-Lhamu Tsering Agenda.. East Asia pre crisis  Thailand  Crisis timeline  The dilemma  Asian Weaknesses  After the shock  Countries involved..          Thailand Philippines Hong Kong Taiwan Singapore South Korea Malaysia Indonesia China Thailand..  May 1997: Thailand spends billions of its foreign reserves to defend the Thai baht against speculative attacks  In case of Thailand:  Allowing too many short-term capital flows to accumulate with a high degree of currency speculation,  Sustaining a fixed exchange rate when it was no longer suitable,  Lack of sufficient risk management system at the national level as well as regional level.  concerns of large current account deficits  weakness in the Thai financial system  culminating with the failure of a major finance company, Finance One Speculative attacks brings down investor confidence causing- “capital flight”  Crisis in Thailand turned out to be a contagion  Crisis Timeline..  July 1997  Thailand is forced to devalue the baht, which drops the value of the baht by as much as 20%-- a record (had actually attempted a 15% controlled devaluation)  Malaysia’s central bank intervenes to defend the ringgit.  The Philippine peso is devalued. Indonesia widens its trading band for the rupiah in a move to discourage speculators  The Singapore dollar starts a gradual decline. Crisis timeline..Contd/.  August1997  Thailand agrees to adopt tough economic measures proposed by the IMF in return for a $17 billion loan from the international lender and Asian nations. The Thai government closes 42 ailing finance companies and imposes tax hikes as part of the IMF's insistence on austerity  Indonesia abandons the rupiah's trading band and allows the currency to float freely, triggering a plunge in the currency Crisis timeline..Contd/.  October1997  Indonesia asks the IMF and World Bank for help after the rupiah falls more than 30% in two months, despite interventions by the country's central bank to prop up the currency  Hong Kong's stock index falls 10.4% after it raises bank lending rates to 300% to fend off speculative attacks on the Hong Kong dollar. The plunge on the Hong Kong Stock Exchange wipes $29.3 billion off the value of stock shares.  The South Korean won begins to weaken  The IMF agrees to a loan package for Indonesia that eventually swells to $40 billion. In return, the government closes 16 financially insolvent banks and promises other wide-ranging reforms Crisis timeline..Contd/.  November1997  Bank of Korea allows the won to fall below 1000 against the dollar (record low)  December 1997  IMF approves a $57 billion bailout package to the South Korea  As part of IMF economic restructuring plan, the Thai government closes 56 insolvent finance companies (30,000 white collar jobs lost)  South Korea’s first president elected from country’s opposition party. In days the won hits new low.  $3 billion emergency loan released by the world bank , part of a $10 billion support package. Crisis timeline..Contd/.  January 1998:  Release of Indonesia budget plan pulls the rupiah to an all-time low  Inflation rises. Prices for basic food staples in Indonesia increase by as much as 80%  The rupiah plunges to 12,000 rupiah against the dollar  June 1998  Japan announces that its economy is in a recession  Yen falls to levels near 144 to the dollar. US treaury and Federal reserve intervenes to prop up the yen  August 1998  Wall Street reacts; the Dow plunges 300 points in its third biggest loss Dilemma..  Drop in currencies  Raise import prices leading to inflation threat  Threat that potentially viable banks and companies may become bankrupt  Defend the currency  would mean to raise interest rates  Threat of economic slump resulting in the failure of banks Asian Weaknesses..  Weaknesses that became apparent after the crisis: Productivity: economic expansion before crisis later explained by the rapid growth of production inputs (capital and labor) – but relatively little increase in productivity 2. Banking Regulation: Ineffective government supervision 3. Exchange rate regimes- Mostly pegged exchange rate system 4. Legal Framework: lack of structured legal framework to deal with bankruptcy 1. After the Shock..  Ties of some currencies to the dollar had to be abandoned resolving floating rate systems  Supervisory process reforms  Need for accumulation of high levels of international reserves  Evidence that excessive capital inflows to a country to take advantage of high rates can cause unwise investment decisions East Asian CA/GDP annual averages, percent of GDP) Country China Hong Kong Indonesia Malaysia South Korea Taiwan Thailand 1990-1997 1998-2000 2001-2004 1.5 0.6 -2.5 -5.6 -1.6 4 -6.3 2.4 2.5 4.1 8.7 4.6 3.9 12.8 10.3 6.5 1.9 2.3 8.1 10.2 5.1  Questions?????...