Asian crisis (Essay Sample)

Asian Financial Crisis
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Table of ContentsHYPER13 HYPERLINK \l "__RefHeading__120_1538536096"HYPER14Introduction3
Causes, Effects of Asian Financial Crisis and Global Financial Crisis of 2008 and how Korea and Thailand Responded to it3
Causes of the financial crisis in Thailand3
Causes of the Financial Crisis in Korea 4
Effects of Asian Financial Crisis of 1997-1998 and Global Financial Crisis of 2008 on Korea and Thailand 6
Response from the Thailand Government in dealing with these crises7
Response from the Korean Government in dealing with these crises7
Conclusion 8
Reference list10HYPER15
Introduction
It is believed that the Asian Financial Crisis began in Thailand when the government introduced measures to protect baht from depreciating further. The move became catastrophic in that it affected the economies of other Asian countries such as South Korea, Malaysia, Hong Kong, and Indonesia. The Gross Domestic Product of these countries contracted sharply making companies that had depended on foreign currency remain on the brink of bankruptcy. Many people across Asian countries became victims of this problem by losing their jobs.
Causes, Effects of Asian Financial Crisis and Global Financial Crisis of 2008 and how Korea and Thailand Responded to it
Causes of the financial crisis in Thailand
It is widely speculated that the Asian Financial Crisis began in Thailand before spreading to other Asian countries. Some of the main It has been observed that Thailand had poor domestic macroeconomic fundamentals coupled with many years of low account deficit of less than ten percent of Gross Domestic Product (GDP). This was occasioned by appreciation of her currency and an increase in peoples’ earnings. However, Baht came under speculative attack that made the government spend billion of dollars trying to protect it from depreciation and the collapse of her economy. (Gup 2010)
Secondly, the political parties contributed to this financial crisis. Political parties took large chunks of money to fund their operations. Due to weak policies in the banking sector, these parties defaulted resulting in huge loss of money by the financial institutions. In addition, politicians demanded money from business people to fund their campaigns a situation that hurt many of them. Politicians were also able to source for financial assistance beyond Thailand through unregulated means. As a result, money was readily available to the electorate making it difficult for the Central Bank of Thailand to regulate the flow of money in her economy. (Pempe 1999)
Corruption has over the years remained a major challenge in subsequent Thai governments. There existed a belief amongst business people and the politicians that ‘gifts of good will’ were good for the country’s economic growth. (Sutthirak 2012), However, (Inomat 2011) laments that gift of good will amounts to corruption. According to him, the gifts of good led to the deregulation of the financial policies in Thailand. This is because the government could not control the incoming capital from outside the country.
Causes of the Financial Crisis in Korea
South Korea has experienced two financial crises between 1997-1998 and 2008-2009. According to (Liu 2011), in the early 1990s, the government account balance began to go down as a result of high inflation rate, appreciation of her currency, and the slump of the world economy. He observed that, in 1991 for instance, her current account had a shortfall of 9 billion dollars compared to 1990, when the deficit was about 2 billion dollars. This prompted the government to look elsewhere to finance this deficit. As a result, Foreign Exchange Management Act was amended that stimulated and improved capital inflows in the country.Iny 1993, the Korean government had a master plan of liberalizing her financial institutions. However, this master plan was not implemented immediately, and therefore, some of her financial institutions experienced foreign currency debts. (Ries 2000)
In addition, (Gonjanar 2012) has noted that this move by the government was seen as a way of minimizing borrowing. This is because all companies were required to give an account of how they would spend the money borrowed before the government gave a go ahead. According to him, the Korean financial crisis was brought about by fluctuation of the United States dollar. According to him, many companies that were investing in Korea were doing so hoping that the dollar would be weak. However, this did not last for long because in 1995 when Robert Rubin was appointed to head the US Treasury, he introduced changes meant to strengthen the dollar. He has noted that, with the strengthening of the dollar, the Korean won remained strong unlike the Japanese yen that lost its value against the dollar a lot. According to (Akyuz (2000), with the when the dollar appreciated, Korea experienced trade deficit in the international market resulting in reduced profits. As a result, many businesses that had invested in the export business experienced financial difficulties. The depreciation of the Japanese yen meant that Japanese investors could not invest in Korea and other Asian countries. This was a big blow to Korea as there had been a booming business between the two countries. (Ries 2000)
The other cause of the financial crisis in Korea was the associated with the bankruptcy of the big companies in the land. According to (Kihwan 2006), companies such as Hanbo group, Sammi and Jinro experienced financial difficulties around 1997. He has observed that since these companies had huge investments in the country, it was expected that the government would chip in and bail them out. However, due to the prevailing economic conditions, the government was unable to offer any help to them. As a result, this marked the beginning of bankruptcy proceedings for these companies.
Furthermore, international and domestic issues contributed to the financial crisis in Korea. In addition, the currency crisis in other Asian countries affected the performance of the Korean economy. In October 1997 for instance, Hong Kong stock market performance declined as a result of speculative attacks on her currency. The attacks on Hong Kong dollar forced foreign banks to hold on to their loans to banks in Korea. As a result, the country foreign reserves reduced to dangerous levels. (Lee 2002)
In 2008-2009 global financial crises, various factors have been cited as main causes of this economic depression. According to (Inomat 2011), people and companies took more debts that they could not service. He says that there were many loan defaulters which became a big blow to the financial institutions. There were no stringent measures to punish those who default an idea that motivated many to default their loans. There was also ineffective use of existing authorities by bank regulators. He says that the government did little to coerce well established financial institutions to reinforce their risk management to nub loan defaulters.
Effects of Asian Financial Crisis of 1997-1998 and Global Financial Crisis of 2008 on Korea and Thailand
The aftermath of the Asian Financial Crisis and Global Financial Crisis of 2008 were severe on the Korean and Thailand economies. First, there was widespread unemployment in these countries. Following the closure of firms many people were rendered jobless. The inflation rate went up making the prices of basic goods rise beyond the reach of many ordinary citizens. (Kazuyuki 2009).
In addition, there was a drop in stock prices which affected the exchange rate of these currencies against world major currencies such as the dollar and the Sterling Pound. Furthermore, their external debts went up because there was high dependence on foreign capital. As a result, investors lacked confidence in these economies as a result of depreciation of their currencies. Lee (2002)
According to (Gonjanar 2012), many insolvent financial institutions collapsed while those that withstood this storm suffered from financial panic. He says that the two governments could do nothing to save these institutions because they were also suffering. Furthermore, the number of non-performing loans increased as many people defaulted their loans.
Response from the Thailand Government in dealing with these crises
As a results of the financial crisis,Thailand Government turned to the International Monetary Fund (IMF) for financial assistance. The International Monetary Fund decided to offer a financial support of about 17.2 billion dollars. This money was meant to help the country stabilize her currency and cushion it from further depreciation. Corsetti (1999). In addition, (Lee 2008) points out that the IMF wanted to help the government put to an end more capital outflows so that the stock market would regain investors’ confidence during that period. In addition, this money was meant help the country regain its foreign reserve spent trying to protect her currency.
Under the terms of this bail out, the government was required to liquidate all the insolvent financial institutions. Moreover, the IMF required the government to issue Baht 500 billion in bonds to finance the just formed Financial Institution Development Fund (FIDF). The government was also mandated to make sure that there were strict rules that regulated the banking sector. IMF wanted the government to make an undertaking that all monies deposited in the financial institutions would be safe in case such an eventuality happened again. This policy was meant to reinforce the banking sector so that all possible loopholes are sealed.
The government decided to bail out her ailing financial institutions on c...