ASIAN FINANCIAL CRISIS OF LATE 1990s.   Term Paper ID:28980 Click to get this paper

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Paper Abstract: Examines causes of the crisis focusing on Thailand. Economic factors. Asian economy & markets. International trade. Credit & monetary policies. Currency devaluations. Bankruptcies. Foreign investment. Role of International Monetary Fund (IMF) & U.S. regarding assistance to Thailand. Debt restructuring. Paper Introduction: Introduction The recent upheaval in the Asian economies in general, and in Thailand in particular, produced ramifications felt throughout the world, a result of the global market in which business and economies now operate. The effects of the crisis include bankruptcies throughout Asia; Philippine Airlines is just one highprofile company that ceased operations. The effects have spread to the United States, where American goods must now compete with cheaper Asian goods because currencies have been devalued. This research examines the possible causes of the crisis and considers the research that has been done into the crisis with a particular emphasis on Thailand. Objective of the Research It is impossible to consider the financial crisis in Thailand without taking in Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. Seiberg, Jaret. Recently, currencies in Asia have fallen significantly: the Thai bahtreached a 32-month low, the New Taiwan dollar reached its lowest point in18 months, and the Australian dollar reached an all-time low (Guyot, 2 ,p. Still, analysts such as Erskine remain positive about Thailand'sfinancial future and maintain that the concerns regarding its financialposition are overstated. But theseanalysts also note the severe currency decline, the high reliance onexports to the United States, and the still-high rate of nonpayment on eventhe restructured debt ("The Recovery," 2 , p. Areas for Additional Research The research available on the Thai financial crises centers onanalyzing the crisis and describing what happened. If prices collapse in an industry or if there is a lack ofworking capital, the financial institutions as well as the companies theyloan to are likely to find themselves in even more financial trouble. This is because Thailand is an integral part of theAsian economy, but also because the region as a whole has considerabletrade with the rest of the world. Domestic borrowing can be used to finance a significantportion of internal spending; this spending, in turn, will provide thedemand necessary to pull the countries out of the economic problems theynow face. At the same time, exports from the UnitedStates to the troubled countries become more expensive and consumption inthose target countries may well decline. 15). Unemploymentrates were low, and the governments of these nations undertook what wereconsidered to be sound credit and monetary policies--policies which metwith the approval of foreign creditors and foreign investors--during theearly 199 s (1998, p. 38). Moody's, for example, which provides bond ratings based on adebtor's perceived ability to repay those bonds, increased Thailand's bondrating from Ba1 to Baa3, effectively moving out of the "junk" bond categoryand into a more attractive rating. However, this scenario only works whenthere is effective management in place and when the company itself isprofitable. (2 , April 17). Because of this,countries must sell more of their goods in order to realize the sameeconomic benefit; this can lead to charges of "dumping" and calls forregulations which will protect American goods and jobs ("APEC," 1998, p.21). The actual causes ofthe crisis remain more elusive. In 1999, government spending increased 9.6percent over 1998, consumer demand was up 8.6 percent, and exports (key toThailand's financial position) increased 17 percent. While few are expecting the Asian currency problem to reach thesame levels that it did several years ago, there are fears that currenciesin other nations could fall, as well. (2 , November 27). In this way, I will be in a better position to evaluate strategy inthe future, and perhaps identify areas of potential problems before theybecome serious. Bankruptcies in South Korea signaled that conditions were changing;the Thai government's decision to allow the baht to float was anothersignal. By early 2 , Thailand's manufacturing sector was largely creditedwith leading Thailand out of its financial crisis, although some analystsnoted that Thailand was among the first countries in the region to enterfinancial trouble and among the last to emerge from it, despite arelatively strong manufacturing sector prior to the problems. Thailand received assistance from the IMF inthe form of a package designed to help stimulate the economy, and thenation's goal was to use the IMF aid only temporarily in order to avoidbecoming dependent on outside intervention (Seiberg, 1998, p. However, the bahtcontinued to fall against the dollar even after the rating upgrade wasannounced, and investors did not move to purchase Thai bonds with theenthusiasm that had previously been expected ("Investors Shrug," 2 , p.9). The United States, for example, could cut itsinterest rates even more than it has so that American investments are lessattractive when compared to Asian investments (because of the lowerinterest rate). This move (in mid-2 ), should havemade the bonds more attractive to investors and reduced the amount ofinterest that Thailand will have to pay on its bonds. Introduction The recent upheaval in the Asian economies in general, and in Thailandin particular, produced ramifications felt throughout the world, a resultof the global market in which business and economies now operate. EmergingMarkets Week, p. Erskine, A. 9. There was some flattening of demand for key products, suchas semiconductors, but foreign lenders continued to make loans and bondrating agencies did not significantly downgrade ratings in this region. Guyot, E. 21). Still, there is debate over just how successful Thailand's recoveryhas been. The IMF withdrew from Thailand in mid-2 , but many analysts consider that the nation's financial troubles arenot yet over, nor is it even clear that the nation is on a strong road torecovery. There is a risk withusing government spending to stimulate the economy in that it can put thenation farther into debt, but analysts noted that since the commercialsector was also enjoying better performance, tax receipts were expected toincrease which would help finance the government spending ("Slouching,"2 , p. ThePhilippine peso faced devaluation next, followed by the Malaysian ringgit.The Indonesian rupiah, which was able to stave off severe devaluationduring the earliest days of the crisis, lost 8 percent of its valueagainst the dollar by January 1998 (1998, p. Even the boost in demand for Asian goods is not necessarily aboost to the economies themselves since the goods are selling for less realvalue than they did when the currencies had higher value. Investor confidence throughout the world began to falter and thelarge money fund managers started pulling their investments, in effectcutting off additional sources of financing. Erskine is generally positive about the Thai recovery, but agrees withother analysts that non-performing loans (NPLs) pose a significant threatto the progress made by the Thai economy. Erskine notes that the growth in GDP and currentaccount surplus are indeed signs that the economy is getting stronger andsuch signs should not be ignored or simply dismissed out of hand. 36). Business Week, p. Asian currencies falter on exportworries. The factthat the IMF ended the stand-by arrangement means that Thailand will not besubject to the often-stringent regulations imposed by the IMF on nationsthat are receiving its assistance, and there is a plan in place under whichthe nation will pay off its debt earlier than originally planned, whichalso indicates economic strength, rather than weakness, in the Thai economy(Erskine, 2 , p. 31). 36). 36). Foreign debt was also in decline throughout the region. These analysts note that economic growth is projected at 4.5percent for 2 , trade surpluses are being realized on a monthly basis,nonperforming loans have decreased (increasing the health of the nation'sfinancial infrastructure) and companies have refinanced $26.5 billion incorporate debt, eliminating some of the debt in the process. Fox notes that even investorswho did not have funds in the countries directly affected began to re-evaluate their positions in economies they judged to be similar, and beganto shift their funds to "safer" instruments (1998, p. Business Week, p. Conclusion The financial crisis in Thailand was declared "over" in March 2 when the International Monetary Fund declared that there is no need torenew an international rescue package that expired in June 2 . The countries did have high short-term debt relative to short-termassets, and there was a high level of lending by foreign institutions.Much of this lending was in real estate rather than in the manufacturingsector; investment in the latter stimulates the economy in ways that theformer cannot. The United States provided this service to Mexico in 1995 when itlent the Mexican government $28 billion although Mexico had only $1 billion in dollar reserves. This topic has relevance to all who are interested in internationaltrade, which is increasingly becoming business professionals whose owncompanies may not even compete in the international arena. This drop is being attributed to anexpected decline in exports to the United States, owing to the fact thatthe United States is experiencing an economic slowdown. However, Marshall also notes that the currencies of the region werelargely overvalued immediately preceding the crisis. However, since the crisis affected theentire region, individual economies could not boost their imports in orderto help other economies' exports. 31). Summary While it is clear that the events in Asia are clearly interrelated(bankruptcies, economic upheaval, currency devaluations), it is not clearthat there is only one cause for the problems. 36). Investors shrug at Thai ratings upgrade. Business Asia, p.36. The immediate effect of currency devaluation is to make imports fromcountries where currencies are in trouble less expensive in the UnitedStates relative to competing products (both from the United States andother regions, such as Europe). The number of NPLs are declining, but arestill running at a high (36.5 percent) rate. Fox, Justin. Literature Review According to Marshall, who wrote as the crisis was winding down, theredid not appear to be a single "trigger" event which can be cited as causingthe upheaval in Asian economic markets. This would provide incentive to investors to move fundsback to Asia and help boost the economy ("APEC," 1998, p. C12). "Study Urges a Global Lender of Last Resort."American Banker, 9 October 1998, 2. "Understanding the Asian Crisis." EconomicPerspectives, Fall 1998, 13-28. In addition, monetary expansion can also be used to stimulatedemand. Thisis the situation in the steel industry in Thailand where prices fell in1998 due to problems in Russia, and where financial institutions whichaccepted equity for debt now own stakes in companies which are unable tocontinue operations ("The Recovery," 2 , p. This is evidenced bythe fact that when the Thai baht was allowed to float by the Thaigovernment in early July 1997 it fell approximately 2 percent. 2). The ways in which some of the countrieshandled the situation can provide insight into how similar crises might behandled in the future, and can help analysts identify such crises beforethey reach proportions that make then difficult to control. (2 , July). There is also disagreement among analysts about when the financialcrisis can be considered resolved. (2 , May 1). C12. However, as aThai student, this topic holds even greater interest for me. Objective of the Research It is impossible to consider the financial crisis in Thailand withouttaking into account the larger regional economic crisis that developedduring the late 199 s. Fiscal controls can be used to help solve the financial crisis since,in most cases, the countries had relatively strong and stable budgetpositions prior to the crisis, although the crisis itself has created somebudget deficits. 31. Outside intervention by other countries or parties is another way forthe crisis to be resolved. Slouching toward recovery. Theeffects have spread to the United States, where American goods must nowcompete with cheaper Asian goods because currencies have been devalued.This research examines the possible causes of the crisis and considers theresearch that has been done into the crisis with a particular emphasis onThailand. Marshall, David. The countries experiencing themost significant effects of the crisis, including Thailand, Malaysia,Indonesia, South Korea and the Philippines, had inflation rates lower than1 percent prior to the crisis and budgets which were generally in surplus. If interest rates are cut, demand for goods and services willincrease and supply will be boosted as the cost of providing those goodsand services declines. References "APEC to the Rescue." The Economist, 7 November 1998, 21. Theeffects of the crisis include bankruptcies throughout Asia; PhilippineAirlines is just one high-profile company that ceased operations. It isimportant for me to understand what led to the financial crisis, what stepswere taken to deal with the situation, and how effective those steps havebeen. The currency devaluations resultin shifts in both the demand and supply curves which lead to newequilibrium points and which can be troublesome for American goodsoverseas. Without additional research into thecauses of the crisis and identification of the strategies which did (anddid not) succeed, future crises such as that which afflicted Asia duringthe late 199 s may well occur again. 38. Fox notes that the currency devaluations came about in part becausethese countries trade with each other, but a greater influence was the factthat these countries trade with common customers (such as the UnitedStates). The most promisingsolution may be outside intervention in the form of loans and loanguarantees. In fact, despite the optimism of the IMF and other analysts, there aresome who suggest that Thailand's recovery is not nearly as complete nor aspermanent. Either the currency is devalued or goods are sold for lessmoney, but the result is that there is downward pressure on currencies fromcompeting countries (1998, p. When one currency is devalued, its goods become more attractivein target nations compared to other goods from countries with a strongcurrency. If financial institutions areunable to recover their investments through these loans, there will be asignificant drain on capital. There doesnot seem to be one "trigger" event which caused the problems, but rather anumber of events which, when taken together, produced an atmosphere inwhich foreign investors did not want to participate. These were relativelystrong economies which had a high reliance on foreign investment, and whichsaw that investment evaporate when problems were encountered. The recoverywas identified by increases in the real gross domestic product (GDP), whichwas up 4.2 percent for 1999 (compared to posting a decline of 1 percent in1998) and which increased 6.5 percent in the fourth quarter 1999 comparedto the same quarter in 1998. For example, some Thaifinancial institutions have swapped debt for equity (meaning that they haveaccepted ownership positions in companies which formerly had large debtswith the banks) with the assumption that the equity position wouldeventually repay the obligation. Erskine also agrees withothers that the statistics regarding nonperforming loans might be skeweddue to restructuring that may not be as effective as initially forecast(Erskine, 2 , p. The UnitedStates is an attractive market, and some Asian countries have increasedtheir exports to the United States, but protectionist actions within theUnited States are likely to be taken when the far less expensive Asianproducts begin to make significant inroads and American workers begin to beaffected directly ("APEC," 1998, p. "Economic Epidemics." Fortune, 12 October 1998, 36. The countries affected by the crisis initially tried to resolve thecrisis through their exports. (2 , June 26). There is such a high dependence onregional markets for exports (approximately 5 percent, in the case ofJapan) that this strategy could not work on a regional basis. When demand dropsoff, the balance of payments shifts and the currencies in exporter nationscan suffer. Wall Street Journal, p. For example, the baht is generallyconsidered to have been overvalued when the crises began in the mid-199 s,but the cause of that overvaluation may well run deeper than just the factthat it went from a fixed to a floating currency. However,the literature review suggests that the factors leading to the crisis arestill not entirely understood, and that a combination of economic factorscould again "surprise" the region. Third parties such as the International Monetary Fund (IMF) or theUnited States (or some other large nation) could also step in and providethe funds necessary to see one or more economies through the economiccrisis. Some of the debt restructuring is seen as only providing temporaryrelief with underlying problems going unaddressed. The loan amount still represented only afraction of the country's gross domestic product (GDP), and the UnitedStates has since been repaid. 14). 21). The Recovery is only skin-deep. Without additional research into the underlying causes of thecrisis, and without clear guidelines to determine when such crises can beconsidered "over," future financial upheavals are likely to occur withequally devastating results. Thailand's time warp. If this paper is not what you are looking for, you can search again: Search for: or Click here to request an essay written just for you.

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