The 1997 financial crisis swamped a number of developed and developing countries like Singapore, Thailand, Indonesia, Malaysia, South Korea, Philippines and Thailand and put the worldwide economy under pressure due to subsequent financial contagion. How come the leading countries in the region, the so-called “tiger economies”, had their stocks and currency values plunged down to the extreme? In this article, we will have a close look at the major causes, solutions and lessons learned from one of the most lamentable crisis of its time.
What Caused Financial Crisis?
Let’s kick off with Thailand – the first responder to the Asian crisis. As you may have heard, Thailand of those times (along with other leading economies in the region) had a growth boom which in turn triggered big influx of FDIs to the country. As expected, all these positive signs had eventually led to investment reduction due to surplus capacity across the economy. Further to this – Thailand government decided to untie its national currency baht from the US dollar amid less attractive export and FDIs decrease. The currency market collapsed and local currency was devalued by over 30% – followed by similar slumps in other effected Asian countries. As a result of this, inflation became next point in a series of problems in the national markets of Singapore, Malaysia, South Korea and Indonesia. Apart from this, financial markets also went crazy and dropped as much as 60%. These declines became visible in Europe, the USA and of course Russia (financial crisis hit the country in 1998).
How Was It Resolved?
Outside intervention was crucial given the severity of total losses and aftermath of the crisis. In the second half of 1997, International Monetary Fund began its rescue operation with $110 billion of stabilization loan to the most affected economies – Thailand, South Korea and Indonesia. The fund obliged the countries to tighten the following conditions: make both taxes and interest rates higher and cut public spending. Despite the fact that signs of the crisis stayed through 1998, by 1999 the affected region began showing a recovery path toward increasing GDP figures. All the provided solutions gave a boost to the region and widened its portfolio of investment decisions.
Lessons for Future Times
So far one of the main lessons of the Asian financial crisis is beware of asset bubbles – never underestimate the soaring asset prices especially when they are not fundamentally warranted. In addition, we detail a few key facts that must be looked at: fixed currency exchange rate revaluation, public spending reduction and stabilization plans.
As regards fixed exchange revaluation –though this concept appears to not have been widely used, being traded against a basket of currencies may prevent from happening such crises going forward.
Public spending should also be reduced insofar as governments tend to deploy these funds on unwarranted projects that in turn may lead to similar financial crisis.
Stabilization packs such as by the IMF need to be eased in terms of strictness on short-term loans for recovery purposes.