According to Hill (n.d.), the Asian Financial Crisis took place between mid 1997 and early 1998. This financial crisis was brought about by depreciation of the currency, being the result of excessive borrowing (Nanto, 2008). Prior to the crisis, Asian countries had registered a remarkable economic growth.
Such countries as Thailand, Singapore, Malaysia, Indonesia and South Korea had a Gross Domestic Product (GDP) growth rate of 6% to 9% (Hill, n.d.). This growth was associated with ”inflow of investments, improvements in technology, increases in education, a ready supply of labor as people moved from the countryside to the cities to work in factories, and reduced restrictions on trade and commerce leading to free‐market economies” (Vallorani, 2009, p. 3).
However, this economic boom came to its end in June 1997 after most of Southeast Asia’s stock and currency markets collapsed (Hill, n.d.). Therefore, although this financial meltdown hit most Asian countries, Southeast Asia was most affected. This essay explains and assesses the causes, extent and effects of the 1997-1998 Asian Financial Crisis as well as its recovery process.
Before the crisis, most Asian countries were enjoying an unprecedented growth in GDP and exports (Hill, n.d.). For instance, between 1990 and 1996, Malaysia, Thai and Singapore’s exports grew by 18%, 16% and 15% respectively (Hill, n.d.). Furthermore, exports from these countries transformed from basic items to complex and high technology goods, such as automobiles and electronics (Hill, n.d.).
At the same time, most countries experienced reduced barriers to international trade and an inflow of international investors. In other words, Asian countries’ Foreign Direct Investment (FDI) was on the rise. For that reason, the financial crisis occurred after a decade of the economic growth in Asia.
Hill (n.d.) reiterates that this financial crisis was mainly caused by mismanagement of Asia economic growth. While agreeing with Hill (n.d.), Vallorani (2009) adds that this borrowing led to an increase in the prices of retail spaces, real estates and other assets. In addition, local banks borrowed heavily from international banks and provided unregulated loans to local customers (Vallorani, 2009).
The deregulated financial sector then led to loans and easy money. As a result, Asia found itself in huge debts. Subsequently, this borrowing led to unsustainable valuations of most investments. For instance, enterprises which did not deserve credit were given enormous loans. Consequently, these enterprises lacked the capacity to repay these loans after the crisis. As such, investors began speculating on currency value (Vallorani, 2009).
Expecting local currencies to lose value, many speculators sold their local currencies. This action later led to the actual devaluation of local currencies. Thailand’s baht was the first currency to depreciate. Later on, the devaluation spread from one country to another like a series of dominos knocked down from the first to the last (Vallorani, 2009). Accordingly, international loans, which were valued in dollars, skyrocketed (Vallorani, 2009).
Worse is the fact that investors started to re-evaluate their investment risks in Asia while other completely lost faith in Asian markets. In addition, the crisis raised serious issues about the Asian economic model as well as the ideas behind fixed and floating exchange rates. The Asian economic model advocates for cooperation between businesses and the government. Therefore, Asian countries combine a central government’s planning ability with the dynamics of a market economy (Hill, n.d.).
Prior to the crisis, most Asian countries pegged their currencies against the US dollar and only intervened when their currencies were under threat (Hill, n.d.). Asian countries, therefore, used a managed float as a way of accruing gains related to a fixed exchange rate. However, this undertaking is susceptible to speculative pressure (Hill, n.d.). For that reason, a managed float system can be directly related to the 2007 economic downturn in Asia.
Nonetheless, this crisis did not hit all countries with the same magnitude. China and Singapore were among the least affected countries (Vallorani, 2009). In fact, these countries only suffered from spillover effects. China’s GDP rose, FDI leveled and the Yuen appreciated against the dollar in late 1990s (Vallorani, 2009).
On the other hand, Hong Kong’s GDP growth slowed significantly in late 1990s before bouncing back in 2000 (Vallorani, 2009). The GDP of most countries in Southeast Asia dwindled; FDI remained level and their currency depreciated at an alarming rate against the dollar (Vallorani, 2009).
Examples of countries that were most affected include Japan and Southeast Asian countries, such as Thailand, Singapore, Malaysia, Indonesia and South Korea (Hill, n.d.). In early 2008, the stock markets in most Southeast Asian countries depreciated by over 70% and their currencies lost more than 70% of their value against the dollar (Hill, n.d.). Some Japanese brokerage firms and banks collapsed in November 2007.
Top on the list were Sanyo and Yamaichi brokerage firms and the Hokkaido Takushoku bank (Hill, n.d.). However, in most countries FDI increased immediately after the crisis (United Nations Conference on Trade and Development (UNCTAD), 1998). This increase was brought about by decreased costs, resulting from depreciated exchange rates, low property prices and selling of company assets. Companies, which sold their assets, were in big debts and could not access liquidity.
For that reason this crisis affected international business. Owing to the 1990s boom, many investors predicted that Southeast Asia was going to become the next propeller of world’s economy (Hill, n.d.). The collapse of this boom, thus, brought investors back to the drawing board.
The damage caused by the 1997-1998 Asian Economic Crisis took long to repair. Ravaged by this economic downturn, Asian countries reverted to IMF for help. However, IMF’s help came with certain conditions. For instance, affected countries were forced to raise interest rates and relax their restrictions on FDI (Hill, n.d.).
Moreover, these conditions had to be met before any additional funding was provided by IMF. For instance, IMF signed a $58.4 billion rescue package with South Korea on condition that South Korea would correct certain mistakes in its financial systems (Jeon, 2010).
In other words, South Korea was to reform its financial and corporate sector and the labor market. In addition, South Korea was required to soundly manage its macroeconomic policy as a way of regaining global confidence (Jeon, 2010). Nevertheless, affected countries countered the depreciation of their currencies by raising interest rates and selling their foreign exchange reserves (Nanto, 1998). Consequently, their economic growth became sluggish. In addition, equity became less popular than interest-bearing securities.
By engaging in a borrowing spree, Asia brought most of its emerging and powerful economies to their knees (Hill, n.d.). This slump was brought about by depreciation of local currencies. Consequently, Asia lost a decade of unsurpassed economic growth and reverted to the IMF’s for help. Nonetheless, some countries were hit harder than others and it took them long to recover. For example, the crisis had more adverse effects on Japan and Southeast Asian countries than China and Hong Kong.
References
Hill, C.W.L. (n.d.). The Asian financial crisis. Web.
Jeon, B.N. (2010). From the 1997-98 Asian financial crisis to the 2008-09 global economic crisis: Lessons from Korea’s experience. East Asia Law Review, 5 (1). Web.
Nanto, D.K. 1998. The 1997-98 Asian financial crisis. Web.
United Nations Conference on Trade and Development (UNCTAD). (1998). The financial crisis in Asia and foreign direct investment: An assessment. Web.
Valloran, ED. (2009). 1997 Asian financial crisis. Web.