The Asian Financial Crisis began in July 1997 and severely impacted economies across Asia, including Thailand, Indonesia, South Korea, and other countries. The crisis was triggered by Thailand deciding to float its currency, the baht, causing its value to collapse and spread contagion to other economies. Weak financial systems, liberalization of capital flows, overreliance on foreign capital, and inconsistent economic policies contributed to the crisis by exposing vulnerabilities and causing investors to lose confidence. The crisis represented a failure of many parties to identify risks and prevent the downturn.

1. THE
ASIAN FINANCIAL
CRISIS
1997

2. Introduction
 A period of financial crisis – Beginning July
1997
 Started in Thailand
 Floating the pegged currency
 Real estate driven financial over extension
 Excessive foreign exposure
 Resulting collapse of the Thai Baht
 Also affected Indonesia, South Korea, Hong
Kong, Malaysia, Phillipines.
 IMF – $40 billion to stabilize their currencies

3. Overview
 The Asian Miracle (pre-crisis scenario)
 What happened in
 Thailand, Indonesia
 South Korea, Philippines, Malaysia
 Japan, US & China
 Consequences
 Role of IMF (International Monetary fund)

4. The Asian Miracle
 1960s – 1990s: Thailand, South Korea, Hong
Kong, Singapore, Taiwan, Indonesia
 Maintained very high growth rates (8-12%)
 Primarily due to:
 Maintained High Interest rates to attract foreign
investments
 Rapid industrialization
 Industrial Policies supporting exports
 Below market interest rates for exporting industries, etc

5. Pre-crisis scenario
 Foreign Capital Inflows:
 US was in recession -> Low interest rates
 Asian Tigers - 50% of capital inflows in Asia
 Dramatic run-up in Asset prices
 Pegged Currencies
 Encouraged external borrowing
 High exports – driving rapid economic growth
 Export to GDP ratio grew from 35% to 55%
 Excessive exposure to forex movements

6. The down turn..
 Asset prices began to collapse
 Causing individuals & companies to default
 Panic among lenders – led to withdrawal of funds
 Credit crunch & bankruptcies
 Depreciative pressures on exchange rates
 Government action:
 Raised interest rates tremendously to prevent capital
flight
 Buying up excess domestic currency at fixed rate to
maintain the peg
 Not sustainable in the long run (due to limited
supply of forex reserves)

7. Thailand
 Prominent economy of South-east Asia.
 During 1985-96 was growing at highest rate of
9%.
 Real Estate sector was booming.
 High interest rate attracted investments from
US and west.
 Export growth was very high.

8. Indonesia
In June 1997 Indonesia seemed far from crisis
because of
 Low inflation
 Trade surplus
 Huge foreign reserves $ 23bn
 Good banking system.

9.  Its currency Rupiah was appreciating due to
this various company borrowed loans from
foreign institutes.
 Thailand floated its currency due to this
Indonesian authority also widened rupiah band
from 8% to 12%.
 In August rupiah comes under severe
speculative attacks which devalued it to
greater extent.

10.  South Korea
 High NPA’s ( Non Performing Assets)
 Great Conglomerates owned by government
 Debt to Equity : 30%
 No returns and Profit on these NPA’s
 Excessive debt lead to takeovers
 Daewoo motors sold to General Motors

11.  South Korea
 High NPA’s ( Non Performing Assets)
 Great Conglomerates owned by government
 Debt to Equity : 30%
 No returns and Profit on these NPA’s
 Excessive debt lead to takeovers
 Daewoo motors sold to General Motors

12.  Philippines:
 Stock market fell to 1000 points from 3000
 Raised interest rates by 3.75%
 Overnight rates jumped from 15% to 32%
 Huge outflow of money

13. Malaysia
 Attacked by Speculators
 Overnight rates jumped from 8% to 40%
 Stock markets fell by 50% from 1200 to 600
 All sectors were hurt, construction sector
contracted 23.5%, manufacturing shrunk 9%
and the agriculture sector 5.9%
 3.80 peg against dollar
 First ever recession

14.  China
 US
 Japan

15. ASIAN CURRENCY
CRISIS AND ITS MAJOR
REASON

16. Currency Crisis
A currency crisis is brought on by a decline in
the value of a country's currency. This decline
in value negatively affects an economy by
creating instabilities in exchange rates,
meaning that one unit of the currency no
longer buys as much as it used to in another.

17. Origin of the Crisis
 Thailand was the first to run into trouble.
 The currency markets first failed in Thailand as
the result of the government's decision to no
longer peg the local currency to the U.S. dollar.

18.  The Baht's fall impacted other Southeast
Asian currencies struggling with current
account deficits (Indonesian rupiah,Philippine
peso and Malaysian dollar)
 As the crisis spread, most of Southeast Asia
and Japan saw slumping currencies, devalued
stock markets and other asset prices, and a
precipitous rise in private debt.

19. Reasons of Crisis

20. Weak Financial market
 In case of newly opened or reformed
economies the financial system plays even
more important role in allocating scarce
resources to their final uses.
 The use of open financial systems that was not
properly prepared for international competition
and not very competitive.
 It may be rational for an individual borrower to
use cheaper credit available on international
markets, but for the economy of a country this
collective behaviour may result in a risky

21. Liberalization
 Unmanaged international capital flows and private
sector financial decisions were one of the most
important contributory factors of the crisis
 This facilitated the large inflows of funds in the form of
international bank loans to local banks and companies,
purchase of bonds, and portfolio investment in the local
stock markets.
 Foreign investment may have been at least partially
speculative, and investors may not have been paying
close enough attention to the risks involved.

22. Continue…
 In 1996, US$94 billion entered and in the first
half of 1997. With the onset of the crisis, $102
billion went out in the second half of 1997. The
massive outflow has continued since.

23. Economic Integration and
Interdependence
 Integration with the global financial markets
has not been an unmitigated blessing for the
emerging market economies.
 Up until the Asian crisis, emerging East Asia
attracted almost half of total capital inflows to
developing countries.
 The regional economies east Asian countries
received large capital inflows and experienced
a dramatic surge in asset prices, with an

24. Inconsistent economic policies
 The countries of the region had been reluctant
to strip capital controls, in the 1990s these
controls where reduced in order to increase
the efficiency of the financial system.
 The governments sought to improve the
efficiency of their financial sector by
deregulating them and by allowing foreign
competition.
 Capital could flow freely in and out of the
countries

25.  The main reason for the Asian financial crises
was an underestimation default and exchange
rate risk combine with fragile financial system
in which both domestic and foreign investors
lost confidences.
 The crisis represented a forceful manifestation
of the weakness of the economic profession,
commercial businesses, international financial
organizations and the banks in identifying the
vulnerability and preventing the economic

26. THANK YOU…..