A CLOSER LOOK TO SOUTHEAST ASIAN FINANCIAL CRISIS IN 1997 AND THE LESSONS FOR VIETNAM International Finance

FOREIGN TRADE UNIVERSITY
FACULTY OF FINANCE AND BANKING

International Finance Essay

A CLOSER LOOK TO
SOUTHEAST ASIAN FINANCIAL CRISIS
IN 1997 AND THE LESSONS FOR VIETNAM
Lecturer: PhD. Mai Thu Hien
Students:
Tạ Đình Việt Anh – 1214150010
Nguyễn Hải Anh – 1212150008
Chu Minh Lan – 1217150068
Nguyễn Khánh Linh – 1217150070

Hanoi, November 12th 2015


TABLE OF CONTENTS

2|Page


INTRODUCTION
After years of economic stability, various Southeast Asian countries experienced their
currencies under pressure in 1997 as an effect of the appreciation of the dollar against the
Yen. A number of Southeast Asian countries had maintained a currency peg against the US
dollar and experienced a deteriorating current account position as well as an increasing
foreign debt burden in the process (Dornbusch, 1998). To almost all observers, these
developments came as a surprise.
The 1997 crisis was largely unexpected. Warnings of fragile financial systems in the

region seem to have been few and appeared at a time when the crisis had almost been
under way already. Therefore, The East Asian financial crisis is remarkable in several
ways. The crisis hit the most rapidly growing economies in the world and prompted the
largest financial bailouts in history. It is the sharpest financial crisis to hit the
developing world since the 1982 debt crisis. It is the least anticipated financial crisis in
years (Radelet and Sachs, 1998). Few observers gave much chance in early 1997 that
East Asian growth would suddenly collapse. The crisis has also raised serious doubts
about the International Monetary Fund’s (IMF’s) approach to managing financial
disturbances originating in private financial markets.
From the aforementioned features, the purpose of our paper “A closer look to Southeast
Asian financial crisis in 1997 and the lessons for Vietnam” is to analyze the causes and
consequences of the East Asian financial and currency crisis with the view to discovering
whether intrinsic instabilities in the international capital markets helped either set it in
motion or deepen the crisis, particularly in Thailand, Malaysia, Indonesia, the Philippines
and Korea, from which lessons and recommendations for Vietnam to deal with upcoming
financial crises are withdrawn.
The structure of our research is divided into two main parts. The first part focuses on the
causes, occurring and consequences of the East Asian crisis on several Southeast Asian
countries including Thailand. Malaysia, Indonesia, Philippines along with Korea and Hong
3|Page


Kong. This part also analyses the solution to escape from this financial crisis of such
countries. The second part of our paper draws lessons learnt from this crisis so that
countries may have appropriate methods to prevent and handle similar crises in the future.
We also suggest several recommendations for Vietnam from this crisis to better the
financial market and risk management in the last part of our paper.

4|Page

I. A closer look to Southeast Asian financial and currency crisis in 1997
1. Causes of the crisis
1.1. Subjective causes
1.1.1. Week macroeconomic foundation and imbalanced economic growth
Assessing the developing level, though different, but overall Thailand and some Southeast
Asian countries’ economies saw an overheating economic growth at the average rate of
7.5-8% in the previous years which latently signaled the imbalances leading to the
financial crisis.
First of all, the inner imbalance was exposed through the contradiction of the rapid growth
rate to put upward pressure on prices due to the growing cost of production and business.
Thailand's consumer price index rose rapidly, reaching 5.6% in 1996 compared to 3.4% in
1993. The government must, therefore, increase the minimum wage to the average of
8.5%/ year; meanwhile, labor productivity increased on average of only 3%.
(Jungjaturapit, 2008). This feature happened similarly in Malaysia, Indonesia and
Philippines. On the other hand these countries had to raise foreign loans to compensate for
the domestic shortage in order to speed up the modernization of production and increase
the investment in infrastructure.
1.1.2. Deficit in current account
Except for Indonesia who partly relied on oil export, Thailand and Malaysia both fell into
deficit of current accounts at an alarming rate. According to analysis of the IMF, if the
deficit was above 5% of GDP, the country would be pushed into recession. Current
account deficit also implied that Southeast Asian economy had been seriously imbalanced.
From 1995 onwards, deficit of current account in Thailand was 8.1% and 8.2% of GDP in
1995 and 1996 respectively. Similarly in Malaysia, the deficit was 9.7% of GDP in 1996.
This is the deficit level at which Mexico encountered when crises exploded in 1994.
Meanwhile the deficit was of 4% GDP in Indonesia and 3.2 % GDP in Philippines in 1996
(Eichengreen, 1998).
5|Page

The main reason causing the situation of current account deficit was that the sharp decline
in exports of such countries from 1995 which severely worsened the deficit of current
account and balance of payments deficit had forced these countries to borrow short-term
loans abroad to offset domestic expenditures.
1.1.3. The flow of foreign investment
Loose monetary policies and financial liberalization in the US, Europe and Japan in the
late 1980s led to an excessively high global liquidity situation. Investors in the
aforementioned monetary center of the world sought to change their asset portfolio by
transferring capital abroad. Meanwhile, Asian countries had implemented policies of
capital account liberalization. Interest rates in such Asian countries were higher than in
developed countries. Therefore, international capital flows were flowing massively into
Asian countries.
In addition, the promotions of investment and implicit protection of the government for
financial institutions also contributed to the situation where Asian companies borrowed
money from bank regardless of risks in the while commercial banks also borrowed foreign
loans regardless of even higher risks, but mostly short-term debt and non-insurance debt.
(The phenomenon of asymmetric information leads to adverse selection and moral hazard.)
(Stephany and Stephan, 1999).
Table 1 – Foreign loans (in percentage of GDP)
Thailand
Indonesia
Malaysia
Korea

1991
36.9
65.1
39.9
13.6

1992
36.2
66.4
36.4
14.4

1993
37.1
58.9
38.7
14.4

1994
43.1
57.4
36.9
15.3

1995
42.4
55.8
38.5
18

1996
54
51.8
40.1
23

1997
61
60.9
31.2
28.4

1.1.4. Reluctantly-retained foreign exchange rate
If the above issues are the root causes of the crisis then the policies of "pegging" among
regional currencies against the dollar creating reluctant exchange rate system was a major
6|Page


cause leading to the serial devaluation of these regional currencies. Despite the onset of
floating of the Thai baht leading to the spillovers effect onto the Philippines Peso,
Malaysia Ringgit and Indonesia Rupiah, in fact in some extent, the local currency had
already been depreciated confronting the increasing trend of the dollar (Lionel, 2014).
In theory, the fixed exchange rate regime under the Bretton Woods system, had positive
implications on the stabilization of local currency flow and support economic growth.
However, if overusing a fixed exchange rate in the context that local currency had been
dropped against other strong currencies as well as economic structure was imbalanced it
might lead the economy to a greater risk of crisis.
Back to 1996 when the symptoms of the current account deficit had just appeared,
Thailand and other Southeast Asian countries should have implemented the policies to
float the domestic currency to return them to their real value, in combination with
tightening fiscal policies, the risk of crisis might have undoubtedly been stamped out. But
instead, the governments of Southeast Asian countries imposed artificially managed
foreign exchange rate policies to retain their value so as to attract foreign investment to
cover the hole of the current account and inflation.
Thailand and some Southeast Asian countries had fallen into the Impossible Trinity in

economy. They had pegged their domestic currencies value to the US Dollar and at the
same time allowed the free flow of capital (capital account liberalization). The rapid
growth of Southeast Asian economies in the 1980s and the first half of the 1990s had
created pressure on increasing value of domestic currency. To defend the fixed exchange
rate, the central banks in Southeast Asia had implemented loose monetary policies. The
result of such actions was an upward pressure on inflation due to the increase in money
supply. Sterilization policy was then imposed to ease the inflation, however, it also
promoted the capital inflows into these countries’ economies.
In the mid-1990s, South Korea had a relatively stable macroeconomic foundation except
one issue that the Korean Won’s value constantly rose with the US Dollar’s in the period
7|Page


after 1987. This was the main cause of the weakening in South Korea’s current account as
prices of Korean export commodities on international markets increased. In this context,
Korea had pursued a loose pegged exchange rate regime and capital account liberalization
(Kim, 2006). Thus, the current account deficit was offset by foreign borrowings of Korean
banks that were mostly short-term debts and non-insurance debts.
1.1.5. A weak financial system and loss of confidence issue
The most costly lesson for each country’s economy was that if they only paid attention to
temporary growth without consolidating the whole financial system, the inevitable
consequence would be the deficit of state budget, increasing inflation, and sooner or later
the economy would fall into crisis. Bank financial system is a very sensitive and risky
field, in which just an injury could cause a major disturbance in the process of economic
regulation. Too long maintaining of fixed exchange rate had created gaps in the banking
systems of these countries. The result of weak banking system was the operational
loopholes through which currency speculators took advantage to buy foreign currency
loans for profit. The appreciation of the Japanese Yen against the US Dollar encouraged
commercial banks rush to buy the Yen and then resell them to buy US Dollar to earn the
exchange difference.

The phenomenon of capital loss due to currency speculation had become increasingly
serious. In order to sustain the growth and fixed exchange rate, commercial banks
continued to borrow money from foreign banks which led to a dangerous limit where the
debt ratio far exceeded the foreign currency reserves. IMF experts said the debt ratio /
foreign exchange reserves in Thailand, Indonesia were approximately 3 times, in
Philippines was 4 times, and especially Malaysia's foreign currency reserve was at the
lowest of 10 billion USD (Pablo, 2000). It was even more dangerous when foreign
investors withdrew their investment capital urgently, seeing the instability of the regional
economies.

8|Page


Due to capital losses and non-performing real estate market, a mass of commercial banks
in the region had gone insolvent. Typically in Thailand, the ten largest banks were on the
verge of bankruptcy. Domestic and foreign investors began losing their faith which led to
the syndrome where a series of capital withdrawal from banks happened had undermined
the stock market in these countries.
After the resignation statement of the Minister of Finance at the end of June, 1997 A.
Vinavan when the crisis occurred, the business investors’ loss of confidence made
Bangkok stock markets fall to the lowest level with only 482.97 points, declined 14.75
points from the middle of such month (Pablo, 2000). The speculators dumped their stocks
and transferred money abroad to buy US dollars.
1.2. Objective causes
1.2.1. The decline of global trade market and unfavourable changes of the world
economy
From 1995, the economic growth of industrialized countries decreased leading to the
decline in the aggregate demand. In particular, these countries were major trading partners
who stimulated the superheated growth towards export of Southeast Asian countries. The
main export products of the region (electronics, fibers, textiles) were facing the risk of the

world market’s saturation.
In 1996, the international semiconductor market fell into a sharp recession; therefore, their
prices fell more than 80% IC. The Japanese and Southeast Asian Newly Industrialized
Countries (NICs)’s electronic products’ sales fell more than 40% on the world market. On
the other hand, the attractiveness of the Southeast Asia market towards the US and
Western European partners were declining comparing to the Chinese, Eastern European
and the US Latin market. Japan was also in confusion about the large loan contract to the
negative fluctation of the financial market area. As reported by D.M. Green Fell Banks,
more than half of Thailand's 70 billion USD banks’ debt was from Japan and mainly was
hot borrowing. Thus, when interest rates rose, not only the cost of borrowing increased but
9|Page


the capital flow into Thailand would also be reduced or reversed and led to a liquidity
crisis in Thailand and also pressured the Philippines Peso and Indonesia Rupiah.
Japan, one of the largest export market of Asian countries, had been stagnant since the
early 1990s. The Chinese Yuan had been undervalued compared to the US Dollar since
1994 along with many other factors made the export products from China cheaper than the
same types of export products in Southeast Asia. Meanwhile, the US economy was
recovering after the recession in the early 1990s and US Federal Reserve System under the
leadership of Alan Greenspan began to raise US interest rates up to curb the inflation. This
action made the US market become a more attractive investment market than those in East
Asia, and therefore attracted lots of short-term capital flows through higher short-term
interest rates and US Dollar’s appreciation. And because the Southeast Asia currencies
were pegged to the US Dollar, the export of such countries became less competitive. From
the spring of 1996, growth in Southeast Asia's exports dropped quickly, weakening their
current account.
1.2.2. Simultaneous speculative attacks and capital withdrawals
The direct cause of the East Asian financial crisis in 1997 was the simultaneous
speculative attacks and capital withdrawals from Asian countries. When detecting signs of

deterioration of financial-banking system of the region, many foreign speculators had
intensified their monetary speculations. Many speculators, in total of 2300 private credit
funds in the US whose assets were worth of more than 100 billion USD had jumped into
the regional market in July and August, 1997. Apart from funds controlled by Soros, there
were other credit funds like Tiger, Orbis, PUMAR, Panther and Jaguar. They bought the
Thai Baht then Philippines Peso, Malaysian Ringgit, Indonesian Rupiah and even
Singaporean Dollar at the estimated total of 10 to15 billion US dollars for speculations
(Giancarlo et al, 1998). Moreover, the central banks’ foreign exchange reserves depleted
made speculative attacks even longer.

10 | P a g e


The consequences were eventually exposed. Real estate market in Thailand collapsed.
Some financial institutions went bankrupt. People no longer believed the governments
could afford to maintain their fixed exchange rates. When detected the serious weakness in
the economies of Asian countries, some macro hedge institution conducted currency attack
to Asian countries. Foreign investors withdrew their capital simultaneously.
Foreign Minister of ten ASEAN countries at the time believed that a tight linkage of
monetary system was a careful attempt to consolidate the ASEAN economies. The 30 th
ASEAN Foreign Ministers Meeting took place in Subang Jaya, Malaysia adopted a joint
statement on July 25, 1997 stating deep concern and calling on ASEAN countries to
cooperate more closely in order to protect and enhance the interests of ASEAN in this
period. Incidentally on the same day, the Central Bank of the most affected countries by
this crisis met in Shanghai in the Executives' Meeting of East Asia and Pacific Central
Banks (EMEAP), and failed to give a measure for a new lending arrangement. A year
earlier, the Finance Ministers of these countries also attended the 3 rd Asia-Pacific
Economic Cooperation (APEC) in Kyoto, Japan on March 17, 1996, and according to a
joint statement, the parties could not double financial funds serviced for General
Agreement on Loan and Mechanisms (Giancarlo et al, 1998).

Finance was in emergent situation. Therefore, the crisis could be viewed as a failure to
build an adequate capacity in time and to prevent the currency attacks. Some economists
criticized the tightened financial policies which IMF applied in such countries in the crisis
worsened the crisis itself (Khor, 1999).

11 | P a g e


2. Developments of the crisis in certain countries
2.1 Thailand
From 1985 to 1995, Thailand's economy grew at an average annual rate of 9%. During the
years 1991- 1996, the trade balance of Thailand has always been in deficit, a total of 35.26
billion USD. The current account deficit in 1996 was 14.7 billion USD. To offset the trade
deficit and for investment, Thailand had foreign debt and by 1996 the debt has increased to
89 billion USD. This debt was used both to increase national reserves, which increased
from 18.4 billion USD in 1991 to 38.7 billion USD in 1996, financial investments and
short-term credit accounted for 90% of total investment annual overseas. Short-term debt
in 1995 was nearly 1.18 times the foreign exchange reserves of the country. Thailand has
lost the ability to pay foreign debt payments since 1995.

Since the beginning of 1997 to March 1997, residents and investors started withdrawing
their capital in the form of money out of the banks and financial companies, forcing the
government to close down the stock market on March, 3rd 1997 and required all financial
institutions to increase cash reserves and announced 10 financial companies active in

12 | P a g e


removing abnormal condition (Unico Housing Co.Ltd, Themes- Fuji, Royal International,
Sri Dhana, etc.)

On March 4th and 5th 1997, over 21.4 billion baht was withdrawn from banks and finance
companies. On May 14th and 15th 1997, the Thai baht was attacked large-scale
speculation. In 13 years, the Thai baht exchange rate anchored with 1 USD / 25 Baht. On
June 25th 1997, the Government announced the closure of 16 finance companies, raising
the total number of bankrupt finance companies up to 58/91 (64%) nationally. The Thai
government had to sell foreign currency, as foreign reserves fell sharply from 38.78 billion
USD in June 1996 to 31.4 billion USD on June 30th 1997. June 30, Prime Minister
Chavalit Yongchaiyudh said they would not devalue the baht, but eventually re-floated the
baht on July 2. Baht immediately devalued by nearly 50%. In January 1998, it was down to
56 baht rate for 1 USD. Stock market index has dropped from 1.280 in 1995 to 372 in the
end of 1997. At the same time, market capitalization decreased from 141.5 billion USD of
capital to 23.5 billion USD. Finance One, the largest financial companies in Thailand was
bankrupt.
On August 11th, IMF announced that it would provide an aid package worth 16 billion US
dollars for Thailand. On August 20th, IMF adopted another rescue package worth 3.9
billion USD to ask the Thai government to raise taxes, cut public spending, privatization of
some enterprises under state ownership and increased interest rates. In December 1997, the
government has closed 56 financial institutions, laid off 16,000 people.
Direct results of the financial and economic crisis in Thailand were:
- Banks and financial companies continuously went bankrupt, national economic
recession. Economic growth of 6.7% in 1996 dropped to -0.4% in 1997, -8.3% in 1998 and
1% in 1999.
- Nearly 2 million workers lost their jobs and income.
- Foreign investors lost confidence, pulled out of the country, worsening investment
climate. In 1995, 1996, each year about 20 billion USD were poured into the Thai capital,
13 | P a g e


but in 1997, 15.8 billion USD was withdrawn from the country, in 1998, 9.5 billion USD
of capital went overseas.

Economic turmoil, people lose faith inevitably shaken the political system. Four months
after floating the baht, Thailand's prime minister resigned.
In the process of the crisis, after floating the baht, the exchange rate has been increasing,
from January1998 to July 1997 and reached 53 baht/USD, with 212% in June 1997 . Only
this time, January 1998, the government formally committed to pay all the debts of
commercial banks, including foreign, the new foreign exchange rate decreases.

1996
1997

Thailand
Philiippines
Malaysia
Indonesia
Baht/USD
Peso/USD Ringgit/USD Rupiah/USD
25,61
26,29
2,52
2308
47,25
39,50
3,88
5400
The average exchange rate for 1996 and 1997

Korea
Won/USD
844.2
1695,8

2.2 Korea
In early 1996, Woosung corporation was bankrupt. On January 23th 1997, Hanbo Steel
Corporation went bankruptcy, leaving a 5.9 billion USD debt to 61 banks and financial
companies. On March 19th 1997, the steel Sammi Group, a chaebol ranked 26th in Korea,
was bankrupt, leading to 27 member companies bankrupt and a 2.2 billion USD debt.
From January1997 to February 1998, 8 chaebol went bankruptcies, including automobile
company KIA, which ranked the 3rd in the automotive industry. In 1998, Hyundai Motor
acquired Kia Motors. Venture Capital Fund 5 billion USD worth of Samsung also
dissolved by the strong impact of the crisis, followed by Daewoo Motors sold to General
Motors. From July 13rd 1997, numerous banking companies were evaluated for
"untrusted" relegation. On September 30th, exchange rate reached 914.8 won/USD, an
increase of 8% compared with 833.2% on December 31st 1996. On October 28th and 29th
1997, the foreign exchange rate hit allowed fluctuation, no one sold foreign currency to
banks. On November 19th 1997, fluctuating rate limit is extended to 10%.

14 | P a g e


At the time the crisis broke out in Thailand, South Korea had a giant foreign debt burden.
The companies owed domestic banks, domestic banks still owed foreign banks. Some of
the defaults occurred. When the Asian market crisis happened, investors began selling
Korean stocks at a large scale. November 28th, 1997, the credit rating agencies Moody's
lowered the rating of Korea from A1 to A3, then on December 11th back down to B2. This
contributed to the stock price of Korea more discounts. Particularly on November 7th, the
Seoul stock market dropped 4%. November 24th slipped 7.2% due to psychological fear of
IMF would require South Korea to adopt austerity policies. Meanwhile, the won dropped
the price to about 1700 Won/USD from 1000 Won/USD. From May 6 to 12/1997, the
Government had to sell $ 14 billion to retaining the peg, but had to abandon the effort
when foreign currency reserves fell from 34.1 billion USD to 20.4 billion USD. On

December 14th 1997, the won was floated. On December 23rd, the price soared to 2,000
Won/USD, equal to 237% compared with December 31st 1996. The final contracts have
floating Won was due to reduced foreign currency loans from abroad and the withdrawal
of foreign investment in South Korea out of the country in 1997. On December 29th 1997,
10 of the 14 commercial banks had been closed. Two major commercial banks were under
government management. At the end of April 1998, healthy plan four commercial banks
were denied, many banks were closed. On June 29th 1997, the Government ordered the
closure of five small banks and two other banks were merged. On August 28th 1998, two
largest Korean banks which were commercial banks, Korea and Hanil Bank announced
that they would merge. On September 25th 1998, the Government announced another
round of restructuring the banks. Total government funding 64 billion won to banks. In
1997, 14,000 enterprises were bankrupt and in 1998, there were 53,000 business
bankruptcy.
The bankruptcy of more than 70,000 businesses and banks in 1997 and 1998 gave the
number of unemployed rose from 426,000 in 1996 to 1.461 million in 1998.
Unemployment, loss of income on a large scale raises a series Social Issues. The number
of drug addicts increased from 6819 people in 1996 to 10,589 people in 1998. The number
15 | P a g e


rose from 80,000 divorces in 1996 to 123 700 in 1998. In order to overcome the
consequences of unemployment, the Government has expanded insurance system for
businesses with 5 employees or more, compared with pre-crisis for enterprises with 30
employees or more. The minimum time to be insured was increased from 1 to 2 months,
and the minimum wage was increased from insurance pay 50% of the salary before
unemployment up to 70%. A program for low-interest loans for the unemployed will be
implemented from May 4/1998 to help them ensure the life, work or children's, career
change and tenants. The government has also implemented training programs to help
unemployed job change and people do not have to learn a job. Within 2 years from 1998 to
1999, the Government spent a total of 10.000 billion won to develop measures to combat

unemployment.
The rising unemployment rate and requires improving the efficiency of labor to make
products more competitive has led to a breakthrough change in the system of recruitment
and salaries of Korea which salary is paid according to time with the company, training
time and age of the employees. From 1997, businesses started moving book based wages
system the contributions of workers. On May 1st 1999, 15% of enterprises with more than
100 employees have salaries applicable on the new system, and to the end of 1999 over
50% of enterprises have adopted. Government has many tax incentives for these firms.
Economic growth and unemployment in times of crisis

Thailand
Malaysia
Indonesia
Philippines
Korea

16 | P a g e

Economic growth (%)
1996
1997
1998
6,7
-0,4
-8,3
8,2
7,0
2,0
7,8
4,6

-13,7
5,8
5,2
-0,5
7,1
5,5
-5,8

Unemployment (%)
1996
1997
1998
3,3
3,7
2,6
2,7
5,0
2,2
3,0
9,5
10,4
13,3
2,3
2,5
8


2.3 Malaysia
Shortly after Thailand floated the baht (July 2nd 1997), Malaysian ringgit and Kuala
Lumpur stock market immediately strong downward pressure. In just the first 12 days of

July 1997, state banks to sell 700 million USD to hold down exchange rates. On August
24th 1997, Indonesia declared a floating rate. Ringgit fell from 3.75 Ringgit/USD to 4.20
ringgit/USD. Most of the downward pressure on the ringgit from the sale of this currency
on money markets abroad. Participants maintain money market accounts in ringgit in state
sold more than bought with plans to use devaluation of the ringgit in the future. As a result
of Malaysia's domestic interest rates fell to encourage capital flows abroad. The amount of
capital outflow of 24.6 billion ringgit reached in the second quarter and third quarter of
1997.
Before the crisis, the current account deficit of 5% of Malaysia. Malaysia is the country
received more foreign direct investment, this is reflected in the KLSE (Stock Exchange of
Malaysia officially) is considered the exchanges with the most active in the world (total
value transactions surpassing even though NYSE market cap is much lower). At that
moment, everyone expected the country to maintain growth and to become developed
country by 2020.
In the period before the crisis, KLSE Index stands at 1,200, the ringgit was traded at the
ratio 2.5: 1 USD, the overnight rate below 7%. Overnight rates rose from less than 8% to
40%, making the credit rating dropped and happen wave of selling the stock and currency
massively.
In late 1997, the credit rating fall below the average for the investments are not guaranteed,
KLSE lost 50% points, falling below 600, the ringgit also lost 50% of its value, while 3.8 1
USD exchange contract . In 1998, GDP decreased by 6.2%, 4.7% extra ringgit and KLSE
value drops below 270 points. The crisis has made economic growth declining from 8.2%
in 1996, to 7% in 1997 and -7.5% in 1998. The unemployment rate rose from 2.5% in
1997 to 3.2% in 1998.

17 | P a g e


On July 1st 1998, the Government of Malaysia to establish a Committee National
Economic Action (NEAC) is the advisory body to resolve the crisis. In the end of July

1998, the Commission has made economic recovery plan includes 6 main solutions:
- Stabilize the value of Ringgit (recommendations flexible exchange rates but limiting
shaken, domestic interest rate policy more reasonable).
- Restoring confidence in market mechanisms (public, more transparent, strengthening
economic information to the public).
- Maintain financial market stability (established Danahata Bank debt management and
Danamodal recapitalization and debt restructuring committee business).
- Strengthen national economic foundations (improving competitiveness, boost growth).
- To continue the programs of economic fairness and social (poverty reduction, improve
their quality of life, reduce the harm caused by the crisis to bring people).
- Restore 12 economic sectors most strongly affected by the crisis.
From February 1999, the Malaysian economy grew by 1.4%, the second quarter growth of
4.1%, 8.8% in 3rd quarter of 1999.
The index of inflation, capital inflows

Thailand
Malaysia
Indonesia
Philippines
Korea

1996
4,8
3,8
6,6
7,1
5,0

Inflation (%)
1997

5,6
2,8
11,6
7,3
9,5

1998
8,1
7,0
47,0
10,3
6,7

Inflow (billion USD)
1996
1997
1998
19,5
-9,1
-9,5
9,5
2,7
10,8
-0,6
43
45
47
23,9
-9,2

2.4 Indonesia
In July, when Thailand floated the Baht, the monetary authorities of Indonesia has widened
the fluctuation band of the exchange rate between the US Dollar Rupiah and from 8% to
18 | P a g e


12% on July 11th 1997 but finally, when foreign reserves declining day one, dated August
18th 1997, the Government of Indonesia to displace float Rupiah announced, replacing the
regime of floating exchange rates with management. Exchange rate immediately increased
by 2.87 Rupiah/USD versus 2.431 Rupiah/USD on July 30th.
Rupiah weakens the devaluation balance sheet assets of the Indonesian company,
especially making foreign bank debt of companies increased. In that situation, many
companies promoted buying USD in (ie sell Rupiah out) making further currency
devaluation and inflation soared. In September 1997, 16 banks lost solvency closed. In the
middle of December 1997, half the assets of the banking system lost by people and
businesses to withdraw deposits. On December 31st 1997, the Government claims 4 large
bank merger and privatization of state-owned commercial banks. On January 13th 1998,
54 weak banks were under the control of the National Committee restructured banks
(IBRA). By mid 1998, about 80% of Indonesia right now decommissioned or bankruptcy
due to lack of working capital, high cost of materials, cost of products sold high. In 1998,
industry declined 39.7%.
Inflation accelerated with austere fiscal policies required by the IMF led the government to
remove subsidies for food and gasoline led two commodity price increases. Violence to
scramble sparked buying. Particularly in Jakarta had 500 people killed by violence. The
economic crisis and social crisis has led to a political crisis. In mid 1998, 80% of firms in
business in Indonesia to cease operations or bankruptcy. In 1996, industrial growth was
10.4%, in 1997 dropped to 5.6%, but in 1998 was -15.6% decline. The agricultural sector
grew by 12.8% in 1996, 6.4% in 1997, and through 1998 declined 39.7%.
The economic and financial crisis, Indonesia has the unemployment rate in urban areas
increased from 5% in 1997 to 11% in early 1998, and throughout the country from 5% to

7%. The poverty rate rose from 11% in 1996 to 18- 20% of the population in 1998, with 40
million people. To reduce difficulties for the people, the Government has undertaken a
number of urgent measures, temporary as selling rice for the poor to subsidize prices,
encourage the establishment of small and medium-sized enterprises, ensure budget training
19 | P a g e


not be reduced, providing free medical services to the poor in the state health centers, food
supplements for children and pregnant women, etc.
Foreign debt, bank rates

Thailand
Malaysia
Indonesia
Philippines
Korea

Foreign debt (billion USD)
1996
1997
1998
4,8
5,6
8,1
3,8
2,8
7,0
6,6
11,6
47,0

7,1
7,3
10,3
5,0
9,5
6,7

Bank rates (%)
1996
1997
1998
19,5
-9,1
-9,5
9,5
2,7
10,8
-0,6
43
45
47
23,9
-9,2

2.5. Philippines
After the crisis broke out in Thailand, on 3 rd July, Philippines’ central bank has tried to
intervene in the foreign exchange market to defend the peso by raising short-term interest
rate (overnight lending rate) from 15% to 24%. The peso has depreciated seriously, from
26 pesos to eat a dollar to 38 in 2000 and to 40 by the end of the crisis.
The financial crisis intensified the political crisis related to the scandal of President Joseph

Estrada. Due to the political crisis, in 2001, Integrated PSE index of the Philippines stock
market fell to around 1000 points from a high of 3,000 points in 1997. It involves

20 | P a g e


additional peso devaluation. The value of the peso was restored only after Gloria
Macapagal-Arroyo became president.
2.6. Hong Kong
On October 1997, Hong Kong Dollar was attacked by speculators. The currency US Dollar
which is based on the exchange rate 7.8 HKD / USD. However, inflation in Hong Kong is
higher than in the US. This is the basis for speculators to attack. Thanks to the massive
foreign currency reserves amounted to $ 80 billion at that time equivalent to 700% of the
money supply M1, or 45% of the money supply M3, so the Hong Kong Monetary
Authority has dared to spend over $ 1 billion to protect its currency. The stock market is
becoming more fragile.
From October 20 to October 23, Hang Seng Index fell 23%. On 15 th August 1998, Hong
Kong raised the overnight lending rate from 8% up to 23% and immediately lift shot up
500%. Also, the Hong Kong Monetary Authority started buying the component stocks of
the Hang Seng Index to decrease pressure off stocks. The agency and Mr. Donald Tsang,
the then Finance Minister and later as Head of Hong Kong Special Administrative Region,
has publicly declared war on speculators.
The government has bought about 120 billion Hong Kong Dollar (US Dollar equivalent of
15 billion) of securities. Later, in 2001, the government sold the securities and gain the
profit of about 30 billion Hong Kong Dollar (about 4 billion US dollars).
The speculation against the Hong Kong Dollar and the stock market of this country was
stopped in September 1998 mainly due to speculators aggrieved by policies to regulate
foreign capital flows of the Malaysian government, and by the collapse of the bond market
and the currency in Russia. Dollar exchange rate anchor between Hong Kong and the US
Dollar is also conserved at 7.8: 1.

21 | P a g e


3. The effects of the crisis
3.1. Negative effects
The crisis has caused serious macroeconomic influences, including currency devaluation,
the stock market crash, property prices in some Asian countries. Many businesses went
bankrupt, leading to millions of people were pushed below the poverty line in 1997-1998.
The countries most severely affected are Indonesia, Korea and Thailand. It marked the end
of the period of rapid growth, prolonged and relies on foreign sources of w countries in the
region, will now move to stage peaceful, prudent and rely on their own strength. The crisis
caused losses to the Asian country at least US $ 300 billion, with approximately 20% of
the GDP of the country in crisis and general damages to $ 500 billion worldwide.
The economic crisis reduced the living standards of workers (due to inflation) also led to
political instability with the departure of Suharto in Indonesia and Chavalit Yongchaiyudh
in Thailand. Anti-Western Sentiment increased with the harsh criticism against George
Soros and the International Monetary Fund. Islamic movements and breakaway thrive in
Indonesia's central government when it weakens. The foreign investor confidence
declining, FDI flows into Asia descending, they invest more timid and cautious when
investing elsewhere. The currency devaluation increased the cost of debt service and debt
burden of the company led to mass bankruptcy situation of the real estate bubble burst,
banks suffer fall into a pile of bad debts to keep a large amount of assets depreciated and
difficult to sell.
A long-term effects and serious, that is GDP and GNP per capita measured in US Dollar
equivalent purchasing power decreases. Depreciation is the direct cause of this
phenomenon. CIA World Fact Book Bench said per capita income in Thailand fell from $
8,800 in 1997 to $ 8,300 in 2005, down from $ 4,600 Indonesia down $ 3,700, down from
$ 11,100 Malaysia down 10,400 USD. The crisis not only increases the number of
unemployed in the country area (doubled in 1998 in Thailand, South Korea and

Indonesia ...) but also their trading partners by downsizing imports for terrorist crisis.

22 | P a g e


The crisis not only spread in East Asia where it contributes to the financial crisis and the
Russian financial crisis of Brazil. Some countries are not in crisis, but the economy also
adversely affected by lower export and by FDI.
3.2. Positive effects
The Asian crisis in 1997 is not only completely harmful and in a certain extent, it is the
first stop to open a new promising phase.
First, the transition to a flexible exchange rate policy will help the government reduce the
amount of foreign currency interventions to keep currency rates as the previous time, help
increase national reserves and long term, with the same substance cheap currency will
encourage and increase export competitiveness, thereby improving the financial balance of
the country.
Second, many countries like Thailand, Indonesia, Korea, the Philippines ... will receive the
amount of official international credit in large quantities in order to serve the objectives of
reform and economic development. The crisis helped reorienting and improving
investment structure, more healthy national financial system, creating pressure for the
business owner must change to adapt to the new situation, to promote the production of
new products export competitiveness higher. Inefficient expenditures will be cut, the
individual projects are encouraged, the process of privatization, reducing the State sector,
reduce monopolies and government subsidies are widely promoted, more positive.
Third, the crisis is an opportunity for the government and people as well as financial
institutions complementary monetary policy shortcomings and the institutional elements of
human ... thus creating the momentum built New poles for economic development and
social sustainability at the national, regional and international as an organic whole. The
process of liberalization and globalization will be pushed to a new step, in part because of
the economic adjustment program extensively in this direction in the area of countries after

"pill of IMF"; partly thanks to the careful preparation and more appropriate than in each
country; another part by the appearance of a mechanism to promote and monitor new
23 | P a g e


regional, the addition of the IMF and regional financial institutions, as well as a result of
the cooperation between regional countries in efforts to overcome the crisis.
In addition, the impact of the crisis was reflected in the work certain shifts roles and
positions of political and economic traditions of the great powers in the region such as
Japan, America, Europe as well as the ASEAN itself as a community.
4. Solutions to extricate form Southeast Asian financial and currency crisis
4.1. International level
4.1.1. Assistance from international organizations
The emergency and tremendous financial support from the international community
through the organization, coordination and supervision of the International Monetary Fund
(IMF) were extremely important and it had the most powerful and instant effects to
conquer the crisis, avoided the widespread disruption and prolonged consequences, both
inside and outside of each country. The specific ones are the “Programs for emergency
relief package” that the IMF has continually deployed to Thailand, the Philippines,
Indonesia and South Korea, with the total value of hundreds of billions of dollars
The international organizations, for examples, IMF, OECD, also called and implemented
plans to strengthen technical and information support and counseling in order to improve
the institutional capacity of the country included in the crisis. In addition, the IMF added
its function through the formation of a new regional monitoring structure, which is more
appropriate for Asia.
4.1.2. International support
The international support was also shown at the agreement between the debtors and
creditors on the moratorium, debt swap and debt guarantee to improve the debt situation of
the countries in crisis. The international assistance is also the ask the large market like the
USA, the EU to open the doors for exports of the countries in crisis, in order to help

improve the balance trade and their foreign exchange earnings.
24 | P a g e


4.2. Regional level
4.2.1. Strengthening regional cooperation
From the beginning months when the crisis occurred, the regional countries have offered
some ideas to coordinate to create synergy to overcome the crisis. These ideas have been
concretized by the establishment of regional financial – currency institutions like the Asian
Credit Fund, the ASEAN multilateral compensatory bank; or the agreements between the
ASEAN Finance Ministers on encouraging the use of the same currency in paying intraASEAN trade transactions on the basis of bilateral agreements, but taken USD as a
reference value of exchange rates between currencies. In addition, there are other efforts to
promote intra-regional economic cooperation in order to alleviate the difficulties caused by
the crisis, such as direct exchange line pickup, finishing fast ASEAN Investment Area...
4.2.2. The establishment of the ASEAN financial supervision mechanisms
One of the causes of the crisis is the weakness of the financial system - banks and the
executive management of the economy have not kept up the pace of liberalization,
globalization. Therefore, to overcome the crisis, ASEAN countries needed to coordinate
actions to achieve high efficiency and quickly brought the regional economy recover. So
ASEAN monitoring mechanism has been formed with the aim to exchange information
and discuss the economic situation - financing of the Member States, thereby giving an
early warning system to enhance stability macroeconomic and regional financial systems.
In addition, a monitoring mechanism will also help ASEAN policy proposals and
encourage unilateral action or exercise to prevent crises, monitoring and discussing the
economic situation - global finance can image awarded to the region and the
countermeasures of each country and region.
4.2.3. Gradually loosen fiscal-monetary policy
In the early days when the crisis broke out, the regional countries urgently adopted
temporary solution to prevent speculation and stabilized the currency, reducing the
pressure of foreign debt maturity and the withdrawal of foreign capital by primarily

25 | P a g e