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South-East Asian Currency Crisis

SOUTH-EAST ASIAN CRISIS

THE ECONOMIC CRISIS IN SOUTH EAST ASIA OF 1997-99 OVERVIEW

Unfolding of the Crisis (June 1997)

 Fixed exchange rate system pegged to the USD. When the Dollar rose,
consequently the ASEAN currencies grew too, resulting in lower exports.
 Decline in Export competitiveness particularly in Electrical goods.
 The decrease in exports resulted in increased Trade and Current Account
deficit.
 The crisis first emerged in Thailand when as a crisis of loan repayment. This
led to fears of loan defaults and foreign short-term creditors withdrew funds
from Thai financial institutions.
 The withdrawal of ST credit led to pressure on forex reserves and the value of
Baht. The Bank of Thailand in its attempt to save the Baht lost all its Reserves
and had to request assistance from the IMF.
 The contagion then spread to Philippines, Malaysia and Indonesia.

ANALYSIS

Causes of the crisis in 1997

There are 2 main theses as to the causes of the crisis.

1. Weakness of Macro-Economic fundamentals

The basic weaknesses in the Macro-Economic fundamentals itself led to Low productivity and competitiveness vis-à-vis other regions of the world. Inadequate supervision of Financial institutions and lack of adequate disclosure by the corporate world further worsened the situation. Weak governments lacked the political autonomy or will to enact the deflationary policies necessary to reduce current account deficits and domestic asset bubbles. They also contributed to the cronyism and ethical problem that encouraged over borrowing, over lending, and over investment in the private corporate sector as well as in state projects.

2. Overvalued Exchange Rate & Openness of Capital Account

Overvalued exchange rates tied to an appreciating U.S. dollar led to large current account deficits and inadequate or declining long-term capital inflows. This resulted in heavy...