The Southeast Asian Economic Crisis



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Code : ECC0004

Year :
2004

Industry : General Business

Region : Asia

Teaching Note:Not Available

Structured Assignment : Not Available

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Rising Trade and Current Account Deficits From mid 1980s to mid 1990s, the average real GDP growth in Thailand, Malaysia, and Indonesia was more than 8%. During the early 1990s, most of the Asian currencies like the Thai baht, the Malaysian ringgit and Philippine peso had a stable exchange rate against the dollar. In 1984, Thailand pegged its currency, the baht to a basket of currencies and 80%of this basket was dollar denominated....

Foreign Short-term Debt and Financial Sector During the early 1990s, the growth in theAsian economies was funded by foreign short-term borrowings. Thailand's foreign reserves increased from about $16.5 billion in 1990 to $46.5 billion in 1995. This growth in the reserves was because of the increase in the short-term debt. The ratio of short-term debt to foreign reserves of Thailand was 1.0 in 1995.9 In 1995, the Asian countries faced export competition from China, as China's exports became cheaper after it devalued its currency. As the exports of the Asian countries declined and the short-term debts became due, these countries looked for other alternatives to encourage inflow of foreign capital....

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Shift in the Market Conditions On May 15th 1997, the investors started selling huge amounts of Thai bahts. The confidence of the investors was shaken due to the economic and political instability. The Bank of Thailand (BOT) and the Monetary Authority of Singapore jointly defended the baht in the spot as well as in the forward market (Exhibit 3). The Thai government had to spend its foreign reserves to buy the baht and maintain the exchange rate stability. The Thai officials had reserves worth $33.3 billion at the end of May, but the Thai government had already purchased forward contracts of the baht.17 The BOT had spent $6.8 billion of its foreign exchange reserves to defend the baht between January and June 1997. And it had also purchased forward sales contracts worth $23 billion.18 Unable to maintain stability in its market, Thailand devalued the Thai baht by 15%-20% on July 2nd 1997....

After the Crisis Thailand continued to have large trade deficits and falling property prices, even after the devaluation of the Thai baht. On August 20th 1997, Thailand was provided a financial bailout package of $17.2 billion. The IMF, the World Bank, the Asian Development Bank, the Japan Export-Import Bank and other countries such as Australia, Malaysia, Singapore and Hong Kong contributed in the package. To be able to receive this package, Thailand had to close its major finance companies, reduce the government spending and increase the taxes....


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