Asian currency crisis

        Another example of currency crisis can be of the Asian crisis that took place in 1997. In this case there was macro economic shocks faced by several Asian economies thus the name Asian crisis. These economies include Malaysia, Thailand, South Korea, Philippines and Indonesia. This started once again due to the devaluation of currency. It started from Thailand where the currency was actually pegged to the US dollar but the Thai government could not keep it further pegged because of drained foreign reserves.

        The government of Thailand allowed its currency to float. At the time this all was happening Thailand already had borrowed a huge amount of foreign debt that made the country go into bankruptcy even before this currency crisis could. This happened because devaluations meant that the value of debt had increased. This is when countries began to default on the due debt repayment. The decline in currency spread throughout the South Asia and led to reduced import revenues along with stock market decline.

        Other economies that too were affected to some extent due to the currency crisis in Thailand include Hong Kong, Laos, China, Singapore, Japan and Taiwan. They suffered because the level of demand decreased and there was a decrease in the level of confidence. The rate of inflation in economies increased too because imports became expensive. The graph below shows the impact of Asian financial crisis. The nominal GDP per capita in 1997 of five countries is shown in the graph. The five countries are Indonesia, Thailand, Malaysia, South Korea and Philippines.  (Sterland, 2017)

        Moreover, in four large economies of Association of Southeast Asian Nations (ASEAN) the foreign debt to GDP ratio increased from 100% to 167%. Fortunately, the IMF stepped in with a $40 billion program to make things stable. The World Bank helped as well. It is estimated that around $110 billion loan was taken by these economies in order to stabilize their economy. The result of this was that many nations believed that protectionist policies turned out to be the best for economies. Protectionist policies make sure that the currency of the country is stable since it is not prone to severe currency depreciation or appreciation.

        Moreover, these economies then opted for some strict policies like decrease in government spending and increase in tax and interest rates. By 1999 major signs of recovery from this event were visible in some economies.  In fact it is also known as the “Asian economic miracle”. This is because the high interest rates attracted great foreign investments and the received great inflow of money. Some economies like Malaysia, Thailand and South Korea really experienced an increased in GDP to double figure.

        Countries like Thailand actually had a current account deficit. Current account deficit means that they were importing more than the levels of goods and services that they were exporting. This was financed by hot money flows this all showed that these economies had greater level of economic growth and consumption. Another reason for the previously mentioned hot money flows was that these economies had fixed or semi fixed exchange rates meaning that interest rates were being used to maintain the specific value of a currency.

        Interest rates were basically attracting hot money flows. Furthermore, since the overall environment in the economies was such that the government was encouraging economic growth hence, they provided guarantees for private sector projects and incentives. This boosted the confidence level of private sectors firms and encouraged them to make investments since there were chances that further expansion plans could be backed up by the government.

        The lessons that were learned from this crisis are of great importance. They can be used in the present or the future to solve similar economic problems. Perhaps the biggest lesson that was learnt was to be aware of the asset bubble. The government and the people should keep an eye on issues that give a rise to the asset bubble. (KUEPPER, 2018)

KUEPPER, J. (2018, August 2). The Asian Financial Crisis. Retrieved from https://www.thebalance.com/what-was-the-asian-financial-crisis-1978997

Sterland, B. (2017, July 2). The Asian financial crisis 20 years on: Lessons learnt and remaining challenges. Retrieved from https://www.brookings.edu/opinions/the-asian-financial-crisis-20-years-on-lessons-learnt-and-remaining-challenges/