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South East Asian Crisis: S. Korea and Indonesia

South East Asian Crisis: S. Korea and Indonesia. Key Points. Origins of the crisis Thai Baht Economy of S. Korea and Indonesia The Chaebols Beginning of the collapse Seoul Stock Exchange Default and bailout IMF response. Origins of the Southeast Asian Financial Crisis. Thailand

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South East Asian Crisis: S. Korea and Indonesia

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  1. South East Asian Crisis:S. Korea and Indonesia

  2. Key Points • Origins of the crisis • Thai Baht • Economy of S. Korea and Indonesia • The Chaebols • Beginning of the collapse • Seoul Stock Exchange • Default and bailout • IMF response

  3. Origins of the Southeast Asian Financial Crisis • Thailand • Fixed exchange rate to the US dollar • Easy credit from Western and Japanese banks • Massive foreign debt • Huge real estate bubble • Real GDP grew at 9% a year from 85 to 96

  4. Thai Baht • Pegged at 25 baht to $1 USD • May 1997 – Investors started to short the baht • June 1997 – Baht was forced to float • Devalued to 56 baht per $1 USD by early 1998

  5. Consequences • Housing bubble burst • Resulted in massive layoffs in finance, real estate and construction • Stock market plunged by 75% • $17 billion bailout package from IMF • Subject to IMF conditionality

  6. Economy of South Korea • 11th largest economy at the time • Dominated by chaebols Multinational conglomerates Implicitly backed by the government

  7. The Chaebols • Aggressive expansion to compete with Western MNC’s • Led to overleveraging and negative returns • Banks were burdened by non-performing loans

  8. Beginning of the Collapse • July 1997 – Kia Motors asked for emergency loans from the government • Was later absorbed by Hyundai • Daewoo collapsed and was sold to General Motors • Moody’s lowered South Korea’s credit rating from A1 to A3 then to B2

  9. Seoul Stock Exchange • Dropped 30% in November 1997 • Massive capital flight • Korean won lost half its value to the dollar from 1997 to 1998

  10. Default and Bailout • Korea was about to default on its foreign debt • Korea was given $55 billion in new loans and credits by the IMF • It was the largest bailout in history up to that point.

  11. IMF response • Structural Adjustment Programs • Reduce government spending • Let insolvent financial institutions fail • Raise interest rates • Restore confidence in the currency

  12. Who’s to Blame? • Most Koreans blame the IMF for the crisis and refer to it as the IMF crisis • Was the IMF truly to be blamed?

  13. Indonesia: • Country in Southeast Asia and Oceania • 17, 508 islands, 6,000 are populated • Area-742,050 sq mi • Population around 230 million • World’s 4th most populous country • Capital city-Jakarta

  14. Republic of Indonesia

  15. Economy of Indonesia • Largest economy in Southeast Asia • GDP: US $932.1 billion • Member of G-20 major economies • Market-based • Over 164 state-owned enterprises

  16. Beginning of the collapse • Depreciation of rupiah • Rp 2,600/$1 (Aug 1997) fell to 11,000/$1 (Jan 1998) • Public debt reaching $60 bn USD • Real GDP contracted by 13.7% • Inflation of 77% in 1998

  17. Initial Response • Float the rupiah • Raise key domestic interest rates • Tighten fiscal policy

  18. IMF Response • Rescue package of $23 billion • Financial sector restructuring • Stabilizing the rupiah • Retention of a tight monetary policy • Flexible exchange rate policy

  19. Source:International Monetary Fund - 2009 World Economic Outlook

  20. Source:International Monetary Fund - 2009 World Economic Outlook

  21. Questions?

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