EAST ASIAN CURRENCY CRISIS

Yesterday I posted about currency pegging. So I thought of posting about Asian Currency Crisis. Since it is more related to currency rates and currency pegging. So this is what I got from the net.

The currencies of East Asian countries came under severe downward pressure during 1997. Fundamental changes in the external and internal environment of several Southeast Asian countries resulted in substantial loss of foreign exchange reserves during the first half of 1997, because of unsuccessful attempts to maintain exchange rate pegs and bands.

The crisis first came out into the open in Thailand where doubts about sustainability of the exchange rate peg (to a basket dominated by the US dollar) prompted a run on the currency in mid-May 1997. There were significant spillover effects on other countries in the region, notably Indonesia, Malaysia, and the Philippines. The Thai baht and the Philippine peso came under renewed pressure in late June 1997 and early July 1997, leading authorities to abandon their respective pegs in early July. The baht had lost around 16 percent against the US dollar in a single day on July 2, 1997. This unleashed a flurry of speculative activity in other ASEAN currencies. The Korean

won, which was relatively stable until mid-October 1997, has depreciated sharply since then.

Between end June 1997 and end March 1998, depreciation of these currencies vis-à-vis US dollar ranged between 11% and 74%: Indonesian Rupiah (74%), Thailand baht (37%), Malaysian ringgit (31%), Philippine peso (33%), South Korean won (36%), and Singapore dollar (11%).

Investor confidence declined leading to sharp declines in equity prices in the stock markets of these countries. Compared with June 1997, the stock prices in January 1998 had declined in the range of 32 per cent (in Thailand) to 53 per cent (in Malaysia).

Inflation is likely to accelerate sharply, partly because of the pass through effect of exchange rate depreciation, which is significant given their trade to GDP ratios of 50% to 120%.

Possible Causes

A number of possible causes have been advanced to explain the onset and spread of the East-Asian currency crisis, including:

Ø Absence of a lender of resort to stem panics.

Ø Imprudent lending by international lenders.

Ø High and unsustainable level of current account deficit.

Ø High short-term foreign debt.

Ø Large real effective exchange rate appreciation.

Ø Inefficient lending and fragility of the financial sector, arising from lack of adherence of financial intermediaries to prudential norms concerning capital adequacy, asset classification, provisioning, and absence of disclosure requirements.

Specific facts relating to these factors which have been cited for individual countries are

Indonesia, Malaysia, Philippines, Singapore and Thailand experienced sustained real effective exchange rate appreciation over the last five years. The cumulative real effective exchange rate appreciation during 1991 to May 1997 was about 47 per cent in Philippines, 17 per cent in Malaysia, about 16 per cent in Singapore, about 12 per cent in Thailand and about 11 per cent in Indonesia.

The current account deficit as a percent of GDP in 1996 was as high as 8.0 per cent in Thailand, about 5.0 per cent each in Korea, Malaysia, and Philippines and 3.4 per cent in Indonesia.

External debt as a proportion of GDP in 1996 was very high at about 50 per cent in Thailand, Indonesia and Philippines. It was relatively high at 33 per cent for Malaysia.

The proportion of short-term debt in total external debt had increased to 50 per cent in Thailand, 26 per cent in Korea, and 18 per cent in Indonesia.

Inadequacies in regulation and intermediation were reflected in imprudent real estate loans. Such lending continued despite signs since 1993 that the property market was overbuilt while demand had weakened. Real estate exposure by banking sector was about 34 per cent in Singapore, 27 per cent in Philippines, 26 per cent in Malaysia, about 16 per cent in Korea and over 13 per cent in Thailand.

Indian Fundamentals

In contrast, India’s economic fundamentals are reasonably strong. During 1991-92 to 1996-97, the deficit on current account of balance of payments averaged about 1.1 percent per annum and it is estimated to be about 1.5 percent in 1997-98. India’s external debt, as a per cent of GDP, declined from about 26 per cent at the end of 1996-97 to about 24 per cent at the end of September 1997. Short-term external debt as a proportion of total external debt was only 7.3 per cent at end March 1997 and has declined to 6.3 per cent at end September 1997.

Debt service payments, as a proportion of current receipts, which was over 35 per cent in 1990-91, had declined gradually to about 21.4 per cent in 1996-97 and it is estimated to decline further to about 18 per cent in 1997- 98.

The financial sector prudential norms and supervision have been introduced in 1992-93 and gradually and continuously strengthened since then.

Sources

indiabudget.nic.in