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Eeb20903 Ibei Ib20 Group Assignment

The Asian Financial Crisis of 1997 was caused by several factors: higher US interest rates which reduced foreign investment in Asian countries; Thailand was forced to float its currency, triggering rapid devaluation and loss of confidence across Asia; high external debt levels in Asian countries and businesses made debt repayments more difficult after currency devaluations. The IMF intervened by providing $110 billion in loans to stabilize economies, but its conditions of high interest rates and fiscal austerity worsened downturns in some countries. Ultimately, sound macroeconomic policies and structural reforms helped Asian countries recover from the crisis.

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7 views

Eeb20903 Ibei Ib20 Group Assignment

The Asian Financial Crisis of 1997 was caused by several factors: higher US interest rates which reduced foreign investment in Asian countries; Thailand was forced to float its currency, triggering rapid devaluation and loss of confidence across Asia; high external debt levels in Asian countries and businesses made debt repayments more difficult after currency devaluations. The IMF intervened by providing $110 billion in loans to stabilize economies, but its conditions of high interest rates and fiscal austerity worsened downturns in some countries. Ultimately, sound macroeconomic policies and structural reforms helped Asian countries recover from the crisis.

Uploaded by

Halima Mohamed ALI
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Causes of the Asian Financial Crisis

Picture 1 Timeline of Asian Financial Crisis 1997

The 1997 Asian financial crisis refers to the macroeconomic shock faced by
many Asian economies such as Thailand, Philippines, Indonesia, South Korea, and
Malaysia. Basically, countries experienced rapid devaluation and the capital outflow
because of the trust and confidence of the investors changed from over exuberance to
the worst aspect of things or believe that the worst will happen as the structural
imbalances in the economy became more apparent. In a few years back around 1993 to
1996, Asian countries achieved massive economic growth of 8% to 12% of their gross
domestic product (GDP). Achievement was known as the "Asian Economic Miracle."
This is because economic developments in those countries have been driven mainly by
export growth and foreign investment.
Chart 1 Data Asian Currencies 1997 to 1998

One of the causes which precipitated in this crisis is higher US interest rates. In
the late 1990s, the US start increasing their interest rates in order to reduce US
inflationary pressures. Higher interest rates in the US have made the East less
desirable as a place to transfer hot cash flows. As the influx of hot money to the East
slowed down, Asian currencies began to fall, and governments struggled to keep their
exchange rates fixed against the US dollar.

Next, in 1997 when Thailand has been forced to float their currency which is Thai
Bhat due to the speculation attack. This contagion has triggered a rapid devaluation,
leading to a loss of trust across the Asian economies. Other countries were soon
pressured to devalue as investors decided to get out of Asian currencies. Investors
found that the previous optimism was beginning to look misplaced.

The currencies pegged to the U.S. dollar also appreciated, and therefore had a
negative impact on export growth. With both export and foreign investment shocks,
asset prices that have been leveraged by massive volumes of credit have started to
crash. The panicked international investors were beginning to withdraw. Both
government and private companies built up high external debt levels in the run-up to the
crisis. However, the devaluations have made debt repayments more costly and as a
result, businesses and countries have begun to default on their debt repayments.

Due to instability of the currency rate, IMF offer themselves to intervene. So many
arguing regarding their intervention because they made all the things worst where the
higher interest rates in Indonesia and the Philippines did not avoid currency devaluation
indicating that investors were not persuaded that high interest rates were sustainable
and start to control on fiscal restraints where they reduced expenditures, higher
taxation, and privatization. This contractionary fiscal policy has intensified the economic
downturn and plunged the economy into recession. Bankruptcy increased and capital
also increased.

Recovery of the Asian Financial Crisis

In the end, Asian financial crisis solved by International Monetary Fund (IMF) where
they provide the loans that necessary to those country such as Thailand, Indonesia,
Philippines and Korea in order to stabilize their troubled Asian economies. During that
time, IMF committed to give almost $110 billion in short term loans to those countries
with strictly condition including high interest rates were sustainable and start to control
on fiscal restraints where they reduced expenditures, higher taxation, and privatization
of state-owned businesses.

Last but not least, sound macroeconomic management was crucial to help reinforce
external positions, stabilize financial markets and encourage an early return to growth.
While the unfinished structural reform agenda in all Asian crisis countries remains huge,
efforts by governments to resolve these difficult issues have led to a strong recovery.

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