Asean Crisis

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1997 ASIAN FINANCIALCRISIS

MULTINATIONAL BUSINESSFINANCE

KAUSHIK PAUL


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INTRODUCTIONINTRODUCTION

The Southeast Asianeconomies(Thailand,

Malaysia,Indonesia,Singapore) and

South Koreaexperienced an

impressive growth

path for over adecade before thefinancial crisis inthe beginning of

July 1997


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GDP per Capita Growth Rate (%)GDP per Capita Growth Rate (%)

0

1

2

3

4

5

6

7

8

9

10

Indonesia Thailand Malaysia Philippines Singapore

1985-90

1990-95


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SUDDEN COLLAPSESUDDEN COLLAPSE -- WHY?WHY?


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PRE-CRISIS BUILD-UP

Currencies pegged to the US $ Stabilize return expectations of foreign inv.

Stabilize interest payment on foreign loans

Current account deficit increasing but

currencies not allowed to float Imports increasing

Exports facing competition from China

Foreign Debt cumulating (High Leverage) Allocation determined by political cronyism

Thailand, Indonesia, Korea, Philippines

Foreign investments (mostly into real estatesector) causing speculative bubble


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682.1911.9

-229.8-400

-200

0

200

400600

800

1000

1200

1990 1992 1994 1996 1998

Export Import Balance

ASEANASEAN -- TradeTrade BalanceBalance(in US$ Billions)(in US$ Billions)


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PRE-CRISIS THAILAND

Bangkok International Banking Facility(BIBF), a government established bankingentity acted as a channel of internationalcapital into the domestic market

BIBF allowed the local banks of Thailand tomake dollar loans to the domestic borrowers atmuch lower rates of interest than those in Thaibaht terms Debt financing cheap and easily available

Companies became highly leveraged

Short-term loans being used to finance long-term projects WHY? Mostly to real estate sector & financial mrkts

Cronyism dictating how loans allocated


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DEBT FINANCING


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LEVERAGE POSITION


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DEBT DISTRIBUTION (1996)


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MATURITY DISTRIBUTION

Indonesia SouthKorea Philippines Thailand Taiwan

0

10

20

30

40

50

60

70

80

90

Proportion of loans with maturity one year or less at theend of 1996

62

68

84

65

50


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CURRENT LIAB. / TOTAL LIAB.


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HOW CRISIS HAPPNED

Large quantities of available credit Highly-Leveraged economic climate

Asset prices pushed up to unsustainable level

Eventually start coming down and collapse- Real Estate and Stock Market

Default on Debt obligation (mismatch ST and LT)

Panic among Lenders

Large withdrawal of credit

Credit crunch and further bankruptcies

Potential Collapse of the market


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HOW CRISIS HAPPENED

G

overnment is forced to raise Domestic interest rate toexceedingly high levels to prevent capital flight- Economy becomes more fragile

Government buys excess domestic currency at fixed exchangerate

- Speculators join the fray

Hemorrhaging foreign reserves of central banks

Tide of fleeing capital does not stop

Authority ceases to defend fixed exchange rate

Currency floats and depreciates Foreign currency-denominated liabilities grow substantially

More bankruptcies

Further deepening of the crisis


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CHRONOLOGY OF EVENTSCHRONOLOGY OF EVENTS

Timeline Important Events

Early May 1997 Japan hints that it might raise interest rates to defend the yen. The threatnever materializes, but it shifts the perceptions of global investors who beginto sell Southeast Asian currencies and sets off a tumble both in currencies

and local stock markets.

July 2, 1997 After using $33 billion in foreign exchange, Thailand announces a managedfloat of the baht. The Philippines intervenes to defend its peso.

July 18, 1997 IMF approves an extension of credit to the Philippines of $1.1 billion.

July 24, 1997 Asian currencies fall dramatically.

August 13-14, 1997 The Indonesian rupiah comes under severe pressure. Indonesia abolishes itssystem of managing its exchange rate through the use of a band.

August 20, 1997 IMF announces $17.2 billion support package for Thailand with $3.9 billionfrom the IMF.

August 28, 1997 Asian stock markets plunge. Manila is down 9.3%, Jakarta 4.5%.


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October 8, 1997 Rupiah hits a low; Indonesia says it will seek IMF assistance.

October 14, 1997 Thailand announces a package to strengthen its financial sector.

October 20-23, 1997 The Hong Kong dollar comes under speculative attack; Hong Kong aggressivelydefends its currency. The Hong Kong stock market drops, while Wall Street and other

stock markets also take severe hits.

October 28, 1997 The value of the Korean won drops as investors sell Korean stocks.

November 5, 1997 The IMF announces a stabilization package of about $40 billion for Indonesia. TheUnited States pledges a standby credit of $3 billion.

November 3-24, 1997 Japanese brokerage firm (Sanyo Securities), largest securities firm (YamaichiSecurities), and 10th largest bank (Hokkaido Takushoku) collapse.

November 21, 1997 South Korea announces that it will seek IMF support.

November 25, 1997 At the APEC Summit, leaders of the 18 Asia Pacific economies endorse a frameworkto cope with financial crises

December 3, 1997 Korea and IMF agree on $57 billion support package.

December 5, 1997 Malaysia imposes tough reforms to reduce its balance of payments deficit.



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September 4, 1997 The peso, Malaysian ringgit, and rupiah continue to fall.

December 25, 1997 IMF and others provide $10 billion in loans to South Korea.

January 6, 1998 Indonesia unveils new budget that does not appear to meet IMF austerity

conditions. Value of rupiah drops.

January 8, 1998 IMF and S. Korea agree to a 90-day rollover of short-term debt.

January 12, 1998 Peregrine Investments Holdings of Hong Kong collapses. Japan disclosesthat its banks carry about $580 billion in bad or questionable loans.

January 15, 1998 IMF and Indonesia sign an agreement strengthening economic reforms.

January 29, 1998 South Korea and 13 international banks agree to convert $24 billion in short-term debt, due in March 1998, into government-backed loans.

January 31, 1998 South Korea orders 10 of 14 ailing merchant banks to close.

February 2, 1998 The sense of crisis in Asia ends. Stock markets continue recovery.



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CURRENCY DEVALUATIONS

Currency

Exchange Rate

(Per US $1)% Change

June

1997July 1998

Thailand Baht 24.5 41 -40.2%

Indonesian Rupiah 2,380 14,150 -83.2 %

Philippine Peso 26.3 42 -37.4%

Malaysian Ringgit 2.5 4.1 -39.0%

South Korean Won 850 1,290 -34.1%


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GDP MELTDOWN

Country

GDP (US $billon)

% Change

June 1997 July 1998

Thailand 170 102 -40.0%

Indonesia 205 34 -83.4%

Philippines 75 47 -37.3%

Malaysia 90 55 -38.9%

South Korea 430 283 -34.2%


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FINANCIAL SUPPORT PACKAGESFINANCIAL SUPPORT PACKAGES

(IN BILLION US$)


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MEASURES TAKEN BY GOVTSMEASURES TAKEN BY GOVTS

Financial sector reforms

Transparent and improved regulations

Strengthening corporate governance

Opening up of markets to morecompetition

Promotion of their economic advantagesby encouraging foreign trade


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RECOVERY FROM CRISISRECOVERY FROM CRISIS

Asean Crisis

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