1. Multinational Business Week 10 tutorial Asian Financial Crisis

2. History Before 1997, Asia was attractive By developing countries High interest rates “Asian economic miracle” Four Asian Tigers

3. Introduction July 1997 Countries most affected by the Asian Financial Crisis.

4. Introduction Most affected: Indonesia South Korea Thailand Hong Kong Malaysia Laos Philippines

5. Introduction Least affected People’s Republic of China India Taiwan Singapore Vietnam

6. Introduction Thailand Thai baht Real estate Burden of foreign debt Southeast Asia and Japan Slumping currencies Devalued stock market Steep rise in private debt.

7. IMF Role $40 billion program to stabilize the currencies of South Korea, Thailand, and Indonesia. Bailouts (rescue packages) for the most affected economies to enable affected nations to avoid default. Structural adjustment package

8. IMF conditions cut back on government spending to reduce deficits, allow insolvent banks and financial institutions to fail and aggressively raise interest rates. The reasoning was that these steps would restore confidence in the nations’ fiscal solvency, penalize insolvent companies, and protect currency values.

9. The Currency exchange rate per USD June 1997 compare to July 1998 Thai baht: 24.5 to 41 Indonesian rupiah: 2,380 to 14,150 Philippine peso: 26.3 to 42 Malaysian ringgit: 2.5 to 4.1 South Korean won: 850 to 1,290

10. Thailand

11. From 85-96 Thailand GDP grew 9% per year Highest economic growth rate Inflation was also low (3.4%-5.7%) Baht value was 25 to the US Dollar Investors were guaranteed US Dollar from their investment

12. Thailand May 14-15, 1997 the Baht faced very bad speculative attacks In June, Prime Minister refused to devalue the baht Thai government failed to defend the Baht, starting the crisis Baht lost more then half it’s value Thai stock market dropped 75%

13. Thailand August 11, 1997, IMF unveiled $17 billion rescue package August 20, 1997 IMF approved another $3.9 billion bailout package Rumors that former Prime Minister profited from the devaluation Finally recovered by 2001, paid off IMF debt in 2003

14. Thailand financial crisis Instability of currencies Investor relies heavily on speculation 1.5 million US$ transaction everyday Speculators are betting a money on how currency will move

15. Consequences As dollar appreciated, so did the currency pegged to USD As a result, export became expensive Sales began to fall Deficit began to grow

16. Speculative attack on Thailand Early 1997, investors and hedge funds had a sharp eye for instability on Thailand They were saying that Thailand had to devalue its money because it is borrowing too much money They started betting on it This would definitely had an effect as huge amount of money was on bet Lots of banks from all over the world followed the speculation

17. Speculative attack on Thailand As betting escalated, Thai Baht came under attack Thai government was forced to buy more and more Baht by the dollar it kept in reserve to stabilize its currency But the investor wanted to cash out their investment following the speculation Each transaction was pulling money out of Thailand and bringing money back to US People want to cash their deposit as well all at once Reaches the point of exhaustion and as a result crisis

18. Speculative attack on Thailand Government of Thailand lost its battle against speculator and ran out of cash Within week currencies tumbled, and government fell down This effect had severe effect on Malaysia, Indonesia and South Korea as well There was generalised financial crisis

19. Role of IMF Thailand asked help from IMF Injected capital In return government had to cut budgets, increase interest rates paid to foreign investors They asked for restructuring of the entire economy Consequence was of social cost Unemployment Middle class now poor Huge protest

20. Indonesia

21. Indonesia was doing good in June 1997 Low inflation $900+ Million trade surplus $20 + Billion foreign exchange reserves Good banking sector However, many corporations were borrowing in U.S. Dollars In July 1997

22. Indonesia On August 14, 1997 the managed floating exchange regime was replaced by a free-floating system, causing the rupiah to drop more IMF created a rescue package of $23 Billion, but didn’t help In Sept they hit a all time low, Moody’s rated Indonesia’s long-term debt to “junk bond” status More effects were felt in Nov when the summer’s hits were felt in the corporate books

23. Indonesia In Feb, the President got rid of the governor of the Bank of Indonesia, but this wasn’t enough and he was eventually forced to resign Effects Rupiah was 200 to 1 USD, afterward hit 18,000 to 1 USD Lost 13.5% of GDP

24. South Korea

25. Large corporations were funding big expansions, however failed due to excess debt Moody’s lowered their credit rating from A1 to B2 Seoul stock exchange dropped 4% on Nov 7, 7% on Nov 8, and 7.2% on Nov 24 In 1998 Hyundai took over Kia Motors and Daewoo was sold to American GM Currency dropped from 800 per dollar to 1,700 National debt-GDP ratio went from 13%-30%

26. South Korea September: S.Korea’s foreign debt= $105 billion ($70 billion under 1 year maturity); its reserves =$25 billion. This figures shows that South Korea is technically bankrupt Therefore it has to accept the IMF’s $60 billion so called ‘rescue’ packae

27. South Korea The IMF conditions Cuts in government spending Unemployment to double from 4% to 8% 12 Govt. owned banks to close immediately Restrictions on foreign ownership of Korean banks to be ended Foreigners to be allowed full access to Korean govt. bond market

28. South Korea The IMF conditions (contd..) Foreigners to be allowed to own up to 100% shares in top Chaebol firms (previous limit was 25%) Foreign firms to be allowed entry into the domestic insurance and pension fund industry Govt.-Chaebol links to be made transparent: privileges, subsidies etc. to be ended.

29. South Korea The terms were humiliating; South Korea attempted to improve the terms by asking for only $30b as opposed to $60b loan. The IMF refused, insisting that i) South Korea needed the entire $60b and, ii) not one dollar would be given unless all the conditions were agreed to.

30. South Korea Was the crisis used as a one-off opportunity to prize open South Korea? Answer: Definitely.

31. Hong Kong

32. After UK gave control of Hong Kong to China the Hong Kong dollar was under speculative pressure Authorities spent more then US $1 Billion to defend local currency Had more then US $80 billion in foreign reserves Stock markets became volatile In Oct the Hang Seng Index dropped 23% In Aug 98, interest rates jumped from 8%-23% overnight, and even 500% once

33. Hong Kong The Hong Kong Monetary Authority (HKMA) setup a system to establish rates, however speculators were taking advantage of this by short selling shares. HKMA wound up buying HK$120 billion worth of shares in various companies to combat this Started selling those share in 2001, profiting HK$30 billion

34. Malaysia

35. In July 1997, the Malaysian ringgit jumped overnight from 8% to over 40% Ratings had fallen from investment grade to junk Lost 50% of value, from 2.50 to 3.80 to the dollar Output of real economy declined Construction dropped 23% Manufacturing 9% Agriculture 5.9% GDP 6.2%

36. Malaysia IMF aid was refused Various task forces were formed to fix economy By 2005 had a surplus of US$14.04 billion

37. Singapore

38. Singapore dipped into a short recession Government kept very active management to ensure security Government programs were put forward Made no attempt to help capital markets, instead allowed a 60% drop, however within a year fully recovered and continued to grow

39. Less Affected Countries China, The US, and Japan were very strong economies and were able to survive China held most of it’s foreign investments were in factories rather then securities U.S. didn’t collapse, but on Oct 27,1997 the Dow Jones fell 554 points (7.2%) Japan was affected because the economy is so prominent (yen fell to 147), but it was world’s largest holder of currency reserves so it bounced back quickly

40. Asian financial contagion Because of this crash in Asia, investment flowed elsewhere in Moscow (1998) Investor thought that Russia would not fail Even if it fails, they thought that rich countries will bail them out Russia defaulted on its debt and currency plummeted Now investor realised that massive risk everywhere

41. USA This did affect USA as well One of the private investment fund LTCM (Long Term Capital Management) was in the brink of bankruptcy LTCM directly controlled $100 billion of global assets and indirectly trillion dollar assets September 1998, LTCM losses were out of control Government could do impose its solution because it was private fund

42. USA Failure of single fund threatened the entire global economy Fate of global economy now on the hand of bankers Bankers agreed to put up their own money to protect LTCM As a result Wall Street avoided the disaster

43. Conclusion Many businesses collapsed and millions of people fell below the poverty line Indonesia, South Korea, and Thailand were most affected Heavy U.S. investment shifted from Thailand to Europe Many countries pushed for corporate governing to avoid problems later Investors were reluctant to lend to developing countries

44. Assignment for workshop Explain why bank-based rather than capital market- based finance has traditionally played the more dominant role in the Asian economic paradigm and why, in the current era of globalization, this continued dominance might be a problem.

45. References Kaufman, GG., Krueger, TH., Hunter, WC. (1999) The Asian Financial Crisis: Origins, Implications and Solutions. Springer. Weisbrot, Mark (August 2007). Ten Years After: The Lasting Impact of the Asian Financial Crisis Tecson, Marcelo L. (2009), "IMF Must Renounce Its Weapon of Mass Destruction: High Interest Rates"