1. Asian financial crisis in 1997
Indonesia Asian Financial Crisis
Asian financial crisis in  
Thailand
Indonesia
South Korea
102SIS71Bae Eun young
Julie Cheremetova
112SIS50 Heejung Park

2. Context of Crisis
Relied on the Bank of Thailand - led by the Governor - finally spent as much as USD24,000 billion (around two-thirds of the Kingdom's international reserves) to protect the Baht value.
As a result, on July 2, 1997, Thailand had only USD2,850 billion left as international reserves and, hence, could no longer fight against currency attack to protect the pegged value of the Thai baht.
In the same day, declared to float the national currency. This was usually marked as the beginning point of the 1997 Asian Financial Crisis.

3. Guarding against currency crises : the observation
Indonesia Asian Financial Crisis
A major question: full currency convertibility
How can the chances of a currency crisis be minimized when even transient difficulties may result in a loss of confidence?
Given the international investor’s aversion to risk,
A. the preponderance of herd behavior
B. the difficulty of distinguishing between temporary and permanent shocks
C. a country is likely to find debt servicing difficult and its currency under attack when its export market is disrupted or its terms of trade decline drastically.

4. Weakness of Thai economy
Indonesia Asian Financial Crisis
A. Consists primarily in reliance on labor intensive exports, lack of upgrade of technology and scarcity of educated and skilled manpower
B. The lack of foresight of private entrepreneurs who enjoyed almost unfettered freedom in choosing production, investment, and mode of its financing.
C. The fundamental defect here lay in the lack of public investment where private investment would be grossly inadequate in view of large and positive externalities.

5. Lessons from the Thai crisis
Indonesia Asian Financial Crisis
Lessons from the Thai crisis
Financial policy
A. It is important to take timely steps so that the troubles do not develop into a full blown crisis and undermined investor’s confidence in the country’s currency.
B. Potential problem of Lending and borrowing policies of finance companies were under the deregulated regime, dictated by the profit motive, and until 1996 these policies appeared eminently successful in securing their objective.

6. Investment , foreign borrowing and exports
Indonesia Asian Financial Crisis
Investment , foreign borrowing and exports
A. The problem is hidden when borrowing and investment decision are driven purely by market forces
There is no mighty invisible hand in the real world
C. The most serious weakness of Thai economy originated from prolonged policy failure at the national level.

7. Possible Interpretation of Thai case
Indonesia Asian Financial Crisis
Possible Interpretation of Thai case
The importance is more psychological than economic:
Thai had Large foreign exchange reserves &
the fact the country does not immediately have to seek loans on a significant scale
Two basic weakness of the Thai economy
Overreliance on low technology and labor intensive exports due to inadequate investment in education and skill formation
2. Financial fragility

8. Last remarks :Way of reducing the risk
1. Diversification of investment
2. Acquisition of income earning assets abroad
3. To build up a flexible economic system. Such a system requires, above all, investment in human capital for development of skill, adaptability to vagaries of world market

9. The Period leading to the crisis: 1995-1996
Indonesia Asian Financial Crisis
The Period leading to the crisis:
Signs of overheating
Quit high inflation
Sharp drop of trade surplus
Inappropriate response of Sukarno’s government
Modest deflationary budget
No tightening of monetary policy

10. The Period leading to the crisis: Bank of Indonesia actions
Indonesia Asian Financial Crisis
The Period leading to the crisis: Bank of Indonesia actions
Goal : reducing the inflation with monetary contraction policy by damping the domestic demand
Actions
Interest rates rising
Reserve requirements for commercial banks increasing
Reducing the foreign capital inflows by increasing of Rupiah’s trading band from 2 to 8%
Results
Trading risks did not discourage capital inflows because of high rate interests
Reserve requirements for commercial banks increasing
The minimum reserve of deposits that the banks have to hold.
Influence the country borrowing by changing the amount of the funds available for banks to make loans with.
Higher is the rate, less banks loans.  Moderate the expansion of credit  Damp the domestic demand
Trading band increasing : increase trading risks and discourage to invest / capital inflows
Monetary contraction policy: reducing the supply

11. Indonesia - 1997 Asian Financial Crisis
From Currency crisis to Financial crisis: Underestimation of total foreign borrowings
Indonesian companies were kept borrowing in international capital markets.
Indonesian government did not take into account the short-term borrowings and underestimated the real value of depts:
Official figure : $117 billion
Reality: $200 billion
Indonesian government policies though Bank of Indonesia failed to avoid Currency crisis .

12. From Currency crisis to Financial crisis: Main dates
Indonesia Asian Financial Crisis
From Currency crisis to Financial crisis: Main dates
July 1997: Rupiah’s depreciation
August 1997: managed floating exchange regime replaced by free-floating exchange regime
November 1997:
a three year stand-by arrangement with the IMF for $10 billion + $18billion from other institutions
closing of 16 insolvent banks
March 1998: Presidential elections
May 1998: Demonstrations and riots, Suharto’s resignation
Institutions: “second line of defense”
Small appreciation of Rypiah

13. From Currency crisis to Financial crisis: Some figures
Indonesia Asian Financial Crisis
From Currency crisis to Financial crisis: Some figures
1996
1997
1998
Real GDP Growth
8.2 %
1.9 %
-14.2 %
Consumer prices (period average)
5.7 %
12.9 %
64.7 %
External debt ($ billion)
127.4
135.0
149.9
External debt (% of GPD)
54.5
163.1
129.0
Rupiah value depreciation (comparing to the beginning of the year)
July
August
September
-9%
-27%
-37%

14. From Currency crisis to Financial crisis: Some figures
Indonesia Asian Financial Crisis
From Currency crisis to Financial crisis: Some figures

15. Indonesia - 1997 Asian Financial Crisis
Main causes
Large stock of private foreign dept of Indonesian companies and banks in USD
Ineffective actions of government
Unstable political situation
Indonesian government policies though Bank of Indonesia failed to avoid Currency crisis .

16. Korea Economy Crisis Content
I. Development process and spread route of IMF foreign exchange crisis
II. Causes of IMF foreign exchange crisis
III. Policy response under economy crisis
- monetary policy and fiscal policy
- restructuring of enterprises
and financial companies
IV. Conclusion

17. I. Development process and spread route of economy crisis -
Korea economy crisis 1997
I. Development process and spread route of economy crisis -
1997 Foreign exchange crisis
Stage Overcome Crisis
Export boom and unified effort for overcoming crisis
Stage Advent of Crisis and its deterioration
Spread of foreign exchange crisis and
IMF bail-out loan application
Stage Sign of Crisis
The failure of financial liberalization policy
in Asia and Korea
<Korea’s OECD accession >
< Bail-out to the IMF in 1997 >
< Export and IT boom >

18. Spread route of economy crisis
Korea economy crisis 1997
IMF foreign exchange crisis
Foreign exchange shortage: approximately 5.6 bn $
(when crisis)
Insolvent financial institution:
90 institutions bankrupted or merged
Chain reaction bankruptcies of companies :
39,996 companies(1997 ~1998)
Economic Recession: growth rate :
-6.9% (1998)
Unemployment rate: 7.1% ( )
168 trillion won
government fund injected

19. II. The main causes of economy crisis
Korea economy crisis 1997
II. The main causes of economy crisis
30 largest firms’ debt composition
Increase of short-term debt
Accumulated current account deficit and failure of Economy liberalization policy
Spread of foreign exchange crisis and Large firms’ chain reaction bankruptcies
Credit crunch by the bankruptcies
Government’s inexperienced action

20. III. Policy response under economy crisis
Korea economy crisis 1997
III. Policy response under economy crisis
1. Monetary policy and fiscal policy
2. Restructuring of enterprises and financial companies!!!

21. Korea economy crisis 1997
IV. Conclusion
Foreign exchange reserves and Foreign exchange liquidity
Still left as a difficult task in IMF crisis or even now
Britain ‘Financial Times’ and American ‘Wall street journal’ mentioned in 2008 global economy crisis that Korea is the most vulnerable to the global financial crisis and the default situation like IMF foreign exchange crisis might occur again.
Q. Why was this kind of default situation expected again?

22. Follow up Questions
Indonesia Asian Financial Crisis
1.What is the role of fear factor in Thailand case?

23. Thank You