Presentation on theme: "The Asian Financial Crisis Hung-Gay Fung University of Missouri-St. Louis."— Presentation transcript:
The Asian Financial Crisis Hung-Gay Fung University of Missouri-St. Louis
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
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.
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 HK dollar Indonesia rupiah Japanese yen Malaysian ringgit Korean won Philippine peso Thai baht
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).
What Happens to Capital Flows? * Private flows, net Equity Investment Private Creditors Source: Institute of International Finance, Inc., “Capital Flows to Emerging Economies,” January 1998.
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
Regional Annual Growth Rate of Exports (%) Country China Indonesia Korea Malaysia Philippines Thailand Mexico Decline in Export Earnings
Excessive and Risky Investment Incremental Capital-Output (ICOR) Ratios Country China Hong Kong Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand Source: Corsetti and Pesenti (1998)
Current Account Deficit (% of GDP) Asian Country: (average) China Hong Kong Korea Singapore Taiwan Indonesia Malaysia Philippines Thailand
Current Account (continued) Latin America Argentina Brazil Chile Colombia Mexico Other countries: Israel Africa (average) Hungary Source: Bank for International Settlements
Overvalued Currency Country Hong Kong Indonesia Korea Malaysia Philippines Singapore Thailand Note: The base figure (100) is the average for the year 1990 Source: J.P. Morgan
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).
Size of Banking sector 1995 % of GDP Bond Bank Bond Bank MarketLending U.S. 110% 54% Japan Malaysian Philippine Thailand Indonesia 6 57
Bank Credit to Private Sector Annual Rate of Expansion% of GDP Country China Hong Kong Indonesia Japan Korea Malaysia Philippines Singapore Thailand United States
June 1996June 1997 Indonesia Korea Malaysia Philippines Thailand Other countries Argentina Brazil Mexico Pakistan South Africa Zimbabwe Short-Term Debt to Reserves
Non-Performing Loans (% of Total Loans) Indonesia Korea Malaysia Thailand N/A Mexico Argentina Source: Bank for International Settlements.
Property Market Bubble Sale Price: Capital Value Sale Price: Capital Value PeriodBangkok (000B/m. sq.) Jakarta ($/m. sq.) Q4, ‘ Q4, ‘ Q4, ‘ Q4, ‘ Q4, ‘ Q4, ‘ Q4, ‘ Q2, ‘ Source: Data Stream and Jones Lang Wootten.
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.
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?
Fundamental Factors-GDP growth (%) Indonesia Korea Malaysia Philippines Thailand Source: Corsetti, Pesenti and Roubini (1998).
Inflation Rate Indonesia Korea Malaysia Philippines Thailand Source: Corsetti, Pesenti and Roubini (1998).
Savings Rates (% of GDP) Country China Hong Kong Indonesia Japan Korea Malaysia Philippines Singapore Taiwan Thailand Source: Statistical Appendix, IMF, 1997.
Human Development Indicators CountryLife-ExpectancyLiteracy RateAverage Income of (years) (%) Poorest 20% (years) (%) Poorest 20% in ‘85 US$ in ‘85 US$ Indonesia Korea Malaysia Philippines Thailand Source: Radelet and Sachs (1998).
Fixed Exchange Rate System âFX rates more efficient. âImposes impediments in the FX system. âGovernment guarantees investors potential upside return if FX devalues.
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.
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.
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.
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.
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.
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
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.