ASIAN CURRENCY CRISES IMPACT ON THAILAND, INDONESIA& SOUTH KOREA

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1 ISSN: , Impact Factor: 4.878, Volume 5 Issue 1, March 218, Pages: ASIAN CURRENCY CRISES IMPACT ON THAILAND, INDONESIA& SOUTH KOREA 1 Rohan Regi, 2 Ajay S. George, 3 Ananthu Sreeram 1, 2, 3 (BBA F&A, Department of Professional Studies, Christ University, Bengaluru, Karnataka) Abstract: During the 199s Asian countries such as Thailand, China, Indonesia, Malaysia ere attracting a huge amount of capital investment and were growing in a rapid rate. GDP growth rates of Thailand had even reached 7% during But due to the Asian Currency crisis that occurred during 1997 the GDP of mainly Thailand, Indonesia, and South Korea fell and currency value dropped drastically. The main aim of the research paper is to find out how much the Asian currency crisis had affected the economy of Thailand, Indonesia and South Korea. Keywords: Thailand, China, Indonesia, Malaysia, Capital Investment, Currency Crisis INTRODUCTION The exchange rate of a currency is a vital indicator of the health and prosperity of a country. A stable foreign exchange rate helps to exert a pull on foreign investment from various external countries rather than an unstable foreign exchange rate as it becomes tough to predict investment proceeds for investors The Asian Economy was on the rise at a rapid rate between the early 196 s and 199 s which even lead to Hong Kong, Singapore, South Korea and Taiwan being well-known as the Four Asian Tigers due to their high growth rates. This growth was fleetingly hampered owed to the Asian Currency Crisis that occurred in the year 1997 which wrapped up much of South Asia which mainly began in Thailand. This came to be known as one of the largest crises prior to the Lehman Brothers. Before the crisis the Thailand economy was reeling in a huge amount of capital inflow and had a steady exchange rate that fluctuated scarcely between baht to baht per dollar. Various other reasons for the rapid growth and massive capital inflows was a low inflation rate of 3.36% and 5.7%,a high interest rate of 13.25% as well as a fiscal balance surplus. The Thailand economy grew at a rate of 9% per annum making it the highest growth rate compare to other countries at that time. This made the Thai economy a major focus point for investment. In July 1997 the Thailand government decided to float its currency (Baht) in order to protect the economy from speculative attack Speculative attack in economics refers to the sudden sale of a country s currency which can be carried out by either domestic or foreign investors. Floating of a currency is when the value of the currency is determined by the forex market based on the supply and demand with comparison to other currencies. Due to the floating of baht the value of baht devalued on the double reaching its lowest point at 56 baht per US dollar in January Almost 1.1 million Thais fell below poverty line due to the crisis. The increasing public debt and domestic lending also contributed to the crisis and made the effects worse. Indonesia and South Korea were also some of the few countries that were affected majorly by the financial crisis. All of the above countries i.e., Thailand, Indonesia, South Korea etc. are part of the Association of South East Asian Nations (ASEAN) and were affected due to the crisis. Most of the countries that were a part of this association had a very rapid and high growth rate during the 198s. Indonesia had increased its currency trading brand from 8% to 12%. This led to the sudden decrease in the value of rupiah as the managed floating exchange was replaced by free floating exchange. This led to further decrease in the value of rupiah. This continued even though the International Monetary Fund had intervened with a rescue package of $23 billion till the rupiah and Jakarta Stock exchange had reached its lowest. The financial crisis also affected South Korea in a drastic manner. During that time South Korea was already suffering from non-performing loans as large corporate were funding aggressively. Due to the Asian market downturn South Korea decreased its credit rating from A1 to A3 and even went down to the extent of B2. This due to these reasons the South Korean further declined The researchers thought about large depreciation in the value of currency faced by the countries affected by Asian Currency Crisis during the 199 s which led to the research question - Impact of Asian Currency Crisis on the GDP and trade of Thailand, Indonesia and South Korea Homepage: jmraeditor@gmail.com Page 79

2 ISSN: , Impact Factor: 4.878, Volume 5 Issue 1, March 218, Pages: LITERATURE REVIEW Impact on Thailand The Asian Currency Crisis begun with speculative attacks on various currencies throughout the Asian Region. These countries include Thailand, South Korea, Malaysia, Indonesia etc. The speculative attack on currency began in Thailand with the Thai Baht. Prior to the crisis Thailand was growing rapidly but this rapid growth came to a halt due to the crisis and fall of currency value of Thai Baht. The attack on the currency of Thailand was predicted to have begun from Due to constant speculative attacks the Thailand government was forced to decide upon floating the Thai Baht in order to protect the economy from further speculative attacks. The floating of Thai Baht led to a drastic decrease in the foreign exchange value of Tai Baht. The currency fell down by 15% onshore and 2% offshore on the same day. Hong Kong Institute of Economics and Business Strategy (2) reviews that the Thai government had faced the most amount of pressure relating to speculative attack were faced the most on May This was mainly because the capital markets had started reporting increase in the purchase of US Dollars by banks and finance companies. The pressure on baht began after the collapse of Bangkok Bank of Commerce and due to the increase of liquidity by the Bank of Thailand. The Bank of Thailand had tried its best to prevent the crisis form occurring by selling US$ 26 billion but later stopped and let the interest rates rise while creating capital controls to protect the country from their foreign exchange reserve of US$ 35 at the beginning of When the situation had gone out of hand and Thailand had gone into recession the Thailand government requested the International Monetary fund for a rescue package of US$ 16.7 billion. Impact on Indonesia Valerio Cerra and Sweta Chaman Saxena (2) reviews about the crisis on Indonesia and the various factors that contributed to the attack on Rupiah. The main reason for the attack on Rupiah was contagion even though Indonesia had various internal problems such as under supervised banks, monopoly power and short term debt. It had least current account deficit compared to all the other Asian countries. The main reason that the rupiah came under speculative attack was because it had become overvalued relative to its equilibrium level. On August 1997 the government decided to abandon the government of Indonesia decided to abandon the managed free floating exchange rate policy which led to decrease in the value of rupiah dramatically. By January 1998 the value of rupiah had fallen down drastically and March the currency was on the verge of hyper inflation Currency Rates (equivalent of US$ 1) Country Currency 3 March 97 3 Jan 98 3 March 98 Gain/ Loss (%) Indonesia Rupiah Thailand Thai Baht South Korea won Another major cause for the crisis was the major capital inflows and outflows from the region during that period of time. This had a major influence on the regions rapid growth and development. It was the inflow of huge capital that helped in the appreciation of the currency rates in most of the Asian countries. The bursting of Thailand s speculative real estate bubble was the beginning of the initial crisis Janet L Yellen, Global Economic view point (27) reviews that one of the main causes for the withdrawal of capital was due to the lack of confidence and doubt of investors. It was a liquidity crisis where the depositors feared the risk of insolvency and start withdrawing capital in large amounts which ked to failure of the banks. Depositors feared insolvency because of various internal problems such as risky lending practices by financial intermediaries. Rather than ending funds on the basis of sound knowledge and information about specific investment projects banks were lending funds on the basis of personal or government connections. As a result when economic conditions became slow in these countries during the year 1997 bank loan portfolios became very risky. Economic conditions became slow in countries such as Thailand, Malaysia, South Korea etc. was because of tough competition from China as China had just devalued its currency in 1994 and thus was able to provide labour at a lower rate than the other Asian countries. Thus people began to look at China as a cheap source of labour than the South East Asian countries. Since labour was the major source of revenue for countries like Thailand the cost of imports exceeded the exports thus leading to a current account deficit which rose to unhealthy levels Homepage: jmraeditor@gmail.com Page 8

3 GDP(US$-BILLIONS) ISSN: , Impact Factor: 4.878, Volume 5 Issue 1, March 218, Pages: RESEARCH DESIGN Objective 1. To evaluate the impact of the Asian Currency crisis on the GDP of Thailand, Indonesia and South Korea 2. To evaluate the impact of the Asian Currency crisis on the international trade of Thailand, Indonesia and South Korea Source of Data The foundation of the research work is purely based on secondary data collected from a diverse collection of research papers research banks and a plethora of articles. In order to collect information about the Asian Currency Crisis which occurred in 1997 due to the actions of the Thailand government, references were made to online articles published by various sources. The research also made extensive use of article pools and research papers by various online published resources. The Asian Currency Crisis that took place was documented in a series of economic journals such as the Economic Times and Live Mint. Type of Study The study is primarily an exploratory research with an in depth analysis into the situations causing the Asian Currency Crisis. The information collected is primarily qualitative and descriptive as it is based on the economic and political, causes and consequences of the Asian Currency Crisis. However, to explain the relationship between exchange rate fluctuations, interest rates, inflation rates and various other indicators, the researchers have also collected some quantitative data. Period of Study The period of study for the research ranges from 199 to 2 by focusing on important events that impacted the position of the economy of Thailand, South Korea and Indonesia. a) THAILAND Impact of Asian Currency Crisis on the GDP 2 15 ANALYSIS GDP 1 5 Prior to the Asian Currency Crisis Thailand s gross domestic product was increasing in a rapid rate. During the year 199 Thailand s GDP was billion US$ which then kept on increasing exponentially every year. Thailand prior to the crisis was able to achieve high GDP growth rates of about 7% per annum. During the period of the crisis, the GDP of Thailand fell drastically. In 1996 Thailand had a GDP 183 billion US$ which then decreased to US$ in the year 1997 which further deceased to billion US$ in the year This was mainly because the currency value had fallen exponentially which led to increase in cost of imports and due to huge competition from countries like China the revenue earned from the exports could not cover the cost of imports, thus creating a current account deficit. All of these factors led to huge capital withdrawal by investors which further led to the downtrend in the economy. In order to protect the economy from the speculative attacks on Thai baht the government used it s a majority of its foreign reserve of US Dollars which amounted to 26 Billion thus reducing the governments resources to cope with further speculative attacks Homepage: jmraeditor@gmail.com Page 81

4 GDP(US$-BILLIONS) GDP% ISSN: , Impact Factor: 4.878, Volume 5 Issue 1, March 218, Pages: Impact of Asian Currency Crisis on GDP Growth Rate 15 GDP GROWTH RATE Thailand s GDP was growing exponentially. They were able to achieve a constant growth rate which attracted huge capital investments from abroad mainly in the fields of construction. During the year 1992 GDP growth rate was about 8% per annum and the Thailand government were successful in maintaining a stable growth rate throughout the years. After the financial crisis the growth rate took a major slump going down to - 7.6%. Due to the crisis almost 1.1 million people became unemployed. After the period of the Asian Financial Crisis with the help from the International Monetary Fund Thailand was able to achieve a much higher growth rate. Impact of Asian Currency Crisis on Imports of Goods and Services IMPORT OF GOODS AND During the period of the crisis the currency value of Thai Baht dropped drastically. On May Thailand faced the first massive speculative attack on its currency. The government had used more than 9% of its foreign reserves in order to protect the economy and defend the value of the baht. The government was forced to change its exchange rate policy to flexible exchange rate system. The currency was devalued by 15-2%. The value of baht had been continuously falling down. From 28 baht per 1 Us$ the value of baht went down to 49 baht per US$ in December of the same year it was devalued. Due to reduction in the value of currency cost of imports rose which led to fall in imports during the year and Homepage: jmraeditor@gmail.com Page 82

5 GDP(US$-BILLIONS) EXPORTS(US$-BILLION) ISSN: , Impact Factor: 4.878, Volume 5 Issue 1, March 218, Pages: Impact of Asian Currency Crisis on the export of goods and services EXPORT OF GOODS AND Thailand prior to the Asian currency crisis was growing exponentially. The government grew confident of its economic state and because of it US dollar- Baht peg. Due to the US dollar Baht peg an increase in the US dollar would lead to increase in the value of Baht. This brought large amount of capital inflows into the country. Due to these factors the Thai government encouraged banks to lend generous amounts of money to real estate and other spending. Furthermore the inclusive liberalization also encouraged domestic companies to borrow from foreign countries extensively. Since most of the loans were taken in US dollar and interest rates were much lower the government found it as an advantage to borrow funds at a lower rate of interest. However once the value of US dollar began to appreciate Thailand lost its competitiveness and its export began to decline. Furthermore tough competition from China made it harder to recover. The total exports fell down by 2% especially when it lost its competitiveness to labour intensive products as China was able to provide labour at much cheaper costs due to its recent devaluation of currency. Thus even though in a ceteris paribus situation a fall in the currency leads to rise in exports in the case of Thailand the above mentioned factors lead to a decline in the exports of the country thus increasing the current account deficit of the country during the financial crisis ( & ) b) Indonesia Impact of Asian Currency Crisis on Gross Domestic Product GDP The Asian currency crisis had started in Thailand but spread other countries. Indonesia was one of the countries that were majorly affected by the currency crisis that took place in Prior to the crisis the GDP kept on increasing at an almost constant rate from US$ 113 billion in 199 to US$ 124 billion in 1991 etc. But during the period of the crisis the GDP of Indonesia fell drastically to US$ 11 billion in the year This was mainly because the currency value of rupiah had decreased exponentially with 1 US$ being almost 8 rupiah in March The economy was going through a high rate of inflation of about 6 to 7% in All of these factors lead to the decline in the GDP of Indonesia during the crisis. The government took various measures in order to recover from the crisis such as requesting for a rescue package of Homepage: jmraeditor@gmail.com Page 83

6 IMPORTS(US$-BILLION) GDP% ISSN: , Impact Factor: 4.878, Volume 5 Issue 1, March 218, Pages: US$ 35 billion as well as various fiscal policies were maintained such as maintaining government surplus at 1% of GDP during the years 1997 and 1998 along with reforms in the financial sector such as disinvestment of non performing institutions etc. Impact of Asian Currency Crisis on GDP Growth Rate 1 GDP GROWTH RATE The GDP growth rate fell drastically during a short period of time during the year 1997 and 1998 due to the Asian Currency crisis. Due to the crisis Indonesia had to borrow a large amount of funds thus increasing their short term debts. The debt to GDP ratio grew exponentially during the crisis. The unstable economy, swelling trade deficit, sluggish growth and risk of investment led to withdrawal of capital investments. Impact of Asian Currency Crisis on Imports of goods and services IMPORT OF GOODS AND The main imported goods of Indonesia include machinery and equipment, fuels and food stuffs. Due to the fall in the value of rupiah from 2419 rupiah per US dollar in the year 1997 to 8 rupiah per US dollar in March 1998 the cost of imports rose thus reducing the amount of goods and services imported during the years 1997 and 1998 Homepage: jmraeditor@gmail.com Page 84

7 GDP(US$-BILLIONS) EXPORTS(US$-BILLION) ISSN: , Impact Factor: 4.878, Volume 5 Issue 1, March 218, Pages: Impact of Asian Currency Crisis on Export of goods and services EXPORT OF GOODS AND The main sectors that were majorly affected by the crisis were agriculture and manufacture. Due to huge competition from China in cheap labour the exports have decreased from US$ 6.1 billion though not drastically. This is because only some sectors were majorly affected by the Asian Currency Crisis and since most of the export goods of Indonesia include natural resources its value did nit decrease exponentially. Thus exports have decreased to some extent but not drastically c) South Korea Impact of Asian Currency Crisis on Gross Domestic product GDP South Korea was also affected but the crisis when the won came under speculative attack. But South Korea had already been facing problems before the crisis even began. These were a decrease in macroeconomic conditions in the year This was mainly because current account deficits were increasing and export growth was slowing down due to fall in demand of semiconductors which hit the economy. The fall in the value of currency hit the economy harder especially because banks were in the verge of bankruptcy due chaebols (family owned business conglomerates) due to non-payment of loans. These led to serious financial difficulties and many institutions went bankrupt. Thus the GDP growth rate had already decreased in the year 1996 and further decreased due to the crisis in 1997 and 1998 Homepage: jmraeditor@gmail.com Page 85

8 IMPORTS(US$-BILLION) GDP% ISSN: , Impact Factor: 4.878, Volume 5 Issue 1, March 218, Pages: Impact of Asian Currency Crisis on GDP Growth Rate GDP GROWTH RATE The GDP growth rate already showed a down trend during 1996 mainly due to an increasing current account deficit and non-payment of loans by chaebols. Thus the GDP growth rate had a downtrend and in the year 1997 and 1998 it further decreased due to the fall in the value of currency of South Korea. The GDP growth rate had gone down drastically. It went down to -5.5% in Impact of Asian Currency Crisis on Imports of goods and services IMPORT OF GOODS AND South Korea prior to the crisis was already suffering from an increasing current account deficit. With the drastic decrease in the value of won from 892 won per US Dollar in 1997 to 1378 won per US$ in This led to the drastic decrease in imports during the crisis from US$ 165 billion to US$ The imports in the year 1998 had decreased by 33% due to the crisis Homepage: jmraeditor@gmail.com Page 86

9 EXPORTS(US$-BILLION) ISSN: , Impact Factor: 4.878, Volume 5 Issue 1, March 218, Pages: Impact of Asian Currency Crisis on Export of Goods and Services 2 1 EXPORT OF GOODS AND The export of goods was already facing a downtrend due to the decrease in the demand of semiconductors which was one of the major export goods of Korea. This with the large amount of competition by China led to further decrease in exports. FINDINGS 1. The Asian Currency Crisis had an almost similar impact on all the three countries taken for the research 2. Thailand, South Korea and Indonesia were growing at a rapid pace with Thailand achieving a GDP growth rate of 7% 3. The value of Thailand Baht had decreased exponentially after changing to flexible exchange rate system. 4. In all three countries the Asian Currency Crisis led to a decrease in imports and the current account deficit kept on increasing. Imports decreased mainly due to fall in the value of baht, won and rupiah 5. Even though the value of currency had decreased the exports of all three companies had a positive relationship, decreasing with it. This was mainly because of increasing competition from China after the devaluation Renminbi in 1994 and furthermore in the case of Thailand the its currency s peg with US dollar led to decrease in competitiveness especially in the labour market as the value of US dollar increased CONCLUSION Referring back to the research topic- Impact of Asian Currency Crisis on the GDP and trade of Thailand, Indonesia and South Korea., it can be concluded that the Asian Currency Crisis in 1997 and 1998 led to imbalances in the economy of all the three countries- Thailand, Indonesia and South Korea which led to severe decrease in the currency value of all the three currencies of the countries. In 197 due to the speculative attack on Thai baht the currency value decreed exponentially. Due to fear of investors about risks huge amounts of capital investment as withdrawn which forced the country to adopt flexible exchange rate system which further decreased the value of Baht. Due to the crisis more than 1.1 million people became unemployed and suicide rates increased. The economic instability in Thailand spread to other countries quickly. Indonesia already had an increasing current account deficit and the crisis made situations worse. The GDP had fallen drastically and value of rupiah fell to the lowest of 8 rupiah per US Dollar. South Korea had already been facing problems with increasing current account deficit, decreasing GDP growth rate and decreasing imports (Due to fall in demand of semiconductors) and increasing competition by China. The crisis further decreased the exports and GDP of the country. Homepage: jmraeditor@gmail.com Page 87

10 ISSN: , Impact Factor: 4.878, Volume 5 Issue 1, March 218, Pages: BIBLIOGRAPHY / Homepage: jmraeditor@gmail.com Page 88