asia crisis - An Economic Overview of the Asian Financial...

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An Economic Overview of the Asian Financial Crisis and Forecast for the Region in the Future Man-lui Lau University of San Francisco June 1998 (with updated charts)
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Background The Asian financial crisis started around April 1997 in Thailand. Investors (especially foreign investors) worried about whether Thailand had enough foreign reserves to cover its external debt. They began to pull money out of Thailand. It induced a dramatic depreciation of the Thai Baht. Later on the financial crisis was spread to the other countries in Southeast Asia: Indonesia, Malaysia and the Philippines. Singapore was also affected indirectly. In late 1997, the financial crisis was spread to South Korea and Hong Kong. To a certain extent, Taiwan, Japan and China were also affected. Reason for the financial crisis 1.Thailand: For a long period of time, the Thai Baht had been pegged to the USD 1 . At the same time, Thailand had a current account deficit, which was financed by (short-term) foreign capital inflow. In 1994, when China devaluated the RMB, Thailand began to lose its competitiveness in the export market. Also, when the USD began to appreciate since 1995 the Thai Baht was over-valued. In order to support the over- valued Baht, the Central Bank of Thailand had to keep on buying Thai Baht (by selling USD) in the foreign exchange market. In around April 1997, foreign investors began to worry whether the central bank had enough foreign exchange reserves to cover the foreign debt and so they began to sell Thai Baht and pull the money out of Thailand. At first, the Central Bank of Thailand announced that it would support the Thai Baht at all cost. A couple of days later, it was apparent that there was no way it could succeed to maintain the value of the Baht. Hence the Baht was allowed to float freely in the market and it nose-dived. The stock market also declined severely as investors tried to liquidate their positions in Thai assets. Although the selling of the foreigners likely induced the fall of the Thai Baht, the collapse of it was apparently due to the selling of the local people. For quite a long while, due to the "fixed exchange rate" and the higher interest rate of Thai Baht, local investors had been borrowing USD substantially. The USD was converted to Thai Baht and was used either to earn a higher interest rate or to speculate in the 1 It was doing magic to the Thai economy when the USD depreciated in the early 1990s. 2
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booming property market. When the Thai Baht began to fall, these local investors had to cover their positions and purchased USD in the market at any rate. The lack of transparency of the Central Bank of Thailand clearly did not help the situation. The investors had no idea how much foreign reserves it had in its coffer. The currency crisis also exposed the weak regulation of the banking system in
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This note was uploaded on 11/06/2010 for the course ECON 716-2 taught by Professor Prof.man-luilau during the Fall '10 term at University of San Francisco.

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asia crisis - An Economic Overview of the Asian Financial...

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