Asian Crisis Essay Research Paper Introduction A

Asian Crisis Essay, Research Paper

Introduction

A financial crisis swept like a bush fire through the .tiger economies. of South East Asia between June 1997 and January 1998. One country after another, local stocks markets and currency imploded. When the dust started to settle, the stock markets in many of these countries had lost over 70% of their value. Leaders of some these nations had to approach the International Monetary Fund (IMF) to beg for massive financial assistance.

The crisis in Asia has occurred after several decades of outstanding economic performance and growth. Annual Gross Domestic Product (GDP) growth in the ASEAN- 5 (Thailand, Malaysia, Singapore, Indonesia and Philippines) averaged closed to 8% in the last decade. Per capital income levels also had increased tenfold in Korea, fivefold in Thailand and fourfold in Malaysia. Moreover, per capital income levels in Hong Kong and Singapore now exceed those in some industrial countries.

Although there were important differences between the individual countries, a number of elements were common to most. Export had long been the engine of economic growth in these countries. A combination of inexpensive and relatively well educated labour, export orientated economies, falling barriers to international trades, heavy investment by foreign companies, had combined during the previous quarter of the century to transform many Asian states into export powerhouses. The nature of these exports had also shifted in recent years from basic materials and products such as textiles to complex and increasingly high technology products, such as automobiles, semi-conductors and consumer electronics.

Origin of the crisis

The wealth created by the export-led growth helped to fuel an investment boom in commercial and residential property, industrial assets and infrastructure. The value of commercial and residential real estate in cities such as Hong Kong and Bangkok started to soar. This started a building boom all around the region. Heavy borrowing from the banks financed much of this construction.

As for industrial assets, the continued success of Asian exporters encouraged them to make even bolder investments. This was exemplified most clearly by South Korea.s giant diversified conglomerates, or chaebol, many of which were encouraged by the government. But the chaebol always rely on heavy borrowings, built up a massive debts that were equivalent, on average, four times their equity.

As might be expected, as the volume of investments ballooned during the 1990s, often at the bequest of national governments, the quality of many of these investments declined significantly. All too often, the investment is based on unrealistic projection of the future demand conditions. The result was the emergence of significant excess capacity.

A good example was the investments made by Korean chaebol in semiconductor factories. Investments in such facilities surged in 1994 and 1995 when a temporary global shortage of Dynamic Random Access Memory chips (DRAMs) led to sharp price increases for this product. However, by 1996 supply shortages had disappeared and excess capacity was beginning to make itself felt, just as the Koreans started to bring new DRAM factories on stream. The results were predictable; prices for DRAMs plunged through the floor and the earnings of Korean DRAM manufacturers fell by 90%, which meant it was extremely difficult for them to make scheduled payments on the debt they had taken on to build the extra capacity in the first place.

In another example, a building boom in Thailand resulted in the emergence of excess capacity in residential and commercial property. By early 1997 it was estimated that there were 365,000 apartment units unoccupied in Bangkok. With another 100,000 units scheduled to be completed in 1997, it was clear that years of excess demand in the Thai property market had been replaced by excess supply. By one estimate, by 1997 Bangkok.s building boom had produced enough excess space to meet its residential and commercial need for at least five years.

The Debt Bomb

By early 1997 what was happening in the Korean semiconductor industry and the Bangkok property market was being played out elsewhere in the region. Massive investments in industrial assets and property had created a situation of excess capacity and plunging prices, while leaving the companies that had made the investments groaning under huge debt burdens that they were now finding difficult to service.

The make matters worse, much of the borrowing to fund these investments had been in US dollars, as opposed to local currencies. At the time this had seemed like a smart move. Throughout the region local currencies were pegged to the dollar, and interest rates on dollar borrowings were generally lower than rates on borrowings in domestic currency. However, if the governments in the region could not maintain the dollar peg and their currencies started to depreciate against the dollar, this would increase the size of the debt burden that local companies would have to service, when measured in the local currency. Currency depreciation, in other words, would raise borrowing costs and could result in companies defaulting on their debt payments. At the same time, it makes the exports more expensive and less competitive on the world markets.

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