Asian Financial Crisis on Southeast Asia - Case Study Example

Asian Financial Crisis on Southeast Asia Part Assistance from IMF The currency market first failed in Thailand and then it affected the other Asian countries of the world. This financial crisis led to the decline of the stock market and reduced the import revenue. The decline in the currency compelled the south Asian countries especially Thailand to borrow money from other countries of the world which resulted in the increase in debt burden in the economy. The GDP of the country also declined due to the financial crisis. Thailand and Indonesia were among the countries affected mostly by the crisis (International Monetary Fund, 2000). The IMF considered the Asian Financial Crisis similar to other situations where the countries are not able to fulfill their balance of payment obligations. The fund arranged funds in order to assist the countries to pay the foreign debt. Most of the government of Asia experienced sound fiscal policies. The main steps or the measures adopted by the international monetary fund is to stabilize the currencies of Thailand Indonesia which were among the South Asian countries that were severely hit by the economic and the financial crisis. The economies of the South East Asian countries maintained a high rate of interest for attracting the foreign investors who are in search of high rate of return. Therefore the economies received money and experienced an increase in the asset prices. During the same time the economies of Malaysia, Thailand, Indonesia and Singapore experienced an increase in the GDP growth rate of 8 to12%. This recovery of the financial crisis was due to the assistance and the constant endeavor of the financial institutions which includes The World Bank and IMF. The support received by the South East Asian countries for its revival is considered as the miracle of the Asian economies. IMF provided billion dollars to Philippines to relief excessive pressure on peso. The fund adopted various measures for assisting Thailand. The IMF extended its support by tightening the fiscal and the monetary policies, reforming the banking system and cancelling the trade barrier. The role of IMF towards Philippines is restructuring the financial sector of the economy. IMF assisted Malaysia in facing the financial crisis by forming various agencies and imposing control on capital. Capital and Currency Control The free flow of money across the cross border is considered as a means for controlling the capital and currency in the economy. The capital and currency control measure is adopted by the government to discourage the foreign money from flooding the national economy. During the South Asian Financial Crisis the government can impose restrictions on the banks from frequent withdrawals and limit the tax purchase of the bonds and the stocks or limit the foreign exchange transaction of the country. The Asian financial crisis acts as an evidence for explaining the importance of capital and currency control during the period of financial crisis. For example Malaysia which was severely affected by the crisis recovered rapidly after the imposition of restrictions in the year 1998. Therefore by the end of the year 2010 IMF realized the importance of capital control and acknowledged that it can be used for stabilizing the economy during depression prevailing in the economy. During crisis in Asia, Indonesia, Singapore, Thailand and Philippines received financial assistance from IMF whereas Malaysia adopted a different path by for receiving assistance in order to face the financial crisis. It turned to capital and currency control for regulating the flow of capital in and out of the country (Takatoshi, 2001). Tightening of fiscal policy The crisis in the economy of Thailand, Singapore, Indonesia, Malaysia and Philippines focused on tightening the fiscal policy for stabilizing the currencies. The government emphasized on controlling the interest rate and reducing the debt burden which increased the severity of the financial crisis. The South Asian countries faced crisis due to the devaluation of the currencies and the overdependence on the foreign funds. Therefore adequate fiscal policy measures are adopted by the government of the respective countries to generate more capital inflows in the economy and restrict the excessive capital outflows from the economy. For example the government adopted adequate measure for making the fiscal adjustment stronger in Thailand which faced an increase in deficit in the previous year. The government initiated to transfer the burden of debt on the private sector for anticipating the carrying cost required for financial restructuring of the economy. The adjustment of Fiscal policy was strong in Thailand as compared to other countries of the world. The fiscal policy was tightened at different stages in different South Asian countries to restrict the fall of the exchange rate. The monetary policy adopted by the government is adopted on a temporary basis for recovering the market condition and stabilizing the economy. Therefore the fiscal policy was strengthened to extend help and assistance for Indonesia whereas in case of Thailand the tightening of the fiscal policy was planned to decrease the deficit before the year of crisis (Lee, 2007). Measures to promote private consumption The Asian countries experienced a growth in its GDP and private consumption prior to the financial crisis. But the financial crisis led to the decrease in the private consumption due to the increase in the non performing asset in the economy. The banks that provided loan failed to recover the loan amount. The measures or the step adopted for promoting the private consumption of the south east Asian countries are the countries such as Indonesia and Philippines that experiences a large domestic market experienced smaller downturn and it is now recovering The private consumption in the non export oriented South East Asian countries offered a buffer stock against the demand. Private Investment The investment and the current account balances of the South East Asian countries were severely affected due to the adverse shock in the private investment during the crisis. The private investment decreased by 7% in Singapore. The dramatic decline in the private investment ratio in Indonesia, Thailand and Malaysia was due to the financial crisis which depressed the demand for the private investment in the economy. The rate of private investment has collapsed significantly from 27% to 20% during 1999. The main reason for the fall in the private investment is due to the transfer of the current account from the deficit to surpluses. Therefore in order to recover the private investment, the government focused on private restructuring the financial structure of the economy. The economy experienced a huge rate of private investment during the period of pre crisis which affected the economy during the crisis. The private investment declined during the economic crisis. The stock market have not recovered, indicates the increase in the financial risk and decrease in the return on investment which affected the private investment. Therefore the recovery in the stock market prices will result in increasing the private investment. The expansionary monetary policies are implemented by the government for recovering the private investment demand. But the monetary policies were unable to inject private investment in the economy. Therefore the government switched to public investment. The fiscal expansion assists in appreciating the real exchange rate and decreasing the current account surpluses in the economy. The expansion of public investment in the economy results in increasing the infrastructure investment that contributes significantly towards the economic growth and development (Kwon, 2009). Export and import action taken by Central bank Malaysia is considered as the open economy of the world with its external trade which includes export as well as import. The export and import significantly contributes in GDP. Prior to the financial crisis it experienced high export and import facilities across the world. Figure 1: Performance of export and import of Malaysia during crisis Malaysian export and import was severely affected due to the financial crisis. Therefore the central bank adopted adequate measure for its revival as well as recovery. The export and import are considered as the most important element in generating revenue for the economy. But during the financial crisis the export and import by the south East Asian countries were adversely affected. The central bank of different countries adopted different measures for improving the export and import of the countries. The Central Bank increased the short term interest by more than 12% which is double the inflation rate. The central bank intervened in the currency exchange market of the economy by purchasing won and selling dollars. This initiative was taken by the Central bank for depleting its foreign exchange reserves. The Thai Central bank locked most of its foreign exchange reserves required for forward contracts. The drastic fall in the export in Malaysia resulted in the increase in capital outflow from the economy leading to a situation of recession in the economy. Therefore the central bank adopted adequate monetary policy for increasing the capital inflow in the economy as compared to the capital outflow from the economy (Collins, 2015). Long term strategies: Recapitalization of banks Recapitalization of bank is considered as one of the most important step or strategy adopted by the Central bank to control the economic crisis prevailing in the economy. The recapitalization was given more prominence as compared to the IMF programs. The reforms were formulated with the cooperation of the respective authorities of each country and the Asian Development bank and the World Bank. The South East Asian countries encountered currency crisis and banking problem. The economy faced severe crisis due to the recession that resulted from the lack of supervisory schemes and vulnerability in the banking system. The tightening of the fiscal policy by the government facilitated in recapitalization of banks. The need for the financial sector reform led to the recapitalization of the potentially viable banks and the financial institutions with the assistance and support of the government of respective countries. It took the initiative of closure of the insolvent bank and the financial institutions incurring loss for the economy or the nation. The importance of the recapitalization of banks strengthened the regulation and supervision to prevent crisis. Improvement in governance Corporate restructuring focused on improving the governance and competition policies during the economic crisis prevailing in the economy. The financial and operational restructuring assist in achieving the goal of the economy by strengthening the capital structure and reducing the debt level. The banks adopted various measures for capital restructuring of the economy. The corporate restructuring reforms along with the banking reforms led to the improvement of corporate governance in the economy. The crisis countries focused on implementing the structural reforms for the weak financial institutions and banks. A higher dividend supports the improvement in governance practices in all South East Asian countries. The improvement in governance results in lowering down the rate of inflation, decreasing the budget deficit and increasing the GDP of the economy (Park, 2011). Institutional framework The institutional frameworks were developed by the government including the laws on completion policy and the laws on bankruptcy for providing freedom to the Central Bank in operating its function independently. The framework emphasized on reform for the foreclosure procedures and the restrictions on foreign investments. The banks and the financial institutions are required to be restructured for reducing the burden of the non performing asset .in order to accelerate the restructuring of the corporate debt changes or modifications are made on the institutional framework. The framework emphasized on stabilization of rupiah, eliminating the inflation and recovery of the foreign exchange reserves. The interest rates and the prices are stabilized. The improved market condition due to the implementation of the institutional framework led to the improvement in the stock market and decline in the risk premium. The framework was designed for restructuring the debt. Economic restructuring The corporate and the financial sector weakness played a major role in the Asian financial crisis that occurred in the year 1997. This weakness led to the increase in the threat for various financial institutions operating in the crisis affected countries. The capital inflows resulted in the rapid expansion of credit in the economy which led to the increase in asset price inflation. The government focused on economic restructuring of the crisis countries during the period of financial crisis in the economy. Adequate measures are required to be adopted by the government for stabilizing the economy. The countries faced crisis due to the devaluation of currency which increased the debt burden and the rate of inflation. The countries experienced an increasing debt burden due to the overdependence on borrowings from other countries which resulted in financial crisis in the economy. The export and import transactions of the countries were severely affected. Therefore measures were adopted by the government in restructuring the economic policies of the countries which controlled the rate of fluctuation in the interest rate of the countries. The government along with the IMF and World Bank implemented various economic reforms for stabilizing the economy. The banks and the financial institutions that were unable to generate profit were foreclosed. The crisis led to the formulation of prudential policies for tailoring with the needs for promoting economic booms and eliminating economic downturn. Impact of AFC on Thailand and Singapore Singapore was adversely affected by the Asian Financial crisis as compared to the other South East Asian countries of the world. The crisis affected Singapore through different channels, firstly the export of Singapore was negatively affected due to the diminishing demand for its product in the regional market, secondly its export became less competitive in the markets of third country and thirdly the banks of Singapore were weakened due to its lending exposure to the south east Asian countries, the brokerage firm were affected when the Kuala Lumpur stock exchange imposed new rules and regulations for trading Malaysian shares. Since the Asian Financial crisis eroded the competitiveness of Singapore export, new policies were formulated for adjusting the crisis and adapting in the new environment. Their responses to the crisis have been timely, flexible and pragmatic. The outflow of capital led to the devaluation of currency in Thailand which created a panic in the economy. The Thai economy reduced by 1.3% in the year 1997.The economy shrinked by 8% in the year 1998.The main causes of crisis in Thailand is due to the deficit in the current account, decrease in the export growth rate by more than 23.5%. The deficit led to the increase in external borrowing. The large external debt increased the debt service ratio of the country from 11.4% to 15.5%. Thailand experienced short term debt crisis that led to the increase in borrowing. The further increase in borrowing by the countries resulted in worsening of the situation in the economy. IMF played a major role in providing fund to the crisis affected countries for repaying their debt. The government adopted various measures along with the International Monetary Fund and World Bank towards the growth and development of the economy. Therefore the government adopted various measures for restructuring the economy. Thai export increased with the decrease or depreciation of baht. The current account and the trade balance improved after 1998. Ethnic communities Asian Financial Crisis created a strong negative impact on Burma, Indonesia, Malaysia and Philippines. Economic condition of all of these countries became very bad after this financial crisis. But the ethnic communities of these counties played a vital role in improving the financial condition of these countries. Various industries of Burma were negatively affected by Asian financial crisis. The negative impact of AFC was less in Burma than in any other South East Asian countries. But still the international trade of Burma was negatively affected by AFC. Its export to other South East Asian countries had reduced significantly during the financial crisis which lowered the income level of Burma’s people. Unemployment rates increased in Burma which hampered the rural development on the country. Many industries were bound to shut down their business which negatively affected the labor force of Burma (Noble and Ravenhill, 2000). Indonesian rural development and green revolution was negatively affected by Asian Financial Crisis. The price of various communities in Indonesian market increased a lot during this crisis and continued for a long period of time. As a result people of this country were unable to buy their necessary goods. Inflation took place in the country which hindered its economic situation. In 1996 Indonesia had an inflation of 6.5 and in 1998 it became 65. Investment in trade decreased a lot for the crisis which affected the industrial development of the country very badly. This caused a negative impact on the local companies. Most of the companies were not able to cope up with rapid increase of cost in Indonesian market which caused bankruptcy of local companies. As a result the income level of rural people in Indonesia was reduced. Asian Financial crisis also affected the food production and food price of the country. This negatively affected the green revolution of Indonesia. The huge price of food products compelled Indonesian people began to purchase minimum quality of food. Many farmers stopped their agricultural activities for huge inflation (Jao, 2010). In equality of income took place in Indonesia for AFC which leads to the rise of middle class society. In 1998, after the fall of Indonesian President people demanded end to corruption. During this time Islamic political party started its fight against corruption and took part in democratic election. The value of rupiah depreciated significantly during the time of financial crisis. Continuous depreciation of rupiah created a negative impact on Indonesian companies. 16000 rupiah became equal to one dollar. Banking sector of the company experienced a huge debt for this. The financial crisis led to uncertainty in the market which called the investors to get involved in short selling. Investors began to speculate the market conditions and take their decisions accordingly. This kind of attitude created tantrums in the market. The short selling of Malaysian shares acted as the catalyst. The speculative attack on the market coupled with investment decisions deformed the principles of supply and demand. The role of George Soros cannot be disregarded when talked about crisis in Malaysia. Soros brought out a distinction between the market participants with working conditions so that the market participants can follow it. After the devaluation of Malaysian ringgit the overnight rate climbed up to 40% from 8%. This situation led to downgrading of the ratings and sell off on current markets. Prime Minister, Mahathir Mohammad took the initiative to impose strict controls and initiated a 3.80 peg against the U.S. dollar. The Asian financial crisis shed negative impacts upon productivity and that is the reason the local entrepreneurs had to retrench workers from the firms operating in Philippines. The government of Philippines made structural reforms for after financial crisis for reducing unemployment and social problems. Many policies were adopted by the government for making its banking system strong. The government of this country relaxed its fiscal and monetary policies for controlling its expenditure References International Monetary Fund. (2000). Financial sector crisis and restructuring, Retrieved from: < http://www.imf.org/external/pubs/ft/op/opfinsec/ >. Takatoshi, I. (2001). Bank Restructuring in Asia, Retrieved from: < http://www.rieti.go.jp/jp/publications/dp/07e039.pdf >. Lee, J. W. (2007). Domestic Investment and External Imbalances in East Asia, Retrieved from: < http://www.oecd.org/eco/growth/38728451.pdf >. Kwon, O. (2009). Korean Financial crisis, Retrieved from: < http://info.worldbank.org/etools/docs/library/252520/Session3_DrKwon.pdf >. Jao. Y. (2001). The Asian Financial Crisis and the Ordeal of Hong Kong. Westport: Greenwood Publishing Group, Noble. G and Ravenhill. J. (2000). The Asian Financial Crisis and the Architecture of Global Finance. Cape Town: Cambridge University Press. Collins, K. (2015). Exploring Business. New York: Flat World Education, Inc. Park, S. Y. (2011). Asian Financial crisis. Retrieved from: < http://ngo.cier.edu.tw/policy/1.3.pdf >. Read More