could spark a global crisis. The Asian Financial crisis of 1997 refers to the macroeconomic
shock experienced by Thailand, Philippines, Malaysia, South Korea and Indonesia.
On the May of 1997, Thailand spent billions of dollars of its foreign reserves
to defend the Thai baht against speculative attacks which followed months of more
speculative pressures that had substantially depleted Thailand’s official foreign
exchange reserves, sparked the beginning of a deep financial crisis. Just
months after, Malaysia, the Philippines, and Indonesia also allowed their
currencies to weaken substantially in the face of market pressures, with
Indonesia gradually falling into a complicated financial and political crisis.
What’s odd is the most affected economies
were also among the world’s most successful that time. “The Asian Miracle” (1960s-1990s)
offered business-friendly policies and cautious fiscal and monetary management that
had translated into high and better rates of savings and investment. Following
a fixed exchange rate encouraged external borrowing. High exports resulted in
the rapid growth of these economies. Southeast Asia’s secret for its booming
economic growth that time is the increasing capital investment. Though it may
sound that everything seems right and properly managed, countries became
extremely dependent on exports. Thailand’s economic bubble is still to be
tested now that it involves short-term capital flow.
In this time, the U.S. Economy also just
recovered from the recession. The U.S. started raising their interest rates and
became a more attractive investment destination compared to Southeast Asia. For
Asian currencies attached to the U.S. dollar caused their own exports to become
more expensive and less attractive in the global markets.
Asset prices began to collapse. Prices rise
quickly over a short period. It asked for more money as the size of the bubble
grew, and proved that it’s not going to be sustainable in the long run. Ran by
credit and buying in installment, which turned out, was totally unsustainable.
It became clear that the solid growth record
of these economies had concealed important vulnerabilities that lead to the
sudden collapse. I would like to give focus and details on how most Asian
countries relied on foreign investments that time. I am no expert to discuss
these kind of things, but I would like to analyze the 1997 situation with my
2017 knowledge and experience.
Reliance on foreign investments.
I’m fully aware that relationships are really
important for any country to promote economic growth that’s why there are lot
of organizations that helps in building these connections. Even if that is the
case, I would like to argue how foreign investment may fill the funding gap
now, but it could be more costly and risky when used in longer term.
During the crisis, falling domestic economies
and real estate markets added to the risks and led to hefty reliance on foreign
savings, that also caused a build-up in external debt. Heavy foreign borrowing at
short maturities offered a short-term solution but has eventually lead into liquidation
and even suffering.
During the peak of the crisis, sudden pullback
by foreign investors, caused heavy depreciation, recession, and amplified banking
sector weakness. In the face of these pressures, foreign exchange intervention
often proved counterproductive, with some countries depleting most of their
official reserves and suffering even larger subsequent depreciations.