![ Many Korean firms were having trouble raising the
cash needed to make their interest payment.
The government asked the International Monetary
Fund[IMF] for $20 billion but the cost to clean up
the country’s disintegrating banking system range
from $60 billion to $100 billion.](https://image.slidesharecdn.com/asianfinancialcrisis1997-1998-170801171128/85/Asian-financial-crisis-1997-1998-7-320.jpg)
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Asian financial crisis 1997 1998
- 1. ASIAN FINANCIAL CRISIS 1997-1998
- 2. INTRODUCTION Asia is a region that is a home to 60% of the world’s people, and where many economies were growing by nearly 10% a year in real terms. By late 1997,the economic outlook for many of the Asian Tigers has changed drastically. So the countries which were mostly affected by the crisis are Indonesia, Thailand, South Korea. Hong Kong, Laos, Malaysia, and the Philippines were moderately hurt. Brunei, China, Singapore, Taiwan, and Vietnam were less effected.
- 3. THAILAND The first hint of the Asian currency crisis appeared in Thailand . Before crisis, Thailand was a country that had averaged over 8% real GDP growth since the late 1980’s and joined the rapidly growing group of countries known as the “Asian Tigers”.
- 4. CAUSES OF CRISIS IN THAILAND In 1993, Thailand allowed offshore banking and these banks offered high interest rates on deposit that attracted tremendous amounts of foreign savings. Loaded with foreign money, the banks loaned carelessly and loan defaults began to rise. Then, there was slow down in Thai exports due to high competition from other countries . Thailand was losing out in world markets due to a combination of higher labor and production costs and the strong value of the Thai baht in foreign exchange markets.
- 5. SOUTH KOREA South Korea’s economy is dominated by large industrial conglomerates. South Korea is the world’s largest producer of ships and computer chips, and has the world’s fifth largest car maker.
- 6. CAUSES OF CRISIS IN SOUTH KOREA The state-guided banks lent based on political preferences and favoritism rather than on proper risk management. The chaebol of multinational conglomerates that dominate the economy , fueled by easy money, borrowed too much , and expanded recklessly, without regard for adequate returns. This resulted in excess supply of goods in domestic and international market which resulted in price down of the products.
- 7. Many Korean firms were having trouble raising the cash needed to make their interest payment. The government asked the International Monetary Fund[IMF] for $20 billion but the cost to clean up the country’s disintegrating banking system range from $60 billion to $100 billion.
- 8. IMF’S DEMANDS FROM SOUTH KOREA IMF demanded South Korea to undertake significant reforms in its corporate structure , and in financial and labor markets South Korea gave job guarantee to the workers but put restraints on the growth of wages by banning most trade union activities. This way production cost and unemployment were kept in control. IMF demanded that conglomerates and badly run banks should be allowed to close in addition to the ones that have already gone under.
- 9. INDONESIA In July 1997, Indonesia’s monetary authorities widened the rupiah currency trading band from 8% to 12%. The rupiah suddenly came under severe attack in August. On 14 August 1997 , the managed floating exchange rate regime was replaced by a free floating exchange rate arrangement . The rupiah dropped further . IMF came forward with rescue package of $23 billion, but rupiah was sinking further due to string demand of dollars, selling of rupiah , and fears over corporate debts.
- 10. REASONS OF THE CRISIS No prudent regulations Lack of risk management
- 11. NO PRUDENT REGULATIONS They liberalized their financial market. Firms borrow money with unprecedented records. On the lender side , financial institutions granted credits to Asian firms who were already in debt. Money lending by these financial institutions accounted for 95% of the short termloans which contributed to the crisis.
- 12. LACK RISK MANAGEMENT Before the financial crisis , Asian market was lucrative. Because of falling interest rate and liquidity expansion financial institutions in the west rushed into the market and fought for a greater market share by expanding credit irresponsibly to projects obviously low in return. Domestic firms and banks over-rely on government because in Asia businessmen and government had close relationship , which is referred as Crony Capitalism. Financial intermediaries thought not to bear the full cost of failure because they believed the government will pay for them. In other words , there was no incentives to effectively manage the risk.
- 13. IMMEDIATE RESPONSE Currency attack
- 14. CURRENCY ATTACK When the Thai government floated the baht in July 1997 the exchange rate dropped by 17% and so the stock market came to chaos. Due to the fluctuation of Thai Baht , Philippine peso, Indonesian rupiah , Malaysia ringgit , Hong Kong dollar had become targets for international speculators After the attack on Thai Baht started, market went panic and foreign investors pulled out their money all at once. Then the exchange market of Asian countries was flooded with the domestic currencies leading to depreciation pressure on exchange rates
- 15. Many of Asian countries faced falling currencies, devalued stock market price, rise in private debt because most them had debt in foreign currency , they could not pay and then went bankrupt and hence the crisis was all set.
- 16. IMPACT Social Economical Political technological
- 17. SOCIAL ASPECT Overall quality of life is downgraded Government and household had no money to invest on health and education. They had fewer subsidies for higher level of schooling so more children dropped out after primary education and looked for employment . Hence, lower level of illiteracy rate. In health, traditional healer and self treatment were used instead of modern medical care.
- 18. ECONOMICAL ASPECT Asian countries become more open to FDI as they needed foreign capital and technology to support their recovery from crisis they needed to accept the foreign investment conditions. MNCs outsourced the production units to less developed Asian countries to reduce production cost.
- 19. POLITICAL ASPECT Ironically, crisis had positive effect on this aspect. The Asian countries started having more human right protection act UNICEF called for more child protection policies and integration of child protection services as there were more drop outs in these countries. Government of Asian countries made broader social protection policy
- 20. TECHNOLOGICAL ASPECT Asian countries put more emphasize on technological advancement . They invested more on research and development in order sharpen their competitive edge.
- 21. THANKYOU
Editor's Notes
- #10: Currency band refers to some specific interval of values of a national currency, compared with currencies of other countries. A country selects a range oF ‘band’ , of values at which to set their currency and returns to fixed exchange rates if the value of their currency shifts outside this band.