Financial crisis will brings the huge impact on economy in the world. It applied broadly to a variety of situations in which financial institutions lose a large part of their value suddenly. With regard to the 19th and early 20th centuries, many financial crises were related with banking panics, and often the recession has happened coincided with these panics.
The Asian financial crisis was a period of financial crisis that gripped much of Asia beginning in July 1997, and raised fears of a worldwide economic meltdown due to financial contagion.
Maybe some people have misunderstanding that the Asian financial crisis was caused by the macroeconomic imbalances but actually it is not cause by the macroeconomic imbalances it was caused by a booming economy and booming property markets which encouraged expansive borrowing by firms.
The seeds of the 1997 to 1998 Asian financial crisis were sown during the previous decade when these countries were experiencing unprecedented economic growth. Although there were and remain important differences between the individual countries, a number of elements were common too most.
The fundamentals of Malaysia, Indonesia, Philippines and Korea were and are sound. These economies have high domestic savings and investment rates, high rates of output growth, strong export performance, low inflation and more egalitarian economic policies than any other region.
Which countries are mostly affected by the crisis?
When the Asian Financial Crisis 1997 happen it almost affected the whole Southeast Asia and some others country. The most affected countries by this crisis are Indonesia, South Korea and Thailand.
Thailand
Start from 1985 until 1996, Thailand's economy have grew at an average of over 9% per years; this is the highest economic growth rate of all the country at that time. On 14 and 15 of May 1997, Thai baht have been hit by massive attacks. On the 30 June 1997, the Prime Minister of Thailand said that he would not devalue the baht. This was the spark that ignited the Asian financial crisis as the government of Thailand had failed to defend the baht. Thailand's booming economy came to a halt amid massive layoffs in finance, real estate, and construction that causes in huge amount of workers returning to their villages in the countryside and over 600,000 foreign workers had been sent back to their home countries. The baht had lost more than half of its value, it reached the lowest point of 56 units to the US dollar in January 1998, The Thai stock market dropped 75%, this cause the Thai largest finance company - Finance One collapsed.
Indonesia
In June 1997, Indonesia seems like still far from the crisis. Unlike Thailand, Indonesia had a low inflation, and a trade surplus that more than $900 million, huge amount of foreign exchange reserves of more than $20 billion, and had a good banking sector.However, there is a large amount of Indonesian corporations had been borrowing in U.S. dollars. On the previous years, as the rupiah had strengthened respective to the dollar, this practice had worked well for these corporations and their effective levels of debt and financing costs had decreased as the local currency's value rose. In July 1997, when the Thai baht float, Indonesia's monetary authorities widened the rupiah currency trading band increase from 8% to 12%. The rupiah suddenly came under acute attack in August. On 14 of August 1997, the managed floating exchange regime was replaced by a free-floating exchange rate arrangement. The rupiah had dropped further from $1=Rp2,400 in early August to $1=Rp4,000, and the Jakarta stock market index had declined from just over 700 to under 500. The IMF came forward with a rescue package of $23 billion, they try to help rupiah back to normal, but the rupiah was sinking further amid fears over corporate debts, massive selling of rupiah, and the strong demand for dollars. The rupiah and the Jakarta Stock Exchange had touched the historic low in September. Moody's finally downgraded Indonesia's long-term dent into 'junk bond'.
South Korea
Initially South Korea seemed to be insolated from the currency turmoil sweeping through the region. As the world's 11th largest economy, and a member of the Organization of Economic Cooperation and Development, Korea was clearly in a different league from Thailand, Indonesia, and Malaysia. However, underneath the surface Korea too had serious problems. The Korean debt problem started to deteriorate in January 1997 when one of the chaebol, Hanbo which collapsed under a $6 billion debt load. The situation deteriorated further in July 1997 when Kia- the third largest car company at Korea, ran out of cash and asked for an emergency bank loan to avoid bankruptcy. At about the same time Jinaro the largest liquor group at Korea, filed for bankruptcy.By October 1997 it was clear that additional funds for Kia would not be forthcoming from private banks, that why the government took the company into public ownership in order to stave off bankruptcy and job losses.The nationalization of Kia transformed its private sector debt into public sector debt. Standard & Poor's, the US credit rating agency, immediately downgraded Korea's debt, this action cause the Korean stock market to plunge 5.5%, and the currency - Korean won fall to $1=Krw929.5.
What happened to the countrys' economy after the crisis?
Thailand
At the year 2001, Thailand's economy had recovered. The increasing tax revenues allowed the country to balance its budget and repay its debts to the IMF in 2003, four years ahead of schedule. The Thai baht continued to appreciate to 29 Baht to the Dollar in October 2010.
Indonesia
Indonesia's external position is far more comfortable than it was before the Asian financial crisis. Its current account recorded an estimated surplus of 2.6% of GDP in 2006, compared with a deficit of 3% of GDP in 1996. Its foreign-exchange reserves now cover 5.2 months of imports, compared with 3.9 months before the crisis. External debt ratios have fallen dramatically. Furthermore, unlike before the crisis when the currency was pegged at an artificially high exchange rate, the exchange rate has been allowed to adjust with some freedom in recent years, meaning it is less vulnerable to speculative attack.
South Korea
South Korean won, meanwhile, weakened to more than 1,700 per U.S. dollar from around 800. Despite an initial sharp economic slowdown and numerous corporate bankruptcies, South Korea has managed to triple its per capita GDP in dollar terms since 1997. Indeed, it resumed its role as the world's fastest growing economy-since 1960, per capita GDP has grown from $80 in nominal terms to more than $21,000 as of 2007. However, like the chaebol, South Korea's government did not escape unscathed. Its national debt to GDP ratio more than doubled (approximately 13% to 30%) as a result of the crisis.
Impact on Malaysia
Before the 1997 Asian Financial Crisis, Malaysia had a large current account deficit of 5% of its GDP. At that time, Malaysia was a popular destination for investment. The general performance indicators of the Malaysian economy were very auspicious due to its high growth, virtual full employment, low inflation and low foreign debt. However, when the Malaysian macroeconomic conditions at the time are closely examined in light of the literature on currency crises, it is clear that Malaysia was not an innocent victim of the financial crisis (Thai contagion): it had in fact developed considerable vulnerability to a speculative attack.
Exchange Rate
The ringgit experienced a heavy selling pressure when the Thai baht came under speculative attack in mid May. In July 1997, within days of the Thai baht devaluation, the Malaysian ringgit was attacked by speculators. The overnight rate increased significantly from under 8 percent to over 40 percent. Thus, this led to rating downgrades and a general sell off on the stock and currency markets. By the end of 1997, ratings had fallen many notches from investment grade to junk, the KLSE (Kuala Lumpur Stock Exchange) had lost more than 50 percent from above 1,200 to under 600. Between the first week of July 1997 and 7 January 1998 the ringgit depreciated against the dollar by almost 50 percent. The ringgit fall from above 2.50 to under 4.57 (on Jan 23, 1998) to the dollar.
Capital Flows
In the second quarter of 1997, the net quarterly flow of portfolio capital turned negative for the first time after 1991 and total net outflow in the first three quarters of the year amounted to over US$ 11 billion. Reflecting the massive reversal of portfolio capital flows, by the end of 1997 the composite share price index of KLSE had fallen by over 50 percent from the pre-crisis level, wiping off almost $225 billion of share values. However, given the low foreign debt exposure of domestic financial institutions, for a while the Malaysian policymakers were able to muddle through.
Unemployment rate
The Malaysian economy was in recession by August 1998. National account released in the last week of August exhibited a contraction of output by 2.8 percent and 6.8 percent in the first two quarters respectively. While employment growth had been growing stably at 4.9 and 4.6 percent in 1996 and 1997 respectively, it contracted by 3 percent in 1998. The number of workers retrenched in domestic manufacturing surged from 19 thousand in 1997 to above 83 thousand in 1998. For the whole of 1998, the number of retrenchments was 83,865, a significant increase from the 19,000 number of retrenchments in 1997. Retrenchments in the domestic manufacturing lead to high unemployment rate. Thus, the unemployment rate increased from 2.5 percent in 1996 to 3.2 percent in 1998.
Inflation rate
The 1997 Asian Financial Crisis also had an impact on the inflation rate of Malaysia. The significant increase in the consumer price index (CPL) during the crisis causes inflation occurred. At the same time, the price level is high. Inflation levels rose as well. Before moderating, the inflation rate reached and peaked at 6.2 percent in June 1998 , exceeding the previous peak of 5.3 percent that recorded in 1991. Finally, the inflation rate was 5.3 percent in 1998.
GDP
The Malaysian GDP falls due to the 1997 Asian Financial Crisis. The contraction in GDP resulted in the slowdown of employment growth, and the rise of unemployment rate and retrenchment levels. The real GDP growth rate fell from 7.3 percent in 1997 to -7.4 percent in 1998. In 1998, the output of the real economy declined plunging the country into its first recession for many years. The agriculture sector contracted 5.9 percent, manufacturing shrunk 9.0 percent and the construction sector 23.5 percent. At overall, the Malaysian gross domestic product plunged 6.2 percent in 1998.
By the mid 1990s, market capitalization of KLSE (around US$200 billion) amounted to over 300 percent of GDP, by far the highest in the world. At the onslaught of the crisis, foreign investors accounted for only 30-40 percent of the activity in the market. Outstanding credit as a ratio of GDP increased from an average level of 85 percent during 1985-1989 to 120 percent in 1994 and then rise to over 160 percent when the financial crisis happened in mid 1997. This was the highest credit buildup among the economies of East Asia.
Indicator Name
1996
1997
1998
1999
2000
GDP growth (annual %)
10.00
7.32
-7.36
6.14
8.86
Inflation, consumer prices (annual %)
3.49
2.66
5.27
2.74
1.53
Unemployment, total (% of total labor force)
2.50
2.40
3.20
3.40
3.00
Consumer price index (2005 = 100)
81.38
83.55
87.95
90.36
91.75
Table:Source from World Bank
CONCLUSION
On this assignment, our group member has been explained how the 1997 Asian financial crisis occurs and what is the consequences that was mostly affected of a country and those economy in this crisis. Through the studying of causes and consequences of the financial crisis, we are able to understand the great impact on economy that may cause by the financial meltdown. Moreover, we has been concluded the turmoil that has rocked Asian foreign-exchange and equity markets since June 1997.
The 1997 financial crisis was seriously affected the whole Southeast Asia and even others country, especially the country of Thailand, Indonesia, and South Korea. Those countries of Thailand, Indonesia, and South Korea have suffered a contraction in Gross Domestic Product (GDP) growth because of this financial crisis. However the Thailand is the first countries that have to float on their currency-Thai Baht.
In addition, the 1997 Asian financial crisis cause the Asian economy to stagnant. The currencies, stocks market and asset of Asian country are affected due to this Asian financial crisis. The cause of this financial crisis is begins of when the US has increased the interest rate to reduce inflationary pressure in the late of 1990s, it made the East less attractive as a place to move hot money flows. When the hot money flow totally dried up, the currencies started to fall then this cause a rapid devaluation. Thailand has to float on their currency-Thai Baht during the period of time.
According to the part of impact on Malaysia, it shows the decrease of price level in Malaysia, increase the unemployment rate and inflation rate, and then decrease the GDP during the 1997 financial crisis happened. At the time of Thai baht devaluation, the Malaysian ringgit was attacked by speculators. The unemployment rate had increased from 2.6 percent in 1996 to 3.9 percent in 1998. Besides that, the inflation rate of Malaysia also increasing due to this crisis. The GDP resulted in the slowdown of employment growth and fell the real GDP growth rate.
In conclusion, 1997 financial crisis brings painful memories to many people during the period, that also affected dozens of countries, had a direct impact on the livelihood of millions happened within the course of a mere few months. However, we hope that will have a better financial firefighter to stabilize the crisis, more financial firefighters were commissioned the world economy would be an even safer place.
http://en.wikipedia.org/wiki/1997_Asian_financial_crisis
http://www.wright.edu/~tdung/asiancrisis-hill.htm
