Asian Financial Crisis in 1997 and effect to Latin America (Essay Sample)

Impact of the Asian Financial Crisis in 1997 and effect to Latin America
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Abstract
In 1997, the Asian Financial Crisis spread rapidly all over the Asia and affected almost all the economies in the world. Prior to the Asian Financial Crisis, the Asian countries such as Thailand, Malaysia, South Korea, Indonesia, Hong Kong and Singapore experienced a remarkable growth in the economy that was considered the highest in the world. These Asian economies increased by a notable proportion of 6 to 10 percent annually in the GDP. However, what had been regarded as an Asian miracle seemed to crumple down rapidly 1997 when these Asian countries were faced with a severe financial crisis in their local stock and currency markets. When the economies started recovering from the crisis in 1998, the stock markets in several countries had considerably lost more than 70 percent of their worth, while their currencies depreciated in comparison to the US dollar (Pettis, 2001). The Asian Financial Crisis also affected several nations in the Latin America as they experienced a relentless economic meltdown that had detrimental effects to the economies. For instance, the financial crisis force multinational firms to close down due to liquidation, the banking system deteriorated and this forced high levels of lay-offs leading to unemployment. In addition, the financial crisis resulted in the loss of the people’s purchasing power in the Latin American while nations turned to the International Monetary Fund for monetary assistance. This research paper explains the occurrence of the Asian Financial Crisis, the impact of the crisis and the effects it had on the Latin American countries’ economy.
Asian Financial Crisis in 1997
The Asian financial crisis took place in mid 1997 gripping several countries in Asia and this raised concerns with regards to a potential global collapse of economies as a result of the financial contagion. Thailand was the first country that experienced the financial crisis after the financial meltdown of the Thailand baht following the government’s move to float the baht. Thailand had accumulated a considerable amount of foreign debts making the nation bankrupt prior to the collapse of the currency. As the financial disaster increased several countries in Asia and experienced crashing currencies and diminished stock markets while the private debts increased significantly. The financial crisis severely affected the economies of Indonesia, Thailand and South Korea while the effects of the crisis spread evenly across the globe and almost all the countries that trade with the Asia nations experienced the effects of the crisis (Haggard, 2000).
The Asian financial crisis spread swiftly across the world economies through Russia, Brazil and finally to the Latin America as a result of financial contagion. What started as a financial crisis in Asia quickly spread over to Latin America, particularly in into Brazil and it swiftly enclosed the entire Latin America continent. The economy of Brazil had put in place economic policies that resembled the policies in the East Asian nations that maintained high interest rates so as draw foreign capital and also defend the fixed exchange rates against the dollar (Hunter, 1999). As a result, this resulted in a huge inflow of unstable capital and this increased Brazil’s susceptibility to external financial challenges from any form of financial crisis.
Impact of the Asian Financial Crisis on the Latin American Economy
During the peak of the Asian financial crisis, the Russian financial crisis enhanced the fears concerning the viability of the economy of Brazil and as a result more US$20 billion was drained from the country. Regardless of the negotiations for support grant from the IMF and the United States Treasury, the monetary drainage persisted and Brazil was forced to devalue its currency. As a result, the Brazilian government authorized the real to float, while it abandoned linking its currency to the U.S. dollar. The financial crisis in Brazil spread out rapidly to other nations in Latin America and as a result several billions of dollars were drained from these countries and this hindered the trade exchange with the United States. As a result, the nations in the Latin America experienced one of the nastiest economic recession that was mainly fuelled by the Asian financial crisis. The effect of the financial disaster was predominantly severe in the Latin America’s small economies, for instance Bolivia, Uruguay, Ecuador, Chile and, Argentina and Colombia (Hunter, 1999).
Petti (2001) argues that financial shocks can move rapidly throughout the nations within similar regions as it was revealed by the Mexican peso disaster that occurred in the year 1994. Similarly, the financial crisis that affected the Asian countries proved to be a regional financial crisis and it threatened geographically distant vibrant economies mostly in the Latin America. The Latin America countries began experiencing the effects of the Asian financial crisis in 1997 after the currency devaluation in Asia put pressure on other markets. Accordingly, this threatened to alter the regional financial crisis to a wider financial crisis mostly to the developing economies in the Latin America. The Asian Financial Crisis impacted the Latin America countries economy through two key channels that are finance and trade.
Financial Impact
Prior to the Asian financial crisis, the emerging markets in Latin America experienced enhanced access to global financing and this resulted in the gross influx of large capital that amounted to more than US$ 80 billion in 1997. On the other hand, the foreign direct investment increased in the Latin American countries with a capital inflow of almost US$ 44 billion. After the outbreak of the financial crisis in 1997, the spreads increased in the Asian nations that were directly hit by the crisis while there was a stable or slight decline in Latin American nations. However, the situation rapidly changed in due the peak of the crisis when there was an abrupt decline in the stock market leading to a sudden increase of the risk premiums in the developing economies in the Latin America (Haggard, 2000).
The abrupt drop of capital flow to the nations in the Latin America economies in 1997 was related to the financial disaster in Asia. According to Pettis (2001), the international bonds issued from the Latin America countries reduced drastically to below $5 billion during the last quarter of 1997 in comparison to more than U.S. $21billion during the quarter before the financial crisis. In the same way, the stock indexes across the Latin America lost a considerable ground during the same period. The Brazilian equities deteriorated due to the investors’ concerns about the nation's "managed floats" that are as a result of Brazil's substantial deficit in the current account combined with the fiscal deficits. In addition, the market in Argentina suffered from opinion that the country is twice susceptible as a result of the fixed exchange rate system and its reliance on the Brazilian economy as trading partners.
The changes to the climate of the global financial market, chiefly for the developing economies hit the financial security of the nations. As a result, the Asian crisis directly impacted on most of the sectors that were susceptible to external capital movements due to the need for dollars for trading. The financial crisis in Asia prompted several global investors in the Latin America to seek for profits in the country so as to cover for the losses in the stock markets and also sustain their liquidity. The financial impact of the Asian financial crisis was initial apparent through the fall in prices in the Latin America stock exchange markets. Accordingly, as the crisis continued, with slight variation from nation to nation, the stock market declined and tight terms were introduced in accessing the external capital (Hunter, 1999). As a result, the financial crisis affected the foreign exchange market in the Latin America, the banking systems and also the inflow of the global capital market.
Trade Impact
The financial impacts in Latin American economies was manifested immediately as the aftermath of the Asian financial crisis while the trade effects took some ti...