Key Points  Origins of the crisis  Thai Baht  Economy of S. Korea and Indonesia  The Chaebols  Beginning of the collapse  Seoul Stock Exchange  Default and bailout  IMF response

Origins of the Southeast Asian Financial Crisis  Thailand Fixed exchange rate to the US dollar Easy credit from Western and Japanese banks Massive foreign debt Huge real estate bubble Real GDP grew at 9% a year from 85 to 96

Thai Baht ○ Pegged at 25 baht to $1 USD  May 1997 – Investors started to short the baht  June 1997 – Baht was forced to float  Devalued to 56 baht per $1 USD by early 1998

Consequences  Housing bubble burst Resulted in massive layoffs in finance, real estate and construction Stock market plunged by 75%  $17 billion bailout package from IMF Subject to IMF conditionality

Economy of South Korea  11 th largest economy at the time  Dominated by chaebols Multinational conglomerates Implicitly backed by the government

The Chaebols  Aggressive expansion to compete with Western MNC’s  Led to overleveraging and negative returns  Banks were burdened by non-performing loans

Beginning of the Collapse  July 1997 – Kia Motors asked for emergency loans from the government Was later absorbed by Hyundai  Daewoo collapsed and was sold to General Motors  Moody’s lowered South Korea’s credit rating from A1 to A3 then to B2

Seoul Stock Exchange  Dropped 30% in November 1997  Massive capital flight  Korean won lost half its value to the dollar from 1997 to 1998

Default and Bailout  Korea was about to default on its foreign debt  Korea was given $55 billion in new loans and credits by the IMF It was the largest bailout in history up to that point.

IMF response  Structural Adjustment Programs Reduce government spending Let insolvent financial institutions fail Raise interest rates Restore confidence in the currency

Who’s to Blame?  Most Koreans blame the IMF for the crisis and refer to it as the IMF crisis  Was the IMF truly to be blamed?

Indonesia:  Country in Southeast Asia and Oceania  17, 508 islands, 6,000 are populated  Area-742,050 sq mi  Population around 230 million  World’s 4 th most populous country  Capital city-Jakarta

Republic of Indonesia

Economy of Indonesia  Largest economy in Southeast Asia  GDP: US $932.1 billion  Member of G-20 major economies  Market-based  Over 164 state-owned enterprises

Beginning of the collapse  Depreciation of rupiah Rp 2,600/$1 (Aug 1997) fell to 11,000/$1 (Jan 1998)  Public debt reaching $60 bn USD  Real GDP contracted by 13.7%  Inflation of 77% in 1998

Initial Response  Float the rupiah  Raise key domestic interest rates  Tighten fiscal policy

IMF Response  Rescue package of $23 billion  Financial sector restructuring  Stabilizing the rupiah Retention of a tight monetary policy Flexible exchange rate policy

Source: International Monetary Fund World Economic OutlookInternational Monetary Fund

Source: International Monetary Fund World Economic OutlookInternational Monetary Fund

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