Economic activities are internationally integrated at present to an exceptional degree. Alteration in one country’s economy can be swiftly transmitted to its business partners. The rise and fall of economic activities are replicated almost instantly on fluctuations in exchange values. As a result, multinational corporations having incorporated cross-border productions and businesses, recurrently face de-valuation or revaluation concerns. For example, in 1997 an economic crisis gripped Asia starting from Thailand. Currency and stocks depreciated turning investors bankrupt. The Thai baht, Indonesian rupiah, Malaysian ringgit, Philippine peso, and South Korean won decreased in value to as low as eighty percent.
As much as Asian basics looked vibrant, a financial crisis was realized. Businessmen realized that a lot of Asian economic activities were centered on unsustainable courses that were characterized by big trading shortfalls, hefty short-term foreign debts, over-valued currency, and an ineffective monetary system. Every one of these elements had a responsibility in the financial crisis and its consequent spreading from one nation to others. This paper will therefore focus on the Asian financial crisis realized in 1997.
Before 1997, a lot of Asian nations heavily depended on exporting as a source of income generation. They exported their commodities to Japan and the U.S. Monetary constancy also made Asian banks and business organizations acquire funding by the dollar, yen and deutsche mark. This was about “$275 billion worth, much of it short term, because the dollar and other foreign currency loans carried lower interest rates than did their domestic currencies”.1 Trouble was realized as the dollar strengthened.
The origins of the Asian financial crisis were majorly centered upon a huge financial sector weakness. Although warning signals about inconsistency were flashed early, Asian countries were not able to come to terms with the impending trouble. What brought about the crisis was majorly the sterilization strategies tagged along by the host (capital-inflow) countries. Distinctively, “sterilization operations kept domestic interest rates in the host countries higher than would have been the case, thereby inducing both larger net-inflows and a high share of interest-sensitive short-term flows”.2 In Thailand, Indonesia and Malaysia, the exposure did compound to highs of 80-100% loan to collateral-ratios. Again a lot of banks exposed to property markets reflect an exposure to property developers instead of homeowners.
The crisis also augmented as a result of banks and corporate associates, while looking for ways of minimizing borrowing costs felt they ought to bear rollover and monetary risk. This meant a lot of foreign loans were done at shorter maturities which were equally subjugated in foreign currencies. Among other things, investor confidence was also lost as they dumped local currencies for USD while loaners refused to issue more money due to the decline in business and profitability.
The appreciation of the dollar and depreciation of the Yuan affected the timing and magnitude of the currency crisis in the sense that, it slugged down economic development while hurting commercial profit-making. It made ill-conceived and over-leveraged businesses in property development, and industries into economic failures.
Expectations played a major role in the Asian financial crisis. Prior to the crisis, there was a major economic boom. This made foreign loaners loan Asian countries a lot of money. The countries also took more money feeling old and new loans could be serviced effectively and that financial gain would be realized.
A moral hazard is a situation where, an individual or organization protected from a certain threat, acts differently than when entirely exposed to the threat. In the Asian financial crisis, this took place because countries were not completely accountable and responsible for their actions. As a result, there was a propensity of acting less cautiously making another body get hold of responsibilities for the penalties of these actions.
The reason why many East Asian companies and banks borrowed dollars, yens and deutsche marks to finance their operations instead of local currencies was that loans in these currencies had lesser interest rates as compared to domestic currencies. Here, the risk they were exposing themselves to was the situation where these currencies recovered and got strong against domestic currencies.
The economic crisis in Asia was a time of monetary crisis which gripped most of the continent starting in July 1997, raising fear of a worldwide financial meltdown as a result of economic infection. This crisis began in Thailand with an economic fall down of the Thai baht, brought about by a decision of the Thailand regime to float its currency. The Thai government wanted to cut its’ peg to the U.S. dollar, following comprehensive attempts to sustain it in the face of a harsh economic over-extension which was in part real-estate motivated. During this time, the Thai government had a load of foreign debts which made the nation bankrupt before the collapse of its baht. “As the crisis spread, most of Southeast Asia and Japan saw slumping currencies, devalued stock markets and other asset prices, and a precipitous rise in private debt”.3
Although there was a universal agreement of the presence of a financial crisis and its impacts, what might be unclear are the reasons for the financial crisis, plus the crisis’s extent and resolution. Indonesia, South Korea and Thailand were the nations most impacted by the financial crisis. Hong Kong, Malaysia, Laos, and the Philippines were also affected by the slouch. The People’s Republic of China, India, Taiwan, Singapore, Brunei and Vietnam did not feel most of the effect, though every nation in this region was affected following the loss of demand and self-confidence all through the expanse.
Reference list
Butler, K C, Multinational Finance, Wiley Blackwell publishers, Cincinnati, 2000.
Haider, AK, Global Markets and Financial Crises in Asia. University of Denver Press, Denver, 2004.
Kaufman, GG, The Asian Financial Crisis: Origins, Implications and Solutions, Springer Publishers, New York, 1999.
Footnotes
- KC Butler, Multinational Finance, Wiley Blackwell Publishers, Cincinnati, 2000.
- GG Kaufman, The Asian Finanacial Crisis: Origins, Implications and Solutions, Springer, New York, 1999.
- AK Haider, Global Markets and Financial Crisis in Asia, University of Denver Press, Denver, 2004.