Introduction of the case
Content of the case
Complexity of the case
Critical Review off the case
Drawing conclusion from the case
Recommendation & suggestions
Introduction
• Also called “Asian Contagion”
• Mid-1997 economic crisis started in Thailand with the collapse of the
Thai Baht
• Crisis soon spread to neighboring countries.
• Financial intervention by IMF and the world bank stemmed the crisis.
Basic concepts and definitions
• Floating Exchange Rate
• currency price is set by the forex market
based on supply and demand compared with
other currencies
• Fixed Exchange Rate
• government entirely or predominantly
determines the rate
Basic concepts and definitions
• What are the implications when a country’s currency appreciates?
• Exports become costlier to other markets.
Pre-crisis
• Asia attracted almost half of the total capital inflow
• Robust Growth (8-12% GDP)
• Higher interest rates attractive to foreign investors looking for a high
rate of return
• Moderate inflation
• Export to rich nations
• Increase in asset values ( land and stock prices)
Reasons for the crisis
Excellent Economic Growth, Attractive interest rate
High returns on short-term investments attracted large portfolio investments
Investors flocking to invest in Thailand
(formation of bubble)
Pegged exchange rate system encouraged such investments in the absence of risk.
High interest rate differential between developed markets and Thailand(also other SE Asian countries) tempted banks
to channel funds from developed economics to Thailand
Indiscriminate lending by banks resulted in over-expansion of several industries
Reasons for the crisis
• Persistence of large current account deficit.
• Large foreign debt (high proportion of short-term debt).
• Large inflow of foreign capital.
• Indiscriminate lending by banks and other financial institutions.
• Lack of transparency in economic system that made decision making
difficult for investors.
• Over-investment in several sectors.
• Imprudent lending by international lenders.
• Large real effective exchange rate appreciation.