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Research on the 1997 Asian financial crisis

What is the 1997 Asian financial crisis?

The 1997 Asian financial crisis refers to a macroeconomic shock to many Asian economies including Thailand, the Philippines, Malaysia, South Korea, and Indonesia, and the countries usually experienced rapid currency devaluation and capital outflows as investor confidence shifted from excessive exuberance to contagious pessimism . As the structural imbalances in the economy are becoming more apparent.

The 97-99 crisis came after several years of rapid economic growth, capital inflows, and debt buildup, resulting in an unbalanced economy.

When the market sentiment changed, foreign investors sought to reduce their stakes in these Asian economies causing destabilizing capital outflows, causing rapid devaluation of the currency and further loss of confidence.

Due to financial instability, the International Monetary Fund was asked to intervene, and the IMF implemented $40 billion in financial bailouts and also instigated economic reforms to address economic imbalances.

In contrast to the debt crisis in Latin America, the debt crisis in East Asia arose from improper borrowing by the private sector, due to high rates of economic growth and a booming economy, companies and private companies sought to finance speculative investment projects, however, the companies themselves were exhausted and caused a range of Factors in the lower exchange rate because it was struggling to meet the payments.

Long-term causes of the Asian financial crisis

The external debt-to-GDP ratio rose from 100% to 167% in the four major ASEAN economies in 1993-1996, foreign companies were attracting capital inflows from the developed world , and investors in the West were seeking better rates of return. Asian economies” offer better rates of return than the low-growth economies of the West.

Current account deficit : Countries like Thailand, Indonesia, and South Korea have large current account deficits, meaning that they were importing more goods and services than they were exporting, a reflection of very high rates of economic growth and consumption.

The current account deficit was financed by hot money flows (at the expense of capital), hot money flows had accumulated due to rising interest rates in the East.

Fixed or semi-fixed exchange rates : This made currencies vulnerable to speculation, also interest rates were used to maintain the value of the currency, and caused relatively high interest rates in Southeast Asia which caused hot money flows.

Financial liberalization encouraged more loans and helped create asset bubbles : But the regulatory framework and structure for banks and companies means that loans are often given without adequate scrutiny of profitability and rates of return.

Moral hazard : With a strong political desire for rapid economic growth, governments often provide tacit guarantees for private sector projects. This has been amplified by the close relationships between large corporations, banks, and the government. This convergence has encouraged private companies to focus less on project costs and will support The government's virtual expansion plans

Excessive exuberance : The booming economy and burgeoning real estate markets encouraged expansionary borrowing by corporations and international investors to move capital into these fast-growing economies. There was an element of irrational exuberance in the idea that Asian economies were going through an economic miracle as returns were guaranteed. High.

The reasons that precipitated the 1997 Asian financial crisis

  • Higher interest rates in the US 

In the late 1990s, the United States began raising interest rates to reduce American inflationary pressures. High interest rates in the United States made the East less attractive as a place for hot money inflows.

As hot money flows to the east slowed, Asian currencies began to decline and governments struggled to keep exchange rates at a steady level against the US dollar.

  • Speculative attacks

 On July 2, 1997, due to speculative attacks, Thailand was forced to float its Thai baht currency. This caused a rapid devaluation of the currency, which led to a loss of confidence in all Asian economies, and soon other countries were forced to devalue as investors wanted to get out of Asian currencies. Then he realized Investors that the previous optimism is starting to appear misplaced.

Debt defaults. In the run-up to the crisis, both government and private companies had accumulated high external debt rates. However, currency devaluation increased the cost of debt repayment, and as a result companies and countries began to default on their debts.

At this point the IMF intervened to try to stabilize the crisis, however their intervention proved very controversial with many arguing that their intervention made matters worse.

High interest rates in Indonesia and the Philippines did not stop the currency devaluation, indicating that investors were not convinced that these high interest rates were sustainable.

  • The IMF's insistence on financial restraint

Spending cuts, tax increases and privatization in contractionary fiscal policy exacerbated the economic downturn and the economy entered a recession, bankruptcies increased and there was capital flight.

Economists such as Joseph Stiglitz and Sachs emphasized the importance of market sentiment in amplifying the problem. The initial problem was containable but as confidence evaporated, there was a flight from investors like the classic bank race that caused an unstoppable downward momentum.

Impact of the Asian financial crisis

  • severe recession

Due to a loss of confidence and rising debt payments, companies cut back on investment , which led to lower growth, and significant currency devaluations affected consumer spending with higher prices for imports and imported raw materials. This caused recessions in countries such as South Korea, Indonesia, Malaysia and Thailand.

Measured in dollars, Indonesia experienced a disastrous 84% ​​decline in its GNP between June 1997 and July 1998.

  • global influences

The Asian crisis hit investor confidence in the US Although low interest rates helped stabilize the US economy, China was largely insulated from the crisis because China attracted physical capital investment and did not depend on foreign capital inflows, the crisis had a negative impact on the economy The Japanese have struggled with a decade of low growth.


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