Post on 14-Dec-2015
transcript
The Asian Financial CrisisThe Asian Financial Crisis
Hung-Gay FungHung-Gay Fung
University of Missouri-St. LouisUniversity of Missouri-St. Louis
Presentation OutlinePresentation Outline
Discuss briefly the behavior of the Discuss briefly the behavior of the Foreign Exchange (FX) of Southeast Foreign Exchange (FX) of Southeast Asian Countries.Asian Countries.
Assess different factors that lead to Assess different factors that lead to the currency crisis.the currency crisis.
Opportunities and Implications for Opportunities and Implications for U.S. companiesU.S. companies
Foreign Exchange RatesForeign Exchange Rates Since June 1997, FX rates in many Since June 1997, FX rates in many
Southeast Asian countries have experienced Southeast Asian countries have experienced a substantial decline.a substantial decline.
These countries include the Philippines, These countries include the Philippines, Malaysia, Thailand, Indonesia, and Korea.Malaysia, Thailand, Indonesia, and Korea.
Many of these countries linked their Many of these countries linked their exchange rates to the U.S. dollar before the exchange rates to the U.S. dollar before the currency crisis.currency crisis.
Change in FX rates Change in FX rates (6/30/1998)(6/30/1998)
FX:1 $US FX:1 $US FX: 1 $USFX: 1 $US % %
6/30/986/30/98 6/30/976/30/97changechange
Chinese yuan 8.281 8.289 +0.09
HK dollar 7.745 7.747 +0.03
Indonesia rupiah 14568.89 1760 -87.92
Japanese yen 138.31 114.61 -17.58
Malaysian ringgit 4.1 1.827 -55.44
Korean won 1370 641.4 -53.18
Philippine peso 41.5 19.08 -54.02
Thai baht 42.16 17.9 -57.54
Immediate Results of CrisisImmediate Results of Crisis
In addition to currency devaluation:In addition to currency devaluation: Collapse of their Stock Markets Collapse of their Stock Markets
(all Southeast countries);(all Southeast countries); Call for an IMF rescue plan in theCall for an IMF rescue plan in the
Philippines, Thailand, Indonesia and Philippines, Thailand, Indonesia and Korea;Korea;
Bankruptcy and financial reformsBankruptcy and financial reforms(all Southeast countries).(all Southeast countries).
What Happens to Capital What Happens to Capital Flows?Flows?
19941994 19951995 19961996 1997*1997*Private flows, net 40.5 77.4 93.0 -12.1
Equity Investment 12.2 15.5 19.1 -4.5
Private Creditors 28.2 61.8 74.0 -7.6
Source: Institute of International Finance, Inc., “Capital Flows to Emerging Economies,” January 1998.
Reasons for the Currency Reasons for the Currency CrisisCrisis
Decline in Export EarningsDecline in Export Earnings Excessive and Risky InvestmentExcessive and Risky Investment Current Account DeficitCurrent Account Deficit Overvalued CurrencyOvervalued Currency Underdevelopment of credit marketUnderdevelopment of credit market Property market bubbleProperty market bubble
Regional Annual Growth Rate of Exports (%)Regional Annual Growth Rate of Exports (%)
CountryCountry 19901990 19911991 19921992 19931993 19941994 19951995 19961996
China 18.2 15.8 18.1 7.1 33.1 22.9 1.6
Indonesia 15.9 13.5 16.6 8.4 8.8 13.4 9.7
Korea 4.2 10.5 6.6 7.3 16.8 30.3 3.7
Malaysia 17.4 16.8 18.5 15.7 24.7 24.7 26.0
Philippines 4.0 8.7 11.2 13.7 20.0 31.6 16.7
Thailand 14.9 23.2 14.2 13.3 22.7 25.1 -1.3
Mexico 17.7 0.7 1.4 9.2 14.2 40.3 22.6
Decline in Export EarningsDecline in Export Earnings
Excessive and Risky InvestmentExcessive and Risky Investment
Incremental Capital-Output (ICOR) RatiosIncremental Capital-Output (ICOR) Ratios
CountryCountry 1987-19921987-1992 1993-19961993-1996
China 3.1 2.9
Hong Kong 3.7 6.1
Indonesia 3.8 4.9
Korea 4.0 4.9
Malaysia 3.7 4.8
Philippines 6.0 5.5
Singapore 3.6 4.0
Taiwan 2.4 3.9
Thailand 3.4 5.1Source: Corsetti and Pesenti (1998)
Current Account DeficitCurrent Account Deficit(% of GDP)(% of GDP)
1990-19951990-1995 19961996
Asian CountryAsian Country: : (average) (average)
China 0.9 0.9
Hong Kong 3.3 -1.2
Korea -1.2 -4.8
Singapore 12.7 15.5
Taiwan 4.0 4.0
Indonesia -2.5 -3.7
Malaysia -5.9 -4.9
Philippines -3.8 -4.7
Thailand -6.7 -7.9
Current Account Current Account (continued)(continued)
Latin AmericaLatin America 1990-951990-95 19961996
Argentina -1.6 -1.4
Brazil -0.6 -3.3
Chile -2.6 -5.4
Colombia -1.7 -5.5
Mexico -5.1 -0.6
Other countries:Other countries:
Israel -3.9 -7.4
Africa (average) -11.1 -7.8
Hungary -4.0 -3.7
Source: Bank for International Settlements
Overvalued CurrencyOvervalued CurrencyCountryCountry 19901990 19911991 19921992 19931993 19941994 19951995 19961996
Hong Kong 99.7 103.9 108.5 115.9 114.5 116. 125.5
Indonesia 97.4 99.6 100.8 103.8 101.0 100.5 105.1
Korea 97.1 91.5 87.8 85.2 84.7 87.8 86.8
Malaysia 97.0 96.9 109.7 111.0 107.1 107.0 111.9
Philippines 92.3 103.1 107.1 97.4 111.6 109.5 116.0
Singapore 101.2 105.7 106.0 108.6 111.9 112.7 117.9
Thailand 102.2 99.0 99.7 101.9 98.3 101.7 107.6
Note: The base figure (100) is the average for the year 1990
Source: J.P. Morgan
Japanese ModelJapanese Model
Limit bond market to support long-term Limit bond market to support long-term growth.growth.
KeepKeep savingssavings in a small number of powerful in a small number of powerful banks which arebanks which are notnot properly regulated .properly regulated .
Loans are made toLoans are made to favoredfavored customers and customers and businesses with national ambitions, such as businesses with national ambitions, such as textiles, steel, shipbuilding, electronics, and textiles, steel, shipbuilding, electronics, and automobiles (such as Japan, Thailand, automobiles (such as Japan, Thailand, Korea, and Indonesia).Korea, and Indonesia).
Size of Banking sectorSize of Banking sector
1995 % of GDP1995 % of GDP
BondBond Bank Bank
MarketMarket LendingLending
U.S. 110% 54%
Japan 74 152
Malaysian 56 100
Philippine 39 54
Thailand 10 100
Indonesia 6 57
Bank Credit to Private SectorBank Credit to Private SectorAnnual Rate of ExpansionAnnual Rate of Expansion % of GDP% of GDP
CountryCountry 1990-19971990-1997 19971997
China 13 97
Hong Kong 8 157
Indonesia 18 57
Japan 1.5 111
Korea 12 64
Malaysia 16 95
Philippines 18 52
Singapore 12 97
Thailand 18 105
United States 0.5 65
June 1996June 1996 June 1997June 1997Indonesia 1.724 1.704
Korea 1.623 2.073
Malaysia 0.252 0.612
Philippines 0.405 0.848
Thailand 0.992 1.453
Other countriesOther countriesArgentina 1.325 1.210
Brazil 0.702 0.792
Mexico 1.721 1.187
Pakistan 0.740 2.440
South Africa 4.050 3.124
Zimbabwe 1.319 1.635
Short-Term Debt to ReservesShort-Term Debt to Reserves
Non-Performing LoansNon-Performing Loans(% of Total Loans)(% of Total Loans)
19901990 19941994 19951995 19961996
Indonesia 4.5 12.0 10.4 8.8
Korea 2.1 1.0 0.9 0.8
Malaysia 20.4 8.1 5.5 3.9
Thailand 9.7 7.5 7.7 N/A
Mexico 2.3 10.5 14.4 12.5
Argentina 16.0 8.6 12.3 9.4
Source: Bank for International Settlements.
Property Market BubbleProperty Market Bubble
Sale Price:Sale Price: Capital Value Capital Value
PeriodPeriod Bangkok (000B/m. sq.)Bangkok (000B/m. sq.) Jakarta ($/m. sq.)Jakarta ($/m. sq.)
Q4, ‘90 66.0 3019
Q4, ‘91 67.0 2788
Q4, ‘92 60.0 2482
Q4, ‘93 59.5 2327
Q4, ‘94 60.5 2358
Q4, ‘95 60.5 2179
Q4, ‘96 60.4 2250
Q2, ‘97 43.0 2267
Source: Data Stream and Jones Lang Wootten.
Central Business District Office Central Business District Office Vacancy RatesVacancy Rates
19971997
Bangkok 15.0%
Hong Kong 6.0%
Kakarta 10.0%
Kuala Lumpur 3.0%
Manila 1.0%
Singapore 8.0%
Shanghai 30.0%
Source: JP Morgan “Asian Financial Markets,”
January 1998.
What Really Causes A What Really Causes A Crisis?Crisis?
Corruption?Corruption?Korea, Indonesia, Thailand -corruptionKorea, Indonesia, Thailand -corruptionItaly and India have corruption, but no Italy and India have corruption, but no
crisiscrisis
Bank TransparencyBank Transparencyinadequate regulatory frameworkinadequate regulatory frameworkirrational lenders?irrational lenders?
Fundamental Factors-GDP growth Fundamental Factors-GDP growth (%)(%)
19931993 19941994 19951995 19961996
Indonesia 6.5 7.54 8.22 7.98
Korea 5.75 8.58 8.92 7.13
Malaysia 8.41 9.24 9.46 8.20
Philippines 2.12 4.39 4.76 5.67
Thailand 8.27 8.85 8.68 6.66
Source: Corsetti, Pesenti and Roubini (1998).
Inflation RateInflation Rate
19931993 19941994 19951995 19961996
Indonesia 9.60 8.53 9.43 8.03
Korea 4.82 6.24 4.49 4.96
Malaysia 3.57 3.71 5.28 3.56
Philippines 7.58 9.06 8.11 8.41
Thailand 3.36 5.19 5.69 5.85
Source: Corsetti, Pesenti and Roubini (1998).
Savings Rates (% of GDP)Savings Rates (% of GDP)CountryCountry 19901990 19911991 19921992 19931993 19941994 19951995 19961996
China 38.1 38.3 37.7 40.6 42.6 41.0 42.9
Hong Kong 35.8 33.8 33.8 34.6 33.1 30.4 30.6
Indonesia 27.9 28.7 27.3 31.4 27.6 28.4 28.1
Japan 33.5 34.2 33.8 32.8 31.4 30.7 31.3
Korea 36.1 35.9 35.1 35.2 34.6 35.1 33.3
Malaysia 29.1 28.4 31.3 33.0 32.7 33.5 36.7
Philippines 18.7 18.0 19.5 18.4 19.4 17.8 19.7
Singapore 44.1 45.4 47.3 44.9 49.8 50.0 50.1
Taiwan 22.4 22.2 23.2 23.7 22.9 22.9 21.0
Thailand 32.6 35.2 34.3 34.9 34.9 34.3 33.1
Source: Statistical Appendix, IMF, 1997.
Human Development IndicatorsHuman Development Indicators
CountryCountry Life-ExpectancyLife-Expectancy Literacy RateLiteracy Rate Average Income Average Income ofof
(years)(years) (%) (%) Poorest 20% Poorest 20%
in ‘85 US$in ‘85 US$
19701970 19951995 19701970 19951995 19701970 19951995
Indonesia 48 64 54 84 392 908
Korea 60 72 88 98 303 2071
Malaysia 62 72 60 85 431 1070
Philippines 57 66 83 95 218 435
Thailand 58 69 79 94 361 726
Source: Radelet and Sachs (1998).
Fixed Exchange Rate SystemFixed Exchange Rate System
FX rates more efficient.FX rates more efficient. Imposes impediments in the FX Imposes impediments in the FX
system.system. Government guarantees investors Government guarantees investors
potential upside return if FX potential upside return if FX devalues.devalues.
Currency Model of AttackCurrency Model of Attackby Speculatorsby Speculators
Due to theDue to the ““fixedfixed”” exchange arrangement in exchange arrangement in many Southeast Asian countries, speculators many Southeast Asian countries, speculators start withstart with local borrowingslocal borrowings (i.e., borrowing (i.e., borrowing from local banks).from local banks).
They then sell the local currencies,They then sell the local currencies, convert convert into US dollars,into US dollars, andand sell forward contracts.sell forward contracts.
They realize a profit if theThey realize a profit if the currencies currencies devalue,devalue, because their US holdings can be because their US holdings can be exchanged for more local currencies to pay exchanged for more local currencies to pay off loans.off loans.
Defenses by GovernmentsDefenses by Governments
Buy up sales transactions - FX reserves can Buy up sales transactions - FX reserves can be exhausted quickly.be exhausted quickly.
Jack up the interest rate to deter Jack up the interest rate to deter speculative borrowings, implying high cost speculative borrowings, implying high cost for business that leads to:for business that leads to: bankruptciesbankruptcies discouraging real investmentdiscouraging real investment collapse of stock marketscollapse of stock markets
Penalize banks who lend money to Penalize banks who lend money to speculators.speculators.
The Impact of Crisis on ChinaThe Impact of Crisis on China
More imports from Korea due to More imports from Korea due to lowered prices, e.g., products lowered prices, e.g., products imported from Korea have increased, imported from Korea have increased, including steel (32.4%), petro-including steel (32.4%), petro-chemicals (11.8%), and textiles (9%).chemicals (11.8%), and textiles (9%).
China’s exports slow down.China’s exports slow down. Economic growth slows down.Economic growth slows down.
China’s StrategyChina’s Strategy Under pressure to devalue its currency.Under pressure to devalue its currency.
However, such a decision is political, not However, such a decision is political, not economic.economic.
Could hurt its credibility as an Asian Could hurt its credibility as an Asian leader.leader.
Devaluation will hurt Hong Kong, a Devaluation will hurt Hong Kong, a place to raise external funds via initial place to raise external funds via initial public offerings (IPO) for its state-public offerings (IPO) for its state-owned enterprises.owned enterprises.
China’s Strategy China’s Strategy (continued)(continued)
Ease Ease Export CreditsExport Credits by encouraging by encouraging banks to make loans to export-banks to make loans to export-oriented companies.oriented companies.
Relax export licenses and give tax Relax export licenses and give tax rebates: rebates: Ministry of Foreign Trade and Ministry of Foreign Trade and
Economic Cooperation issues more Economic Cooperation issues more export licenses for base metals.export licenses for base metals.
Exporters will receive full 17% value-Exporters will receive full 17% value-added tax.added tax.
Implications and StrategiesImplications and Strategies
Lowered currency value implies Lowered currency value implies products are cheaper to buy --products are cheaper to buy --Merger Activities in Asian countriesMerger Activities in Asian countries
International trade implicationsInternational trade implications Financial reforms (bond market Financial reforms (bond market
development and banks)development and banks) Corporate StrategiesCorporate Strategies
Corporate Hedging StrategiesCorporate Hedging Strategies
Increased use of hedging Increased use of hedging instruments, given the volatile FX instruments, given the volatile FX markets (markets (use of forward, swaps and use of forward, swaps and other derivative instrumentsother derivative instruments).).
As a long-term strategy, U.S. firms As a long-term strategy, U.S. firms should pay closer attention in should pay closer attention in managing their economic exposure,managing their economic exposure, e.g., Avon’s use of a balance sheet e.g., Avon’s use of a balance sheet hedge in 1997hedge in 1997..