GAP Project Asian Financial Crisis Presentation

A presentation on the asian financial crisis

1. Asian Financial Crisis

2. Thailand’s Economy (1996) CA deficit equaled nearly -8% of GDP in 1996 due to rapid growth (increasing imports demand) and declining global trade (lowering export demand) Large Current Account Deficit Total external debt rose to nearly $95 Billion USD in 1996, leading to an external debt-GDP ratio of 50% High Foreign Debt Money for development went largely uncontrolled to those close to power Improper Governance Economy growing at 6.7% a year, fueling growth via high-risk, highly leveraged investments High GDP Growth The Baht was pegged to the USD at 25 baht/USD Pegged Baht Increasing growth led to large capital flow towards infrastructure and real estate Property Market Bubble

3. Most-Affected Economies

4. 01 02 03 04 05 Developers overbuilt properties and ended up defaulting on loans as supply exceeded demand Simultaneously, a reduction in demand for semiconductors and increase in U.S. interest rates decreased exports Lenders pulled back credit and investors withdrew capital as asset prices plummeted Bank of Thailand floated the bhat after depleting its foreign reserves due to speculative attacks Unraveling of the Crisis in Thailand Speculative runs and capital flight occurred in countries perceived as having similar weaknesses 06 Poor lending practices and a lack of economic/political transparency led to an overheated market 07 Businesses struggled to repay foreign-denominated debt and went bankrupt

5. Currency Depreciation Amount of baht in foreign exchange markets e Demand 1 Supply 1 Demand 2 Supply 2 Peg e 2 Depreciative Pressures Foreign investors withdraw capital, decreasing demand and increasing supply Lowered demand for Thai exports decreases demand Speculative attacks decrease demand and increase supply Actions to Defend Peg Increase Thai interest rates, increasing demand and decreasing supply Supply foreign currency using foreign reserves Outcome Foreign reserves are reduced from $38.7B to $2.85B Bank of Thailand is forced to unpeg baht on July 2, 1997 Exchange rate falls from 25 to 56 baht per USD by January 1998

6. Modeling the Crisis Lenders want to hold cash rather than lend High interest rates had been implemented while defending peg LM Curve: Shift Left Y r FE 1 IS 1 LM 1 IS 2 FE 2 LM 2 Declining productivity as businesses cannot get credit for operations Declining labor demand as businesses default on foreign debts and go bankrupt FE Curve: Shift Left Loss of firm confidence and capital for investment IS Curve: Shift Left

7. Initial Policy During Crisis Increased interest rates to prevent further currency depreciation and protect businesses with foreign debt Contractionary Monetary Policy IS 2 FE 2 LM 2 Received $17B aid package from IMF Liquidated insolvent banks Government intervened in and recapitalized weak banks Financial Restructuring Reduced government spending to reduce government deficit and improve fiscal solvency Contractionary Fiscal Policy Y r FE 3 IS 3 LM 3 Real GDP shrank by 2.8% in 1997 and 7.7% in 1998 Unemployment jumped from 0.9% in 1997 to 3.4% in 1998 Real interest rate constant from 8.9% in 1996 to 8.8% in 1997 Indicators

8. Later Policy / Effects Gradually reduced in interest rates once currency stabilized Expansionary Monetary Policy IS 4 FE 4 LM 4 Privatization of intervened banks Restructuring of corporate debt Reformed bankruptcy laws Financial Restructuring Increased government spending Implemented foreign investment restrictions Improved governance and transparency Expansionary Fiscal Policy / Reforms Y r FE 3 IS 3 LM 3 Real GDP grew by 4.6% in 1999 and continued growing Unemployment fell to 3% in 1999 and continued falling Real interest rate fell to 6.4% in 2000 and continued falling Inflation fell to 0.3% in 1999 and remained low Indicators

9. Other Policy Options (Unimplemented) Similar to Singapore: pegged to a basket of currencies Theorized Effect: reduce vulnerability to exchange rate risk, leading to a less devalued Baht Peg Baht to Multiple Currencies, not just USD LM 2 IS x FE 2 Y r IS 2 FE x Similar to Malaysia: restrict short-term capital outflow Theorized Effect: stabilize the Baht to avoid devaluation Risk: high external debt, capital control risky Restrict Capital Flow Theorized Effect: raise consumer confidence Risk: requires high borrowing, limited capital access Increase Government Spending

10. Conclusion Thailand had a large current account deficit, rising foreign debt, a pegged currency, and a property market bubble Economic Background The property market bubble popped when developers started defaulting, consumer confidence and Baht value plummeted The Crisis Initially: abandoned the currency peg, raised interest rates Later: implemented policy reforms, decreased interest rates Thailand’s Response Initially: recession worsened, everything decreased (output, employment , consumption, investment) Later: loose monetary policy reinstilled trust, everything increased back Impact Alternative options available, but with associated risks, and Thailand returned to pre-crisis output levels by 2003 Aftermath 1 2 3 4 5

11. Works Cited Michael Carson and John Clark. “Asian Financial Crisis.” Federal Reserve History , www.federalreservehistory.org/essays/ asian-financial-crisis. Accessed 26 Nov. 2024. “Recovery from the Asian Crisis and the Role of the IMF -- an IMF Issues Brief.” International Monetary Fund , www.imf.org/external/np/exr/ib/2000/062300.HTM#box1. Accessed 26 Nov. 2024. “Finance and Development.” Finance and Development | F&D , www.imf.org/external/pubs/ft/fandd/1998/06/imfstaff.htm. Accessed 26 Nov. 2024. Yoshihiro, Iwasaki. “Chapter 16 Whither Thailand?” IMF eLibrary , International Monetary Fund, www.elibrary.imf.org/display/book/9781451965476/ch016.xml#:~:text=At%20the%20outset%20of%20the,Thailand%20set%20capital%20adequacy%20targets. Accessed 26 Nov. 2024.