1 / 16

ASIAN CURRENCY CRISIS AND THE IMF, 10 years later: overview

ASIAN CURRENCY CRISIS AND THE IMF, 10 years later: overview. Instructor International Finance. ASIAN CURRENCY CRISIS. Started on July 2,1997 with the devaluation of Thai baht Affected Asian countries, especially Thailand, Indonesia, the Philippines and Malaysia

vicki
Download Presentation

ASIAN CURRENCY CRISIS AND THE IMF, 10 years later: overview

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. ASIAN CURRENCY CRISIS AND THE IMF, 10 years later:overview InstructorInternational Finance

  2. ASIAN CURRENCY CRISIS • Started on July 2,1997 with the devaluation of Thai baht • Affected Asian countries, especially Thailand, Indonesia, the Philippines and Malaysia • By mid Jan 1998 , the currencies of all emerging market economies in East Asia had lost half of their pre crisis values in terms of the US dollar • Indonesian rupiah fell to one-sixth of its pre-crisis value (the worst hit)

  3. 10-year changes

  4. 10-year changes

  5. MEXICAN CRISIS – a precursor • The crisis • Dec 20,1994 – the Mexican government devalued the peso. Investors started to withdrew their capital from Mexico • Inflation start soaring, severe recession in Mexico • The failure of Tesobonos – 3 months dollar denominated government debt • Total support : more than USD 50 billion • Lessons from the crisis • IMF had to improve its role of surveillance, detecting vulnerabilities and weaknesses • When a mid size emerging market country with free capital mobility experiences sudden capital outflows, the amount of assistance needed is much more

  6. THAILAND • The crisis • July 1997 • Large current account deficits (about 8% of the GDP) • More than offsetting capital inflows (about 10% of GDP) • Speculative attacks and the flotation of the baht • IMF support and conditions • Total support : USD 17.2 billion • Fiscal and monetary tightening • Faster closure and liquidation of weak FIs • What went wrong? • Fiscal tightening makes the economy deteriorate quicker. Should aim more to control domestic inflation. • The Thai government could not detect the insolvent FIs due to political instability and poor governance

  7. THAILAND • Lessons learned 1. De facto dollar peg may result in an overvalued real exchange rate if the domestic inflation rate is higher than the US rate 2. If the fixed exchange rate is to be abandoned, the central bank should do so at a time when they hold sufficient foreign reserves 3. Small size of IMF program  deterioration of the baht 4. Maturity and currency mismatch of foreign loans  increase country’s vulnerability

  8. CONTAGION : Depreciation, AMF and Hong Kong • From July to September, Thai baht led the decline of the Asian currencies. • By mid-September, Thai baht lost 30% of its pre-crisis value, followed by the Philippine peso, Malaysian ringgit, and Indonesian rupiah by 20%. • The strongest group was Korean won, Singaporean dollar, and New Taiwan dollar with depreciations of only 5%. The Hong Kong dollar and Chinese yuan were pegged to the US dollar throughout this period (and beyond). • Thai baht was an epicenter of the regional crisis from July to September, but later Indonesia and South Korea became the epicenter from October to December.

  9. CONTAGION : Depreciation, AMF and Hong Kong • The floating of the baht on July 2, 1997, prompted a change in the exchange rate regimes of Thailand’s neighboring countries. • On July 11, the Philippine peso was floated, and the intervention band of the Indonesian rupiah was widened to 12%. • On July 14, the Malaysian ringgit was floated. • Discussions started in Asia about the establishment of a mechanism for supporting a country facing a liquidity crisis

  10. INDONESIA • The crisis • Largest currency depreciation, sharpest decline in output, severest social and political chaos • IMF support and conditions • Total support of USD40 billion • Initial programs: reform plan for the banking sector and recommendations of tight fiscal and monetary policies • What went wrong? • Severe fiscal austerity caused millions of Indonesians lost their job • Monetary and fiscal tightening may have been too bitter medicine for Indonesia – violation of macroeconomic conditions

  11. SOUTH KOREA • The crisis • Chaebols failed in early 1997 but it was considered not serious • Mid Nov 1997,foreign investors refused rollovers of loans to South Korea firms and financial institutions • Foreign reserves started to decline • IMF support and conditions • Financial support of USD 57 billion • Initial programs: tighten monetary policy, a slight fiscal surplus, trade and capital account liberalization, labor reform • IMF had to come up with large amount of assistance in a hurry • What went wrong? • It was a pure form of liquidity crisis. South Korea was under serious capital outflows pressure and depleting foreign reserves, yet has to undergo reforms to open its capital accounts and liberalize imports

  12. THE V-SHAPE RECOVERY • By the end of June 1998, there were three groups of currencies in terms of the degree of their depreciation . • The Indonesia rupiah was still at about one-sixth level of its peak value. • Singapore and Taiwan appreciated to the level that was no more than 20% from the pre-crisis level. • Thai baht, Malaysian ringgit, Philippine peso, and the South Korean won converged to levels of 35–40% depreciations compared to their peak values.

  13. THE V-SHAPE RECOVERY • South Korea repaid all of its IMF loans ahead of schedule in August 2001. • Thailand repaid its IMF loans ahead of schedule in July 2003. • Indonesia required the longest period to repay all its IMF loans in October 2006. • All scars of Asian currency crisis were healed by end 2006.

  14. CONCLUSION • There is still a widespread, persistent resentment against the IMF in Asia. • It was believe that the Asian crisis was a “liquidity crisis” rather than a “solvency crisis” with fundamental structural problems. • IMF’s standard recipe cannot solve problems of every country • Closure of troubled FIs and abrupt cutback of G on food subsidies exacerbated the economic and political conditions

  15. CONCLUSION “ I thought it was a mistake. For one thing, unlike the Latin American nations, the east Asian countries were already running budget surpluses that it was actually starving the economy of much needed investments in education and infrastructure, both essentials to economic growth. And the east Asian nations already had tight monetary policies, as well inflation was low and falling. The problem was not imprudent government as in Latin America but the imprudent private sector – all those bankers and borrowers, for instance, who’d gambled on the real estate bubble.” – former World Bank Chief Economist, Joseph Stiglitz

  16. Thank you

More Related