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East Asian Financial Crisis.. PowerPoint PPT Presentation


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-Lhamu Tsering. East Asian Financial Crisis. Agenda. East Asia pre crisis Thailand Crisis timeline The dilemma Asian Weaknesses After the shock . Countries involved. Thailand Philippines Hong Kong Taiwan Singapore South Korea Malaysia Indonesia China. Thailand.

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East Asian Financial Crisis..

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Lhamu tsering

-Lhamu Tsering

East Asian Financial Crisis..


Agenda

Agenda..

  • East Asia pre crisis

  • Thailand

  • Crisis timeline

  • The dilemma

  • Asian Weaknesses

  • After the shock


Countries involved

Countries involved..

  • Thailand

  • Philippines

  • Hong Kong

  • Taiwan

  • Singapore

  • South Korea

  • Malaysia

  • Indonesia

  • China


Thailand

Thailand..

  • May 1997: Thailand spends billions of its foreign reserves to defend the Thai baht against speculative attacks

  • In case of Thailand:

    • Allowing too many short-term capital flows to accumulate with a high degree of currency speculation,

    • Sustaining a fixed exchange rate when it was no longer suitable,

    • Lack of sufficient risk management system at the national level as well as regional level.

    • concerns of large current account deficits

    • weakness in the Thai financial system

    • culminating with the failure of a major finance company, Finance One

  • Speculative attacks brings down investor confidence causing- “capital flight”

  • Crisis in Thailand turned out to be a contagion


Crisis timeline

Crisis Timeline..

  • July 1997

    • Thailand is forced to devalue the baht, which drops the value of the baht by as much as 20%-- a record (had actually attempted a 15% controlled devaluation)

    • Malaysia’s central bank intervenes to defend the ringgit.

    • The Philippine peso is devalued. Indonesia widens its trading band for the rupiah in a move to discourage speculators

    • The Singaporedollar starts a gradual decline.


Crisis timeline contd

Crisis timeline..Contd/.

  • August1997

    • Thailand agrees to adopt tough economic measures proposed by the IMF in return for a $17 billion loan from the international lender and Asian nations. The Thai government closes 42 ailing finance companies and imposes tax hikes as part of the IMF's insistence on austerity

    • Indonesia abandons the rupiah's trading band and allows the currency to float freely, triggering a plunge in the currency


Crisis timeline contd1

Crisis timeline..Contd/.

  • October1997

    • Indonesia asks the IMF and World Bank for help after the rupiah falls more than 30% in two months, despite interventions by the country's central bank to prop up the currency

    • Hong Kong's stock index falls 10.4% after it raises bank lending rates to 300% to fend off speculative attacks on the Hong Kong dollar. The plunge on the Hong Kong Stock Exchange wipes $29.3 billion off the value of stock shares.

    • The South Korean won begins to weaken

    • The IMF agrees to a loan package for Indonesia that eventually swells to $40 billion. In return, the government closes 16 financially insolvent banks and promises other wide-ranging reforms


Crisis timeline contd2

Crisis timeline..Contd/.

  • November1997

    • Bank of Korea allows the won to fall below 1000 against the dollar (record low)

  • December 1997

    • IMF approves a $57 billion bailout package to the South Korea

    • As part of IMF economic restructuring plan, the Thai government closes 56 insolvent finance companies (30,000 white collar jobs lost)

    • South Korea’s first president elected from country’s opposition party. In days the won hits new low.

    • $3 billion emergency loan released by the world bank , part of a $10 billion support package.


Crisis timeline contd3

Crisis timeline..Contd/.

  • January 1998:

    • Release of Indonesia budget plan pulls the rupiah to an all-time low

    • Inflation rises. Prices for basic food staples in Indonesia increase by as much as 80%

    • The rupiah plunges to 12,000 rupiah against the dollar

  • June 1998

    • Japan announces that its economy is in a recession

    • Yen falls to levels near 144 to the dollar. US treaury and Federal reserve intervenes to prop up the yen

  • August 1998

    • Wall Street reacts; the Dow plunges 300 points in its third biggest loss


Dilemma

Dilemma..

  • Drop in currencies

    • Raise import prices leading to inflation threat

    • Threat that potentially viable banks and companies may become bankrupt

  • Defend the currency

    • would mean to raise interest rates

    • Threat of economic slump resulting in the failure of banks


Asian weaknesses

Asian Weaknesses..

  • Weaknesses that became apparent after the crisis:

    • Productivity: economic expansion before crisis later explained by the rapid growth of production inputs (capital and labor) – but relatively little increase in productivity

    • Banking Regulation: Ineffective government supervision

    • Exchange rate regimes- Mostly pegged exchange rate system

    • Legal Framework: lack of structured legal framework to deal with bankruptcy


After the shock

After the Shock..

  • Ties of some currencies to the dollar had to be abandoned resolving floating rate systems

  • Supervisory process reforms

  • Need for accumulation of high levels of international reserves

  • Evidence that excessive capital inflows to a country to take advantage of high rates can cause unwise investment decisions


East asian financial crisis

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