The Asian Financial Crisis
Hung-Gay Fung
University of Missouri-St. Louis
Presentation Outline
Discuss briefly the behavior of the
Foreign Exchange (FX) of Southeast
Asian Countries.
Assess different factors that lead to
the currency crisis.
Opportunities and Implications for
U.S. companies
Foreign Exchange Rates
Since June 1997, FX rates in many
Southeast Asian countries have experienced
a substantial decline.
These countries include the Philippines,
Malaysia, Thailand, Indonesia, and Korea.
Many of these countries linked their
exchange rates to the U.S. dollar before the
currency crisis.
Change in FX rates
(6/30/1998)
Chinese yuan
HK dollar
Indonesia rupiah
Japanese yen
Malaysian ringgit
Korean won
Philippine peso
Thai baht
FX:1 $US
FX: 1 $US
%
6/30/98
6/30/97
change
8.281
7.745
14568.89
138.31
4.1
1370
41.5
42.16
8.289
7.747
1760
114.61
1.827
641.4
19.08
17.9
+0.09
+0.03
-87.92
-17.58
-55.44
-53.18
-54.02
-57.54
Immediate Results of Crisis
In addition to currency devaluation:
Collapse of their Stock Markets
(all Southeast countries);
Call for an IMF rescue plan in the
Philippines, Thailand, Indonesia and
Korea;
Bankruptcy and financial reforms
(all Southeast countries).
What Happens to Capital
Flows?
Private flows, net
Equity Investment
Private Creditors
1994
1995
1996 1997*
40.5
12.2
28.2
77.4
15.5
61.8
93.0
19.1
74.0
Source: Institute of International Finance, Inc., “Capital Flows to
Emerging Economies,” January 1998.
-12.1
-4.5
-7.6
Reasons for the Currency
Crisis
Decline in Export Earnings
Excessive and Risky Investment
Current Account Deficit
Overvalued Currency
Underdevelopment of credit market
Property market bubble
Decline in Export Earnings
Regional Annual Growth Rate of Exports (%)
Country
China
Indonesia
Korea
Malaysia
Philippines
Thailand
Mexico
1990
18.2
15.9
4.2
17.4
4.0
14.9
17.7
1991
15.8
13.5
10.5
16.8
8.7
23.2
0.7
1992
18.1
16.6
6.6
18.5
11.2
14.2
1.4
1993
7.1
8.4
7.3
15.7
13.7
13.3
9.2
1994
33.1
8.8
16.8
24.7
20.0
22.7
14.2
1995
22.9
13.4
30.3
24.7
31.6
25.1
40.3
1996
1.6
9.7
3.7
26.0
16.7
-1.3
22.6
Excessive and Risky Investment
Incremental Capital-Output (ICOR) Ratios
Country
1987-1992
1993-1996
China
3.1
2.9
Hong Kong
3.7
6.1
Indonesia
3.8
4.9
Korea
4.0
4.9
Malaysia
3.7
4.8
Philippines
6.0
5.5
Singapore
3.6
4.0
Taiwan
2.4
3.9
Thailand
3.4
5.1
Source: Corsetti and Pesenti (1998)
Current Account Deficit
(% of GDP)
Asian Country:
China
Hong Kong
Korea
Singapore
Taiwan
Indonesia
Malaysia
Philippines
Thailand
1990-1995
(average)
0.9
3.3
-1.2
12.7
4.0
-2.5
-5.9
-3.8
-6.7
1996
0.9
-1.2
-4.8
15.5
4.0
-3.7
-4.9
-4.7
-7.9
Current Account (continued)
Latin America
Argentina
Brazil
Chile
Colombia
Mexico
Other countries:
Israel
Africa (average)
Hungary
1990-95
-1.6
-0.6
-2.6
-1.7
-5.1
1996
-1.4
-3.3
-5.4
-5.5
-0.6
-3.9
-11.1
-4.0
-7.4
-7.8
-3.7
Source: Bank for International Settlements
Overvalued Currency
Country
Hong Kong
Indonesia
Korea
Malaysia
Philippines
Singapore
Thailand
1990
99.7
97.4
97.1
97.0
92.3
101.2
102.2
1991
103.9
99.6
91.5
96.9
103.1
105.7
99.0
1992
108.5
100.8
87.8
109.7
107.1
106.0
99.7
1993
115.9
103.8
85.2
111.0
97.4
108.6
101.9
1994
114.5
101.0
84.7
107.1
111.6
111.9
98.3
Note: The base figure (100) is the average for the year 1990
Source: J.P. Morgan
1995
1996
116.
125.5
100.5 105.1
87.8
86.8
107.0 111.9
109.5 116.0
112.7 117.9
101.7 107.6
Japanese Model
Limit bond market to support long-term
growth.
Keep savings in a small number of powerful
banks which are not properly regulated .
Loans are made to favored customers and
businesses with national ambitions, such as
textiles, steel, shipbuilding, electronics, and
automobiles (such as Japan, Thailand,
Korea, and Indonesia).
Size of Banking sector
U.S.
Japan
Malaysian
Philippine
Thailand
Indonesia
1995 % of GDP
Bond
Bank
Market
Lending
110%
54%
74
152
56
100
39
54
10
100
6
57
Bank Credit to Private Sector
Annual Rate of Expansion % of GDP
Country
1990-1997
1997
China
13
97
Hong Kong
8
157
Indonesia
18
57
Japan
1.5
111
Korea
12
64
Malaysia
16
95
Philippines
18
52
Singapore
12
97
Thailand
18
105
United States
0.5
65
Short-Term Debt to Reserves
Indonesia
Korea
Malaysia
Philippines
Thailand
June 1996
June 1997
1.724
1.623
0.252
0.405
0.992
1.704
2.073
0.612
0.848
1.453
1.325
0.702
1.721
0.740
4.050
1.319
1.210
0.792
1.187
2.440
3.124
1.635
Other countries
Argentina
Brazil
Mexico
Pakistan
South Africa
Zimbabwe
Non-Performing Loans
(% of Total Loans)
Indonesia
Korea
Malaysia
Thailand
1990
4.5
2.1
20.4
9.7
1994
12.0
1.0
8.1
7.5
1995
10.4
0.9
5.5
7.7
1996
8.8
0.8
3.9
N/A
Mexico
Argentina
2.3
16.0
10.5
8.6
14.4
12.3
12.5
9.4
Source: Bank for International Settlements.
Property Market Bubble
Period
Q4, ‘90
Q4, ‘91
Q4, ‘92
Q4, ‘93
Q4, ‘94
Q4, ‘95
Q4, ‘96
Q2, ‘97
Sale Price:
Bangkok (000B/m. sq.)
66.0
67.0
60.0
59.5
60.5
60.5
60.4
43.0
Source: Data Stream and Jones Lang Wootten.
Capital Value
Jakarta ($/m. sq.)
3019
2788
2482
2327
2358
2179
2250
2267
Central Business District Office
Vacancy Rates
Bangkok
Hong Kong
Kakarta
Kuala Lumpur
Manila
Singapore
Shanghai
1997
15.0%
6.0%
10.0%
3.0%
1.0%
8.0%
30.0%
Source: JP Morgan “Asian Financial Markets,”
January 1998.
What Really Causes A Crisis?
Corruption?
Korea, Indonesia, Thailand -corruption
Italy and India have corruption, but no
crisis
Bank Transparency
inadequate regulatory framework
irrational lenders?
Fundamental Factors-GDP growth
(%)
Indonesia
Korea
Malaysia
Philippines
Thailand
1993
6.5
5.75
8.41
2.12
8.27
1994
7.54
8.58
9.24
4.39
8.85
Source: Corsetti, Pesenti and Roubini (1998).
1995
8.22
8.92
9.46
4.76
8.68
1996
7.98
7.13
8.20
5.67
6.66
Inflation Rate
Indonesia
Korea
Malaysia
Philippines
Thailand
1993
9.60
4.82
3.57
7.58
3.36
1994
8.53
6.24
3.71
9.06
5.19
1995
9.43
4.49
5.28
8.11
5.69
Source: Corsetti, Pesenti and Roubini (1998).
1996
8.03
4.96
3.56
8.41
5.85
Savings Rates (% of GDP)
Country
China
Hong Kong
Indonesia
Japan
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
1990
38.1
35.8
27.9
33.5
36.1
29.1
18.7
44.1
22.4
32.6
1991
38.3
33.8
28.7
34.2
35.9
28.4
18.0
45.4
22.2
35.2
Source: Statistical Appendix, IMF, 1997.
1992
37.7
33.8
27.3
33.8
35.1
31.3
19.5
47.3
23.2
34.3
1993
40.6
34.6
31.4
32.8
35.2
33.0
18.4
44.9
23.7
34.9
1994
42.6
33.1
27.6
31.4
34.6
32.7
19.4
49.8
22.9
34.9
1995
41.0
30.4
28.4
30.7
35.1
33.5
17.8
50.0
22.9
34.3
1996
42.9
30.6
28.1
31.3
33.3
36.7
19.7
50.1
21.0
33.1
Human Development Indicators
Country
Indonesia
Korea
Malaysia
Philippines
Thailand
Life-Expectancy Literacy Rate
(years)
(%)
1970
48
60
62
57
58
1995
64
72
72
66
69
Source: Radelet and Sachs (1998).
1970
54
88
60
83
79
1995
84
98
85
95
94
Average Income of
Poorest 20%
in ‘85 US$
1970
1995
392
908
303
2071
431
1070
218
435
361
726
Fixed Exchange Rate System
FX rates more efficient.
Imposes impediments in the FX
system.
Government guarantees investors
potential upside return if FX
devalues.
Currency Model of Attack
by Speculators
Due to the “fixed” exchange arrangement in
many Southeast Asian countries, speculators
start with local borrowings (i.e., borrowing
from local banks).
They then sell the local currencies, convert
into US dollars, and sell forward contracts.
They realize a profit if the currencies
devalue, because their US holdings can be
exchanged for more local currencies to pay
off loans.
Defenses by Governments
Buy up sales transactions - FX reserves can
be exhausted quickly.
Jack up the interest rate to deter
speculative borrowings, implying high cost
for business that leads to:
 bankruptcies
 discouraging real investment
 collapse of stock markets
Penalize banks
speculators.
who
lend
money
to
The Impact of Crisis on China
More imports from Korea due to
lowered
prices,
e.g.,
products
imported from Korea have increased,
including steel (32.4%), petrochemicals (11.8%), and textiles (9%).
China’s exports slow down.
Economic growth slows down.
China’s Strategy
Under pressure to devalue its currency.
However, such a decision is political, not
economic.
Could hurt its credibility as an Asian
leader.
Devaluation will hurt Hong Kong, a
place to raise external funds via initial
public offerings (IPO) for its stateowned enterprises.
China’s Strategy (continued)
Ease Export Credits by encouraging
banks to make loans to exportoriented companies.
Relax export licenses and give tax
rebates:
Ministry of Foreign Trade and
Economic Cooperation issues more
export licenses for base metals.
Exporters will receive full 17% valueadded tax.
Implications and Strategies
Lowered currency value implies
products are cheaper to buy -Merger Activities in Asian countries
International trade implications
Financial reforms (bond market
development and banks)
Corporate Strategies
Corporate Hedging Strategies
Increased
use
of
hedging
instruments, given the volatile FX
markets (use of forward, swaps and
other derivative instruments).
As a long-term strategy, U.S. firms
should pay closer attention in
managing their economic exposure,
e.g., Avon’s use of a balance sheet
hedge in 1997.