ASIAN CRISIS
AND
CONSEQUENCES SM71.9005 Country Risk Management
Asian Institute of Technology
Instructor

Dr. Henry Bouchet

By

Aurelien GOUTORBE 103780
Thoppil Sanju Thomas 103857
Somchoke Visuthiratsopon 103913
Hebli Sneha Vadiraj 104002
Ruethairat Sureephong 104019


countries’ high investment levels. While the agricultural sector was decreasing in
importance, it experienced rapid growth and productivity improvement. The population
growth rates were declining more rapidly than in other parts of the developing world. An
efficient system of public administration and a better educated labor force helped also the
start of this impressive economical growth. Macroeconomic management was unusually
good and macroeconomic performance unusually stable, providing the essential
framework for private investment. The policies to increase the integrity of the banking
system and to make it more accessible to nontraditional savers raised the levels of
financial savings. With a focus on primary and secondary schools, the education policies
generated rapid increases in labor force skills.

Government intervention

In most of these economies the government intervened to boost development, and in
some cases the development of specific industries. The governments used multiple,
shifting policy instruments in pursuit of more straightforward economic objectives such
as macroeconomic stability, rapid export growth, and high savings.
The government interventions took many forms:
 Policies to bolster savings, build strong financial markets, and promote
investment with equity included keeping deposit rates low and maintaining
ceilings on borrowing rates to increase profits and retained earnings, establishing
and financially supporting government banks, and sharing information widely
between public and private sectors.
 Policies to encourage private investment:
o Tax, tariff, and exchange rate policies to keep the price of investment
goods low
o Subsidized interest rates for corporate investment
o Policies to limit risk for private investors.
 Policies to protect domestic import substitutes support declining industries, and
establishing firm- and industry-specific export targets.

the region's economies received a large inflow of hot money and experienced a
dramatic run-up in asset prices.
 At the same time, the regional economies of Thailand, Malaysia, Indonesia, the
Philippines, Singapore, and South Korea experienced high, 8-12 percent GDP
growth rates in the late 1980sand early 1990s.
 This achievement was broadly acclaimed by economic institutions including the
IMF and World Bank, and was known as part of the Asian economic miracle.
 Triggered by events in Latin America, particularly after the Mexican peso crisis
of 1994, Western investors lost confidence in securities in East Asia and began to
pull money out, creating a snowball effect.
 At the time Thailand, Indonesia and South Korea had large private current
account deficits and the maintenance of pegged exchange rates encouraged
external borrowing and led to excessive exposure to foreign exchange risk in both
the financial and corporate sectors.
 As the U.S. economy recovered from a recession in the early 1990s, the U.S.
Federal Reserve Bank under Alan Greenspan began to raise U.S. interest rates to
head off inflation. This made the U.S. a more attractive investment destination
relative to Southeast Asia, which had attracted hot money flows through high
short-term interest rates, and raised the value of the U.S. dollar, to which many
Southeast Asian nations' currencies were pegged, thus making their exports less
competitive.
 The foreign ministers of the ASEAN countries believed that the well co-ordinated
manipulation of currencies was a deliberate attempt to destabilize the ASEAN
economies.
 Malaysian Prime Minister Mahathir Mohamad accused currency speculator
George Sorosof ruining Malaysia's economy with massive currency speculation
 At the 30th ASEAN Ministerial Meeting held in SubangJaya, Malaysiathey issued
a joint declaration on 25 July 1997 expressing serious concern and called for
further intensification of ASEAN's cooperation to safeguard and promote
ASEAN's interest in this regard.

and again by 2 points on 19 June. Thailand triggered the crisis on 2 July. On 3 July, the
Philippines central bank was forced to intervene heavily to defend the peso, raising the
overnight rate from 15 %to 24 % The peso fell significantly, from 26 pesos per dollar at
the start of the crisis, to 38 pesos in 2000, to 40 pesos by the end of the crisis.

During the tenure of former President Joseph Estrada, the Philippine economy recovered
from a contraction of .6 %in GDP during the worst part of the crisis to GDP growth of
some 3 %by 2001. Unfortunately, scandals rocked his administration in 2001, most
notably the "jueteng" scandal, became a significant factor to calls for his ouster which
caused significant falls in the share prices of companies listed on the Philippine Stock
Exchange. The PSE Composite Index, the main index of the PSE, fell to some 1000
points from a high of some 3000 points in 1997. The peso fell even further, trading from
levels of about 35 pesos to 50 pesos. Later that year, he was impeached but was not voted
out of office. Massive protests caused EDSA II, which led to his resignation and lifted
Gloria Macapagal-Arroyo to the Philippine presidency. Arroyo did manage to end the
crisis in the Philippines, which led to the recovery of the Philippine peso to about 45
pesos by the time Arroyo became as the president

Hong Kong
The collapse of the Thai baht on July 2, 1997, came 24 hours after the United Kingdom
handed over soveriegnty over Hong Kong to the People's Republic of China. In October
1997, the HK dollar, which was pegged at 7.8 to the US dollar, came under speculative
pressure since Hong Kong's inflation rate was significantly higher than that of the US for
years. Monetary authorities spent more than US$1 billion to defend the local currency.
Since Hong Kong has more than US$80 billion of foreign reserves, which is equivalent to