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President Suharto. Photo by Government of Indonesia (uncredited).

Top 10 Facts about The Asian Crisis of 1997

Due to their quick expansion and the impressive improvements in living conditions of their populations, the East and South East Asian countries at the epicenter of the Asian Crisis of 1997 had been the most successful emerging market economies.

 The countries had been seen as models for many other countries due to their generally prudent fiscal policies and high rates of private saving.

No one suspected that in the postwar period these countries could suddenly become embroiled in one of the worst financial crises.

The crisis started in Thailand when the Thai baht financially collapsed on 2^nd July 1997.

Due to lack of foreign currency to support its currency peg to the U.S. dollar, the Thai government was forced to float the baht.

An international chain reaction was instigated by the capital flight that ensued. Indonesia, Malaysia, Thailand and South Korea were the most affected even though  to a lesser extend the crisis also affected other countries in the region.

On May 21, 1998, Indonesian President Suharto, who had been in office for over  30 years, resigned as a result of the severe devaluation of the Indonesian rupiah, which caused substantial price hikes.

The top 10 facts about the Asian crisis of 1997 include the following.

1. The Regional Economies Had Experienced High Growth Rates Prior To The Crisis

World Bank Building Washington. Photo by Shiny Things.

The period before 1997, almost half of the total capital inflow into developing countries was channeled to the economies of East and Southeast Asia.

These economies were attractive to foreign investors looking for a high rate of return as they maintained high interest rates.

As a consequence, the region experienced a dramatic run-up in asset prices due to the large inflow of money into their economies.

In the late 1980s and early 1990s, the regional economies of Thailand, Malaysia, Indonesia, Singapore and South Korea experienced high growth rates, of 8鈥�12% GDP.

The economic growth in the region was widely acclaimed as part of the “Asian economic miracle” by financial institutions including IMF and World Bank.

2. The Asian Crisis Started in Thailand In July 1997

Thailand Prime Minister Chavalit Yongchaiyudh. Photo by NBT NEWS

The Asian crisis started in July 1997 in Thailand where it was known as Tom Yam Kung crisis in Thai language.

At the onset of the crisis, the Thai baht was hit by massive speculative attacks On 14 and 15 May 1997.

The then Thailand Prime Minister Chavalit Yongchaiyudh said that he would not devalue the baht which was then pegged at 25 units to the U.S. dollar by 30 June 1997.

However, Thai government was eventually forced to float the baht, allowing the value of the Baht to be set by the currency market on 2 July 1997 as Thailand lacked the foreign reserves to support the USD鈥揃aht currency peg.

The action to float Thailand鈥檚 baht ignited a chain reaction of events culminating into the Asian crisis of 1997 which extended to many nations in the region with disastrous consequences.

3. The Asian Crisis of 1997 Was Marked by Slumping National Currencies

Most of the nations affected by the crisis saw  their national currencies devalue against the US dollar by large margins.

For example, the Thailand government led by Prime Minister Chavalit Yongchaiyudh was forced to float the Thai baht on 2^nd July 1997 which in effect allowed the currency market to set the value of the baht.

The baht which had previously been pegged at 25 units to the US dollar reached its lowest point of 56 units to the U.S. dollar by January 1998 losing more than half of its value.

The South Korean won, weakened from around 800 won to the US Dollar to more than 1,700 won to the U.S. dollar during the crisis.

The Philippine peso devalued to 46.50 pesos  to the US Dollar from  26 pesos to the US Dollar at the start of the crisis.

Almost all the other national currencies devalued to the lowest levels after the crisis hit the region including currencies of Indonesia, Malaysia, Singapore and Japan.

4. Capital Flight Ensued at the Onset of The Crisis

Jeffrey Sachs in Moscow. Photo by 袩褉械褋褋-褋谢褍卸斜邪 袩褉邪胁懈褌械谢褜褋褌胁邪 袪肖.

The crisis was compared by Jeffrey Sachs as well as other economists to a traditional bank run brought on by an abrupt risk shock.

 In the wake of the crisis, the governments pursued tight monetary and contractionary fiscal policies, according to the advice of the IMF, said Sachs.

Severe capital flight that ensued at the onset of the crisis is also blamed for the Asian crisis of 1997.

Rapid currency devaluations by the affected Asian countries often referred to as the Asian Tigers triggered a capital flight which resulted in falling stock markets akin to a domino effect.

Stock market prices fell by as much as 60 percent due to the capital flight according to some accounts.

Indonesia, South Korea, Malaysia, the Philippines and Thailand experienced net capital outflows of about $80 billion.

This severe capital flight plunged the countries from a 鈥済rowth miracle鈥� status into the worst recession they ever witnessed in decades in the late 1997 and 1998.

Gross domestic products in the countries dropped drastically by between 5.8% to 10% during the financial crisis.

5. Foreign Debt-to-GDP Ratios Rose Drastically During the Crisis

In the four major ASEAN economies, the ratio of foreign debt to GDP increased from 100% to 167% between 1993 and 1996, then skyrocketed above 180% at the worst of the crisis.

The percentages in South Korea climbed from 13% to 21% and finally as high as 40%, while they fared far better across the other northern newly industrialized countries.

Only Thailand and S Korea experienced a significant increase in debt service to export ratios.

6. The Crisis Had Serious Political Implications in Indonesia

B.J Habibie. Photo by Office of the Vice President, The Republic of Indonesia.

When Thailand floated the baht in July 1997, Indonesia’s monetary authorities increased the trading range for the rupiah from 8% to 12%. As a result, in August 1997, the rupiah was abruptly and severely attacked.

Consequently, a free-floating exchange rate system was implemented on the 14th of the month to replace the managed floating exchange regime. The change caused the rupiah to decline even more.

The IMF offered a $23 billion rescue plan, but the rupiah was depreciating even more due to worries about corporate debt, widespread rupiah selling, and a high demand for dollars.

In September, both the rupiah and the Jakarta Stock Exchange reached historic lows. Indonesia’s long-term debt was ultimately downgraded by Moody’s to “junk bond.”

Prior to the financial crisis, there were around 2,600 rupiah to every dollar in circulation.  On January 9, 1998, the exchange rate fell to over 11,000 rupiah to the dollar.

From January 23 to January 26, spot rates rose to over 14,000, and they did so again for roughly six weeks in June and July 1998.

The exchange rate was almost exactly 8,000 to 1 US dollar on December 31, 1998. About 13.5% of Indonesia’s GDP was lost in that year.

President Suharto fired J. Soedradjad Djiwandono, the governor of Bank Indonesia at the time, in February 1998, but this was insufficient.

Suharto was forced to resign by the public during violent rioting in May 1998, and Vice President B. J. Habibie took his place.

7. The Asia Crisis Wrecked Untold Havoc the Affected Countries

The financial markets’ asymmetric information, according to Frederic Mishkin, played a part in the “herd mentality” among investors that inflated a minor risk in the actual economy.

As a result, behavioral economists who are interested in market psychology began to pay attention to the crisis.

However, the measures made in Indonesia to stop the  economic crisis did nothing to improve the situation there.

Suharto, the president of Indonesia for 30 years, was forced to leave office on May 21, 1998 as a result of massive unrest that followed sharp price hikes brought on by a significant devaluation of the Indonesian rupiah.

Lenders’ subsequent panic caused a significant withdrawal of credit from the crisis-affected nations, resulting in a credit crunch and additional bankruptcies.

Through 1998, the crisis’s repercussions persisted. Growth in the Philippines fell to almost nothing in 1998.

Due to severe layoffs in the financial, real estate, and construction sectors, Thailand’s once-booming economy came to a grinding halt.

The Thai economy sent 600,000 foreign employees back to their home countries and forced a significant number of people to move back to their rural regions.

Major Korean corporations in South Korea filed for bankruptcy as a result of the crisis, which encouraged corruption among government officials as well as businesses.

The worldwide financial community was made aware of South Korea’s economic difficulties and corruption issues by the Hanbo affair in early 1997.

In July of that year, Kia Motors, the third-largest automaker in South Korea, requested emergency loans.

8. The IMF Stepped in to Stabilize Currencies in Countries Facing Severe Devaluation

Despite the fact that the majority of Asian nations appeared to have strong fiscal policies, the International Monetary Fund (IMF) intervened and initiated a $40 billion program.

The objective of the initiative was to stabilize the currencies of South Korea, Thailand, and Indonesia; nations whose economies had indeed been extremely badly impacted by the Asian financial crisis of 1997.

The “structural adjustment package” (SAP) of economic reforms was required for the IMF to help the country.

The SAPs urged countries that were experiencing a financial crisis to cut back on spending and deficits, let failing banks and financial institutions fail, and aggressively hike interest rates.

The rationale was that by taking these actions, the nation’s budgetary solvency would be reestablished, insolvent businesses would be punished, and currency values would be safeguarded.

Above all, it was mandated that capital provided by the IMF in the future had to be managed rationally, with no preferred parties obtaining funding.

Foreign ownership limits were significantly loosened in at least one of the impacted nations.

All financial activities were to be under the supervision of proper government regulations, which were to be independent, at least in theory, of.

9. The Crisis Was Partly Fueled by Corruption and Bad Lending Practices

The disaster’s various and contentious causes are numerous. Hot money helped Thailand’s economy grow into an economic bubble. As the bubble rose in size, more and more was needed.

The similar issue occurred in Malaysia and Indonesia, where it was further complicated by “crony capitalism.”

The short-term capital flow was costly and was heavily geared toward making rapid money.

Only a select few persons received development funding in a largely unregulated manner; these individuals weren’t always the most qualified or effective, but rather those closest to the centers of power.

Additionally, ineffective investment and falling profitability were caused by poor company governance.

The continuation of fixed exchange rates encouraged external borrowing and resulted in excessive exposure to foreign exchange risk in both the financial and business sectors in the middle of the 1990s.

This happened  when Thailand, Indonesia, and South Korea had significant private current account deficits.

10. A Series of External Shocks Created Conditions for The Crisis to Occur

Alan Greenspan photo by White House photo by Shealah Craighead.

A number of external shocks started to alter the economic landscape in the middle of the 1990s in the affected nations.

Their expansion was negatively impacted by the Plaza Accord of 1985’s depreciation of the Japanese yen and the Chinese yuan, the increase in U.S. interest rates that resulted in a strong dollar, and the rapid drop in semiconductor prices.

 In order to prevent inflation, the American Federal Reserve Bank under Alan Greenspan started to boost interest rates as the American economy emerged from a recession in the early 1990s.

This increased the value of the U.S. dollar and made the United States a more desirable place to invest relative to Southeast Asia, which had been luring hot money flows with high short-term interest rates.

The stronger dollar hurt the economies of Southeast Asian countries whose currencies were tied to the US dollar, making their exports more expensive and less competitive on the world market.

 Additionally, Southeast Asia’s current account situation deteriorated in the spring of 1996 as a result of a sharp slowdown in export growth.

Some economists have cited China’s expanding exports as a factor in the slowing in the growth of ASEAN nations’ exports, but these economists contend that excessive real estate speculation was the primary cause of these crises.

Following the implementation of several export-oriented reforms in the 1990s, China had started to compete successfully with other Asian exporters.

Other economists contest China’s influence, pointing out that ASEAN and China both had high export growth at the same time in the early 1990s.

Many economists think that policies that altered incentives in the lender-borrower relationship, rather than market psychology or technology, were what caused the Asian crisis.

Large amounts of credit that were made available as a result created a highly leveraged economic environment and drove up asset prices to an unsustainable level, especially in non-productive economic sectors like real estate.

Eventually, the value of these assets started to decline, which led to a default on debt by both people and businesses.

Due to the ensuing lender panic, a significant amount of credit was withheld from the crisis-affected nations, resulting in a credit crunch and additional bankruptcies.

The exchange market was also saturated with the currencies of the crisis countries as foreign investors tried to withdraw their funds, which put downward pressure on the exchange rates of those countries.

The governments of these nations interfered in the exchange market, buying up any excess domestic currency at the fixed exchange rate with foreign reserves in order to prevent the collapse of currency values.

This helped to reduce capital flight by making lending more appealing to investors. Both of these policy measures were short-lived since numerous nations lacked adequate levels of foreign exchange reserves. 

While the central banks were losing their limited supply of foreign reserves, which can be devastating to a strong economy, very high interest rates further destabilized already vulnerable economies.

The government stopped defending their fixed exchange rates and allowed their currencies to float when it became evident that the torrent of capital fleeing these countries could not be stopped.

As a result of those currencies’ declining value, domestic liabilities denominated in foreign currencies increased significantly, leading to more bankruptcies and a worsening of the crisis.