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The Asian Financial Crisis Hung-Gay Fung University of Missouri-St. Louis.

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Presentation on theme: "The Asian Financial Crisis Hung-Gay Fung University of Missouri-St. Louis."— Presentation transcript:

1 The Asian Financial Crisis Hung-Gay Fung University of Missouri-St. Louis

2 Presentation Outline âDiscuss briefly the behavior of the Foreign Exchange (FX) of Southeast Asian Countries. âAssess different factors that lead to the currency crisis. âOpportunities and Implications for U.S. companies

3 Foreign Exchange Rates âSince June 1997, FX rates in many Southeast Asian countries have experienced a substantial decline. âThese countries include the Philippines, Malaysia, Thailand, Indonesia, and Korea. âMany of these countries linked their exchange rates to the U.S. dollar before the currency crisis.

4 Change in FX rates (6/30/1998) FX:1 $US FX: 1 $US % 6/30/98 6/30/97change 6/30/98 6/30/97change Chinese yuan 8.281 8.289 +0.09 HK dollar 7.745 7.747 +0.03 Indonesia rupiah 14568.891760 -87.92 Japanese yen 138.31 114.61 -17.58 Malaysian ringgit 4.1 1.827 -55.44 Korean won1370 641.4 -53.18 Philippine peso 41.5 19.08 -54.02 Thai baht 42.16 17.9 -57.54

5 Immediate Results of Crisis âIn addition to currency devaluation: âCollapse of their Stock Markets (all Southeast countries); âCall for an IMF rescue plan in the Philippines, Thailand, Indonesia and Korea; âBankruptcy and financial reforms (all Southeast countries).

6 What Happens to Capital Flows? 1994199519961997* Private flows, net 40.5 77.4 93.0 -12.1 Equity Investment 12.2 15.5 19.1 -4.5 Private Creditors 28.2 61.8 74.0 -7.6 Source: Institute of International Finance, Inc., “Capital Flows to Emerging Economies,” January 1998.

7 Reasons for the Currency Crisis âDecline in Export Earnings âExcessive and Risky Investment âCurrent Account Deficit âOvervalued Currency âUnderdevelopment of credit market âProperty market bubble

8 Regional Annual Growth Rate of Exports (%) Country 1990 1991 1992 1993 1994 1995 1996 China 18.2 15.8 18.1 7.1 33.1 22.9 1.6 Indonesia 15.9 13.5 16.6 8.4 8.8 13.4 9.7 Korea 4.2 10.5 6.6 7.3 16.8 30.3 3.7 Malaysia 17.4 16.8 18.5 15.7 24.7 24.7 26.0 Philippines 4.0 8.7 11.2 13.7 20.0 31.6 16.7 Thailand 14.9 23.2 14.2 13.3 22.7 25.1 -1.3 Mexico 17.7 0.7 1.4 9.2 14.2 40.3 22.6 Decline in Export Earnings

9 Excessive and Risky Investment Incremental Capital-Output (ICOR) Ratios Country1987-19921993-1996 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)

10 Current Account Deficit (% of GDP) 1990-19951996 Asian Country: (average) China 0.9 0.9 Hong Kong 3.3 -1.2 Korea -1.2 -4.8 Singapore 12.715.5 Taiwan 4.0 4.0 Indonesia -2.5 -3.7 Malaysia -5.9 -4.9 Philippines -3.8 -4.7 Thailand -6.7 -7.9

11 Current Account (continued) Latin America1990-951996 Argentina -1.6-1.4 Brazil -0.6-3.3 Chile -2.6-5.4 Colombia -1.7-5.5 Mexico -5.1-0.6 Other countries: Israel -3.9-7.4 Africa (average) -11.1-7.8 Hungary -4.0-3.7 Source: Bank for International Settlements

12 Overvalued Currency Country 1990 1991 1992 1993 1994 1995 1996 Hong Kong 99.7 103.9 108.5 115.9 114.5 116. 125.5 Indonesia 97.4 99.6 100.8 103.8 101.0 100.5 105.1 Korea 97.1 91.5 87.8 85.2 84.7 87.8 86.8 Malaysia 97.0 96.9 109.7 111.0 107.1 107.0 111.9 Philippines 92.3 103.1 107.1 97.4 111.6 109.5 116.0 Singapore 101.2 105.7 106.0 108.6 111.9 112.7 117.9 Thailand 102.2 99.0 99.7 101.9 98.3 101.7 107.6 Note: The base figure (100) is the average for the year 1990 Source: J.P. Morgan

13 Japanese Model âLimit bond market to support long-term growth. âKeep savings in a small number of powerful banks which are not properly regulated. âLoans 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).

14 Size of Banking sector 1995 % of GDP Bond Bank Bond Bank MarketLending U.S. 110% 54% Japan 74 152 Malaysian 56 100 Philippine 39 54 Thailand 10 100 Indonesia 6 57

15 Bank Credit to Private Sector Annual Rate of Expansion% of GDP Country1990-1997 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

16 June 1996June 1997 Indonesia 1.724 1.704 Korea 1.623 2.073 Malaysia 0.252 0.612 Philippines 0.405 0.848 Thailand 0.992 1.453 Other countries Argentina 1.325 1.210 Brazil 0.702 0.792 Mexico 1.721 1.187 Pakistan 0.740 2.440 South Africa 4.050 3.124 Zimbabwe 1.319 1.635 Short-Term Debt to Reserves

17 Non-Performing Loans (% of Total Loans) 1990199419951996 Indonesia 4.512.010.4 8.8 Korea 2.1 1.0 0.9 0.8 Malaysia20.4 8.1 5.5 3.9 Thailand 9.7 7.5 7.7 N/A Mexico 2.310.514.412.5 Argentina16.0 8.612.3 9.4 Source: Bank for International Settlements.

18 Property Market Bubble Sale Price: Capital Value Sale Price: Capital Value PeriodBangkok (000B/m. sq.) Jakarta ($/m. sq.) Q4, ‘9066.0 3019 Q4, ‘9167.0 2788 Q4, ‘9260.0 2482 Q4, ‘9359.5 2327 Q4, ‘9460.5 2358 Q4, ‘9560.5 2179 Q4, ‘9660.4 2250 Q2, ‘9743.0 2267 Source: Data Stream and Jones Lang Wootten.

19 Central Business District Office Vacancy Rates 1997 Bangkok15.0% Hong Kong 6.0% Kakarta10.0% Kuala Lumpur 3.0% Manila 1.0% Singapore 8.0% Shanghai30.0% Source: JP Morgan “Asian Financial Markets,” January 1998.

20 What Really Causes A Crisis? âCorruption? âKorea, Indonesia, Thailand -corruption âItaly and India have corruption, but no crisis âBank Transparency âinadequate regulatory framework âirrational lenders?

21 Fundamental Factors-GDP growth (%) 1993199419951996 Indonesia6.57.548.227.98 Korea5.758.588.927.13 Malaysia8.419.249.468.20 Philippines2.124.394.765.67 Thailand8.278.858.686.66 Source: Corsetti, Pesenti and Roubini (1998).

22 Inflation Rate 1993199419951996 Indonesia9.608.539.438.03 Korea4.826.244.494.96 Malaysia3.573.715.283.56 Philippines7.589.068.118.41 Thailand3.365.195.695.85 Source: Corsetti, Pesenti and Roubini (1998).

23 Savings Rates (% of GDP) Country1990199119921993199419951996 China38.138.337.740.642.641.042.9 Hong Kong35.833.833.834.633.130.430.6 Indonesia27.928.727.331.427.628.428.1 Japan33.534.233.832.831.430.731.3 Korea36.135.935.135.234.635.133.3 Malaysia29.128.431.333.032.733.536.7 Philippines18.718.019.518.419.417.819.7 Singapore44.145.447.344.949.850.050.1 Taiwan22.422.223.223.722.922.921.0 Thailand32.635.234.334.934.934.333.1 Source: Statistical Appendix, IMF, 1997.

24 Human Development Indicators CountryLife-ExpectancyLiteracy RateAverage Income of (years) (%) Poorest 20% (years) (%) Poorest 20% in ‘85 US$ in ‘85 US$ 1970199519701995 1970 1995 Indonesia 48 64 54 84 392 908 Korea 60 72 88 98 303 2071 Malaysia 62 72 60 85 431 1070 Philippines 57 66 83 95 218 435 Thailand 58 69 79 94 361 726 Source: Radelet and Sachs (1998).

25 Fixed Exchange Rate System âFX rates more efficient. âImposes impediments in the FX system. âGovernment guarantees investors potential upside return if FX devalues.

26 Currency Model of Attack by Speculators âDue to the “fixed” exchange arrangement in many Southeast Asian countries, speculators start with local borrowings (i.e., borrowing from local banks). âThey then sell the local currencies, convert into US dollars, and sell forward contracts. âThey realize a profit if the currencies devalue, because their US holdings can be exchanged for more local currencies to pay off loans.

27 Defenses by Governments âBuy up sales transactions - FX reserves can be exhausted quickly. âJack up the interest rate to deter speculative borrowings, implying high cost for business that leads to: â bankruptcies â discouraging real investment â collapse of stock markets âPenalize banks who lend money to speculators.

28 The Impact of Crisis on China âMore imports from Korea due to lowered prices, e.g., products imported from Korea have increased, including steel (32.4%), petro- chemicals (11.8%), and textiles (9%). âChina’s exports slow down. âEconomic growth slows down.

29 China’s Strategy âUnder pressure to devalue its currency. âHowever, such a decision is political, not economic. âCould hurt its credibility as an Asian leader. âDevaluation will hurt Hong Kong, a place to raise external funds via initial public offerings (IPO) for its state- owned enterprises.

30 China’s Strategy (continued) âEase Export Credits by encouraging banks to make loans to export- oriented companies. âRelax export licenses and give tax rebates: âMinistry of Foreign Trade and Economic Cooperation issues more export licenses for base metals. âExporters will receive full 17% value- added tax.

31 Implications and Strategies âLowered currency value implies products are cheaper to buy -- âMerger Activities in Asian countries âInternational trade implications âFinancial reforms (bond market development and banks) âCorporate Strategies

32 Corporate Hedging Strategies âIncreased use of hedging instruments, given the volatile FX markets (use of forward, swaps and other derivative instruments). âAs 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.


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