HO CHI MINH CITY UNIVERSITY OF FOREIGN LANGUAGES AND

INFORMATION TECHNOLOGY
FACULTY OF ECONOMICS - FINANCE

ESSAY REPORT
SEMESTER 2
SCHOOL YEAR 2023-2024
Subject: INTERNATIONAL FINANCE
TOPIC: Southeast Asian Financial Crisis
Students perform : Lâm Mỹ Hiền – 21DH202448
Vũ Phương Nghi – 21DH202527
Nguyễn Tường Vi – 21DH202
Instructor guides :Master Dang Thi Thu Hang
 CONTENTS

I. What is a financial crisis?......................................................................................................................3

1. Notion.................................................................................................................................................3
2. Types of financial crises.....................................................................................................................3
II. THE CURRENT STATE OF THE SOUTHEAST ASIAN CRISIS.................................................5
1. Financial crisis at a glance:...............................................................................................................5
2.Cause:..................................................................................................................................................5
3. Evolution of the crisis:........................................................................................................................7
III.CONCLUDE:.....................................................................................................................................10
1. Lesson learned:.................................................................................................................................10
2.Measure.............................................................................................................................................11

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I. What is a financial crisis?
1. Notion
A financial crisis is a situation in which some financial assets suddenly lose a
significant part of their nominal value. Many financial crises in the 19th and early
20th centuries were associated with banking crises, and many recessions occurred
simultaneously with these crises. Some other situations commonly referred to as
financial crises include stock market crashes and bursting financial bubbles,
currency crises, and government defaults. Many economists have proposed
different theories about how financial crises develop and how to prevent them.
However, no theory is completely consistent, and financial crises do happen from
time to time.

2. Types of financial crises

Banking crisis

This happens when customers withdraw large amounts of money from the bank at
once. Since most bank deposits are lent, it will be difficult for banks to repay loans
when customers withdraw money at the same time. Massive withdrawals can cause
bank bankruptcy, causing many customers to lose their deposits unless
compensated through deposit insurance. If large-scale divestment spreads, it will
trigger a systemic banking crisis. It is also possible that the above phenomenon is
not common that credit rates are raised (to raise capital) due to fears of budget
deficits. At this time, it is the bank that will become the factor causing the
economic crisis.

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Currency crisis

A currency crisis is a situation in which people have serious doubts about whether
a country's central bank has enough foreign exchange reserves to maintain a fixed
exchange rate. Crises are often accompanied by speculative attacks in the foreign
exchange market. A currency crisis is caused by a long-term balance of payments
deficit, so it is also known as a balance of payments crisis. Often crises will
eventually lead to currency devaluation.

Speculative bubbles and collapses

Economists argue that a financial asset (such as a stock) is considered a bubble

when its price exceeds the present value of future earnings (such as dividends or
interest) received by its owner until maturity. If investors enter the market buying
an asset only with the expectation of selling it at a higher price later rather than
enjoying the income it will generate, this is evidence that a bubble is present. If
there is a bubble, there is also the risk of a collapse in asset prices: market
participants will only continue to buy as long as they expect others to buy, and
when many decide to sell, it will immediately cause the price to fall.

International financial crisis

When a country is maintaining a fixed exchange rate mechanism, it is suddenly

forced to devalue its currency due to speculative attacks. This phenomenon is
called a currency crisis or balance of payments crisis. When a government fails to
repay its national debt, it is called a sovereign default.

Several countries whose currencies participated in the European Exchange Rate

Mechanism (ERM) experienced a crisis between 1992 and 1993 and were forced to
devalue or withdraw from the mechanism. Another currency crisis broke out in
East Asia from 1997 to 1998. Many Latin American countries also defaulted on
their debts in the early 1980s. The financial crisis in Russia of 1998 was also the
result of the devaluation of the ruble and the default on Russian government bonds.
The most recent example is probably Greece's debt crisis.

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II. THE CURRENT STATE OF THE SOUTHEAST ASIAN CRISIS
1. Financial crisis at a glance:
Thailand was the first breakthrough, a flare shot or, more accurately, the end of the
region's fragile financial system. The direct cause of the East Asian financial crisis
of 1997 was the attack of some macro speculators on the Asian monetary system,
followed by a wave of massive investment withdrawals by investors because
people no longer believed in the government's ability to maintain a fixed exchange
rate. In the face of the depletion of foreign exchange reserves, many subsequent
analyses argue that when a country is first attacked by a currency, Asian nations
should immediately implement currency floats instead of desperately defending the
exchange rate, will eventually lead to that country's degradation. the depletion of
foreign exchange. stockpile and continue to prolong speculative attacks.

2.Cause:
 Subjective causes:

The weak macroeconomy leads to a boom in credit, current account deficits. The
regulations needed to manage global financial inclusion have not kept pace with
capital inflows. Most foreign investment flows are short-term, but companies use
them for long-term projects with low profitability and high risks. In addition to the
psychological reliance on tacit government patronage, banks continued to lend
capital and believed that hedging was not necessary during this period. Another
direct cause of crisis is poor capacity to handle the crisis. Many economists believe
that when they first came under a currency attack, Asian countries should have
immediately floated their currencies rather than trying to defend their exchange
rates to deplete their state foreign exchange reserves, which would have led to
speculative attacks.

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Make the inflexible exchange rate regime more prolonged. The policy of "pegging"
regional currencies to the dollar, creating a coercive exchange rate system, is the
main reason for the mass devaluation of regional currencies. To protect the fixed
rate, Southeast Asian central banks have implemented loose monetary policy. As a
result, the increased money supply causes inflationary pressures. The sterilization
policy has been applied to combat general intangible inflation that promotes capital
flows into the economy. However, large capital flows into the region have created
exchange rate differentials. The fact that the price of local currencies is valued
above their real value reduces the competitiveness of these economies compared to
other countries, and at the same time is subject to speculation in anticipation of
these currencies will depreciate in the near future.

 Objective causes:

Increased foreign capital flows: Loose monetary policy and financial liberalization
in the United States, Europe, and Japan in the late 1980s made global liquidity
excessively high. Meanwhile, Asian countries have implemented capital account
liberalization. Interest rates are higher in Asian countries than in developed
countries. Therefore, international capital flows have flowed massively into Asian
countries. Between 1994 and 1997, the amount of private capital flowing into
developing countries increased more than 6-fold from $42 billion to $256 billion.
East Asia attracted a large amount of this inflow, accounting for about 60% in the
half of the 1990s. Sentiment has also emerged towards foreign capital inflows.
Foreign investors, when lending to domestic financial institutions, also implicitly
assume that their loans will be guaranteed by the host government when they see
the close relationship between the government and domestic banks. When the
economy is growing well, and the amount of foreign capital flows in, no one thinks

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that it will be possible to reverse debts or borrow new loans when previous loans
come to maturity. Capital inflows have created a credit boom in the region

Declining global trade markets and adverse changes in the world economy: Since
1996, the economic growth of East Asian countries began to slow down.

- The growth rate of export turnover of East Asian countries is at 19-21% during
the year

1995-95 fell to 4% in 1996.

+ Global trade growth declines;

+ The yen depreciated and the effective real exchange rate of East Asian countries
appreciated + the demand and prices of exports, especially electronics, declined.

- Current deficits appear and are financed mainly by short-term foreign borrowing.

- Weaknesses in the financial system (bad debts grow larger over the years)

increase indicative credit).

3. Evolution of the crisis:

 In Thailand:

In early 1997, the boom in residential and office construction peaked when supply
exceeded demand. An estimated 365,000 vacant apartments in Bangkok by the end
of 1996, along with another 100,000 to be put into use in 1997, made supply far
exceed demand in the real estate market. During that time, Thailand's investment
boom in infrastructure, industrial parks, commercial parks,... increasing imports at
an unprecedented rate. To build, Thailand had to import expensive equipment and
materials from the US, Europe and Japan. The current account results in a strong
balance of payments deficit throughout the mid-90s.

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On May 14 and May 15, 1997, the Thai baht came under large-scale speculative
attack. On June 30, Thai Prime Minister Chavalit Yongchaiyudh announced that he
would not devalue the baht, but ended up floating the baht on July 2. The baht
immediately depreciated by almost 50%. In January 1998, it went down to 56 baht
to 1 U.S. dollar. The Thai stock market index fell from 1,280 at the end of 1995 to
372 at the end of 1997. At the same time, the capitalization of capital markets
decreased from $141.5 billion to $23.5 billion. Finance One, Thailand's largest
financial company, went bankrupt.

 In Philipines:

The crisis immediately affected the Philippines through a sharp devaluation of the
peso – from a stable exchange rate of 26.4P per US dollar in June 1997 to a rate of
42.7P in January 1998. The devaluation of the peso has increased the inflation rate,
reduced the current-account to GDP ratio (through a reduction in imports), and of
course led to an overall slowdown in the growth rate. Money supply fell equally
sharply from 20.5% in 1997 to 7.1% in 1998. Financially, the 1998 deficit
increased slightly from the 1997 surplus. The financial crisis was exacerbated by
the political crisis related to the scandals of President Joseph Estrada. Due to the
political crisis, in 2001, the Philippine stock market's PSE Composite Index fell to
about 1,000 points from a high of about 3,000 points in 1997. It entails further
depreciation of the peso. The value of the peso has only recovered since Gloria
Macapagal-Arroyo became president.

 In Korea :

In 1997, successive bankruptcies of several major industrial conglomerates in

South Korea, along with the foreign exchange financial crisis in Thailand and other
East Asian countries, undermined investor confidence in South Korea. As a result,

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foreign banks refused to grant credit lines to South Korean financial institutions,
and foreign investors withdrew en masse. By mid-December 1997, South Korea's
foreign exchange reserves were nearly depleted, leading to a request for assistance
from the International Monetary Fund. The crisis caused economic activity to
shrink sharply in 1998, growing by negative 6.7 percent, the worst rate in South
Korea's modern history. Even as there is evidence that the won is overvalued, the
government continues to intervene in the foreign exchange market by setting a
daily limit whereby trading is not allowed to continue if the won falls by more than
10%. For several days in December 1997, currency trading stalled in just the first
few minutes of trading when the won fell below the permissible limit of 10%.

Despite a severe shortage of foreign currency, the South Korean government has
squandered nearly $6 billion worth of IMF funds to maintain the won by
exchanging precious foreign currency for won. Eventually the government realized
that the overvalued won was not okay and it was floated in mid-December 1997.
When the won is floating, the cost of Won to repay foreign debt increases
significantly. This debt became much larger than the original loan due to the
inevitable devaluation of the won when overvalued.

 In HongKong:

In Hong KongIn October 1997, the Hong Kong Dollar was attacked by
speculation. This currency is pegged to the US Dollar at an exchange rate of 7.8
HKD/USD. However, the inflation rate in Hong Kong is higher than in the US.
This is the basis for speculators to attack. Thanks to its strong foreign currency
reserves of up to 80 billion USD at that time, equivalent to 700% of the M1 money
supply or 45% of the M3 money supply, the Hong Kong Monetary Authority dared
to spend more than 1 billion USD to protect the currency. mine. Stock markets are
becoming increasingly fragile. From October 20 to October 23, the Hang Seng
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Index fell 23%. On August 15, 1998, Hong Kong raised the overnight lending rate
from 8% to 23% and immediately jumped to 500%. At the same time, the Hong
Kong Monetary Authority began buying component stocks of the Hang Seng Index
to reduce downward pressure on stock prices. This agency and Mr. Donald Trump,
then Minister of Finance and later Chief of the Hong Kong Special Administrative
Region, openly declared war on speculators. The government bought about 120
billion Hong Kong dollars (equivalent to 15 billion US dollars) of securities

 In Malaysia:

Immediately after the Thai baht floated (July 2, 1997), the Malaysian ringgit and
the Kuala Lumpur stock market immediately came under strong downward
pressure. The ringgit fell from 3.75 ringgit per US dollar to 4.20 ringgit per dollar.
Much of the downward pressure on the ringgit comes from trading the currency on
overseas money markets. Money market participants maintain their ringgit
accounts more sold than bought in anticipation of future ringgit depreciation. As a
result, Malaysia's domestic interest rates have dropped, encouraging capital
outflows. Capital outflows reached RM24.6 billion in the second and third quarters
of 1997.

 In Viet Nam:

Because Vietnam's currency has not been converted, rice barrels (with rice
exported), and oil barrels (with crude oil exported), it has not been sucked into the
spiral of the 1997 crisis. However, Vietnam has also been negatively impacted in
many aspects. Foreign direct investment capital declined. The growth rate of
import and export decreased. Inflation in 1998 rose to 9.2%. GDP growth rate
decreased quickly and deeply (in 1998 to 5.76%, in 1999 to 4.77%,... And it took
several years for economic growth to recover.

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III.CONCLUDE:
1. Lesson learned:
Lesson One: There Must Be Tools to Regulate Capital FlowsThe two Asian
countries least affected by the financial crisis, China and India, did not liberalize
capital markets. For the liberalized nation, Singapore best manages the effects of
the crisis with its best legal system. Due to the lack of controls, many Asian
economies have fallen into over-reliance on highly volatile external financing –
short-term loans. By the end of 1996, East Asian countries owed European banks
$318 billion, Japanese banks $260 billion and U.S. banks $46 billion, most of them
in the form of short-term loans — less than 1 year. In times of crisis, these short-
term sources of capital disappear just as quickly as they appear, because there are
no regulatory tools.

Lesson Two: It is necessary to build an appropriate legal corridor. The lax banking
system in the years before 1997 led to an overdevelopment of credit markets in
many Asian countries, such as Indonesia, Malaysia, the Philippines, South Korea
and Thailand, leading to overinvestment in some economic sectors. An excess of
credit also leads to waste. Moreover, the "excess of money" also triggered the
development of a bubble in the real estate market, which in turn returned to a state
of credit surplus, because banks lent more than the real value of the collateral. The
East Asian financial crisis made people more aware of the need for a strong,
transparent banking and financial system. This prompted the International
Monetary Fund and the Bank for International Settlements to renew their
regulations on banks and credit institutions in general.

2.Measure
First of all, central banks need to persist with tightening monetary policy until
inflation falls significantly back to target. Exchange rates should be allowed to
adjust to reflect fundamentals, including terms of trade — a measure of prices for a

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country's exports relative to imports — and foreign monetary policy decisions. To
prevent a "bubble" in the stock market, it is necessary to restrict foreigners from
buying stocks and borrowing bank credits to buy shares as well as using securities
as collateral for loans.

The financial institution advised countries to urgently consider improving their

liquidity buffers, including by requiring access to hedging tools from the Fund for
those who qualify. Public debt has increased significantly in Asia over the past 15
years - especially in advanced economies and China - and has continued to
increase further during the pandemic. Therefore, the IMF recommends that current
fiscal policy should continue to gradually consolidate to adjust demand along with
monetary policy, focusing on the medium-term goal of stabilizing public debt.
Accordingly, measures to protect vulnerable populations from rising living costs
should be well-targeted and temporary. In countries with high debt levels, support
should be budget-neutral to maintain the fiscal consolidation path.

Allows more flexible exchange rates, avoiding being bound by hard currencies
(USD, JPY, EUR..). Determine the right exchange rate to create competitiveness
for exports, increase the efficiency of use of imported goods. Balancing the trade
balance at the same time taking measures to prevent short-term capital flows of a
speculative nature. Ensuring autonomy in the supply of currency for production
and liquidity markets.

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