Indonesia, and South Korea have all experienced a rapid development of the epidemic Both the rupiah (Indonesia) and the ringgit (Malaysia) are under pressure, and the currencies are being dumped 2.2.2 Indonesia The Indonesian economy collapsed in the second phase of the Asian Financial crisis along with South Korea’s The crisis in Indonesia was brought about by a sudden lack of confidence by foreign investors who suddenly began pulling their money out of Indonesia as they had 17 elsewhere in Asia The attack on the Indonesian currency seemed somewhat unfounded For years, Indonesia had low inflation, high steady growth, balanced budgets and a healthy trade balance of payments Only weeks before the crash the World Bank reported that Indonesia was performing well and the high growth rates it had posted in the past should continue The capital flight caused the currency to drop dramatically, causing businesses with foreign loans to have to pay more money This caused further lack of confidence in the Indonesian economy, sending it spiraling downward The rupiah lost 80 percent of its value Between July 1997 and January it dropped from 2,400 rupiah to the dollar to 10,000 rupiah per dollar During the first week of January the rupiah lost 10 percent of its value every day and reached levels of 14,000 rupiah to the dollar before Suharto's resignation in May 1998 Later it climbed to 16,000 per dollar before stabilizing around 10,000 per dollar The Asian Financial Crisis coincided with severe droughts caused by El Niño When the rupiah fell, banks were straddled with huge foreign currency debts they could not pay, which made the currency fall even more Depreciation of the rupiah caused per capita income to drop from $1,200 to $300 in a few months At the end of December 1997, the stock market had declined by 49 percent In 1998, unemployment rose to 13.2 and the economy shrunk by 15 percent 2.2.3 South Korea In 1997, consecutive bankruptcies of several large chaebol (Korean industrial conglomerates), coupled with financial crises or foreign exchange instability in Thailand and other East Asian countries, weakened investor confidence in Korea Foreign banks refused to renew credit lines to Korean financial institutions as a result, and large numbers of foreign investors left Korea Korea's foreign exchange reserves were practically run out by the middle of December 1997 Korea, along with a number of other economically fragile nations affected by the crisis, was forced to request assistance from the International Monetary Fund The crisis caused the worst negative 6.7 percent growth in Korean history in 1998, a significant decrease of economic activity At the end of 1997, South Korea companies were unable to pay off their loans, the stock market crashed and the Korean currency lost half of its value The South Korean government had to go begging to the International Monetary Fund for a $58 billion loan — the biggest IMF rescue package ever — but even that was not enough Japan, the United States and other countries coughed up more money to prevent the South Korean economy from totally collapsing Unemployment rose from or percent to 8.7 percent At the end of December 1997, the stock market had declined by 49 percent and the currency had depreciated by 65.9 percent A black market for dollars opened in Myeongdong in Seoul Growth in 1998 was -7.8 percent 18 The 1997-1998 Asian financial crisis was a blow to South Korea’s pride The crisis took hold just months after the country reached the $10,000 per capita income level for the first time The collapse of the won (the South Korean currency) quickly reduced it to $6,600 and the world's 11th largest economy was suddenly the 17th largest economy behind Russia, Mexico, India and the Netherlands Problems began in July, 1997 when Thailand devalued its currency and markets fell all over Asia Investors began taking a hard look at South Korea and they were not happy with what they saw: namely inefficient companies with massive debt burdens They began taking their money out of South Korea and tightening credit By October, foreign reserves were dwindling dangerously low Without a supply of credit, Korean companies found themselves unable to pay back their loans and faced defaulting The entire South Korean economy came close to collapsing The crisis in South Korea was rooted in its chaebols (large industrial conglomerates) which had their fingers in many pies, often spent money wastefully and had accrued massive debts South Korea's financial problems began in earnest with the collapse of Hanbo Steel, an arm of Hanbo, the country's 14th largest chaebol The company had borrowed $6 billion to build a huge modern steel plant on a capital base of $343 million By 1997, Hanbo's debt was 22 times more than its net worth The Hanbo Group had 23 subsidiaries, 22,000 employees and annual sales of $8 billion In early December 1997, the Halla Group, South Korea’s 12th largest chaebol, went bankrupt, with debts that were 30 times its equity Also, in early December 1997, the Korean government revealed it was $160 billion in debt (the figure would expand to $450 billion, 1.5 times South Korea’s GNP, a month later) In a meeting in mid-December, the Clinton administration decided that if South Korea was not saved the collapse of its economy could set off a dangerous chain reaction that might have repercussions all around the globe, so it put in motion a rescue plan 2.2.4 Philippines The Philippines' central bank attempted to interfere in the foreign exchange market to defend the peso on July after the crisis in Thailand started by raising the short-term interest rate (overnight lending rate) from 15% to 24% Copper The peso continues to lose value dramatically, falling from 26 to 38 to 40 in 2000 and 40 at the end of the crisis President Joseph Estrada's protective duties caused the financial crisis to worsen The Philippine stock market's PSE Composite Index reached a peak of around 3000 points in 1997 before declining to about 1000 points in 2001 It involves additional peso depreciation The Philippine government is guilty of having a policy of maintaining a steady pesodollar rate Peso depreciations directly affect inflation and public sentiment towards government officials Additionally, a depreciating peso increases the cost of the government in servicing its foreign currency borrowings A pegged rate has always resulted in an overvalued peso and 19 unsustainable current account deficits However, after the political crisis in the 1980s, the peso only started to stabilize in 1992 (with the central bank maintaining the same policy of pegging the peso to the dollar via a dirty float), and the Philippines was able to return to the international capital markets only around 1993 While the "Asian miracle" was boosting the economies of its neighbors, which encouraged them to borrow, the Philippines was labeled "the sick man of Asia." In the early 1980s, confidence in the Marcos regime deteriorated, and it was made worse by the assassination of Benigno Aquino in 1983; the peso plunged 30% in 1983, and a further 50% in 1984 The whole economy was falling apart, and naturally, no one would lend to the Philippines Thus, Philippine companies could not borrow foreign currency as early as those from the other countries until the economy and currency had stabilized Additionally, there were many veteran bankers who experienced the turmoil of the 1980s, which made them more prudent both in their borrowings as well as lendings 2.2.5 Hong Kong Speculators launched an assault on the Hong Kong dollar in October 1997 The exchange rate between the currency and the US dollar is 7.8 HKD/USD However, Hong Kong's inflation rate is higher than that of the USA The attack will start at this point At the time, the Hong Kong Monetary Authority had $80 billion in foreign exchange reserves, which is 700% of M1 or 45% of M3 This amount was used to safeguard the currency Stock markets are breaking down more and more frequently The Hang Seng Index decreased by 23% from October 20 and October 23 Hong Kong increased its overnight loan interest rate from 8% to 23% on August 15, 1998, which immediately increased by 500% In order to ease pressure on the stock price, the Hong Kong Monetary Authority has started buying shares in the Hang Seng Index The agency and Donald Tsang, who was previously the finance minister of Hong Kong and is now the leader of the SAD, have openly vowed war on speculators The amount of securities purchased by the government is around $15 billion or 120 billion Hong Kong dollars The government later sold the stock in 2001 and received nearly 30 billion Hong Kong dollars (or roughly billion US dollars) from the sale In September 1998, speculators hurt by the Malaysian government's foreign capital policy and the collapse of the bond and currency markets in Russia stopped trading in the Hong Kong dollar and the country's stock markets The Hong Kong dollar to US dollar conversion rate is at 7.8 to 2.2.6 Malaysia The Malaysian Ringgit and the Kuala Lumpur stock market were put under pressure to decline as soon as Thailand devalued the Baht (on July 2, 1997) The ringgit increased from 3.75 to 4.20 to the US dollar The ringgit is under significant price pressure as a result of trading on the foreign exchange market Money market participants maintain their ringgit accounts in the state of selling more than purchasing in anticipation of the ringgit's impending decline As a result, Malaysia's domestic interest rates decreased in order to promote capital outflows In the second and third quarters of 1997, capital flow totaled 24.6 billion ringgit 20