South East Asian Crisis: S. Korea and Indonesia

South East Asian Crisis:S. Korea and Indonesia

Key Points • Origins of the crisis • Thai Baht • Economy of S. Korea and Indonesia • The Chaebols • Beginning of the collapse • Seoul Stock Exchange • Default and bailout • IMF response

Origins of the Southeast Asian Financial Crisis • Thailand • Fixed exchange rate to the US dollar • Easy credit from Western and Japanese banks • Massive foreign debt • Huge real estate bubble • Real GDP grew at 9% a year from 85 to 96

Thai Baht • Pegged at 25 baht to $1 USD • May 1997 – Investors started to short the baht • June 1997 – Baht was forced to float • Devalued to 56 baht per $1 USD by early 1998

Consequences • Housing bubble burst • Resulted in massive layoffs in finance, real estate and construction • Stock market plunged by 75% • $17 billion bailout package from IMF • Subject to IMF conditionality

Economy of South Korea • 11th largest economy at the time • Dominated by chaebols Multinational conglomerates Implicitly backed by the government

The Chaebols • Aggressive expansion to compete with Western MNC’s • Led to overleveraging and negative returns • Banks were burdened by non-performing loans

Beginning of the Collapse • July 1997 – Kia Motors asked for emergency loans from the government • Was later absorbed by Hyundai • Daewoo collapsed and was sold to General Motors • Moody’s lowered South Korea’s credit rating from A1 to A3 then to B2

Seoul Stock Exchange • Dropped 30% in November 1997 • Massive capital flight • Korean won lost half its value to the dollar from 1997 to 1998

Default and Bailout • Korea was about to default on its foreign debt • Korea was given $55 billion in new loans and credits by the IMF • It was the largest bailout in history up to that point.

IMF response • Structural Adjustment Programs • Reduce government spending • Let insolvent financial institutions fail • Raise interest rates • Restore confidence in the currency

Who’s to Blame? • Most Koreans blame the IMF for the crisis and refer to it as the IMF crisis • Was the IMF truly to be blamed?

Indonesia: • Country in Southeast Asia and Oceania • 17, 508 islands, 6,000 are populated • Area-742,050 sq mi • Population around 230 million • World’s 4th most populous country • Capital city-Jakarta

Republic of Indonesia

Economy of Indonesia • Largest economy in Southeast Asia • GDP: US $932.1 billion • Member of G-20 major economies • Market-based • Over 164 state-owned enterprises

Beginning of the collapse • Depreciation of rupiah • Rp 2,600/$1 (Aug 1997) fell to 11,000/$1 (Jan 1998) • Public debt reaching $60 bn USD • Real GDP contracted by 13.7% • Inflation of 77% in 1998

Initial Response • Float the rupiah • Raise key domestic interest rates • Tighten fiscal policy

IMF Response • Rescue package of $23 billion • Financial sector restructuring • Stabilizing the rupiah • Retention of a tight monetary policy • Flexible exchange rate policy

Source:International Monetary Fund - 2009 World Economic Outlook

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South East Asian Crisis: S. Korea and Indonesia