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Asian Financial Crisis Causes and Effects

1. THE SEVEN TIGERS: Korea, Taiwan, Singapore, Hong Kong, Thailand, Indonesia, Malaysia

There are seven countries which have an outstanding role in the Asian crisis: Korea, Hong Kong, Taiwan, Singapore, Thailand, Indonesia and Malaysia. Their role is not important only in the context of the Asian crises, because we have to remember that they are the countries that have experimented the most important economic and financial growth in Asia (but Japan and China) the last years.

There are some countries that have similar conditions in the crisis process and including them in a same group could be interesting.

A clear example of that are the countries of Thailand, Indonesia and Malaysia.

In these countries the crisis was caused by a bad macroeconomic management, which has influenced in the bad situation of their payment balance. The absence of competitively, the fix exchanging rates in relation to the dollar and the foreign indebtedness provoked hard speculative attacks against these economies. All this phenomenon has created in these countries a disquieting situation.

These countries, including in the group South Korea, have been specially affected by the drop of their indexes and the massive devaluation of their currencies.

Eastern Asia has the 20% of the world commodities exportations and the industrialized countries have an important commercial deficit with these areas. In this situation, the depreciation of their currencies could have influence in the importation in the European Union and in the United States (between June 1997 and February 1998 the drop of the indexes in relation to the dollar was: 303% in Indonesia, 105% in Thailand, 87% in Korea 63% in Malaysia, 25% in Taiwan, 22% in Singapore, etc.).

The loss of the international markets and the financial sector trust has provoked the cancellation of great infrastructure projects (subway in Bangkok, a ditch in Malaysia, etc.).

There are some countries, like Thailand and South Korea, that have asked for help to the International Monetary Fund. This institution has imposed a couple of conditions to these countries in order to help them:

  • Macroeconomic stabilization.
  • Commercial opening and by capital account.
  • Flexibilization of the working market.

We can say that the countries more affected by the Asian crisis are Thailand, South Korea and Indonesia, but the situation is serious in all the south−west Asian area.

There are predictions which say that the economy will fall, in 1998, 10 points in Indonesia, 8 points in Thailand and 4 points in South Korea. The situation is so bad that Malaysia, who didn’t ask for the IMF help could have a deduction in its GNP.

One of the negative factors of this situation is the dependence between the countries of the area. This factor has made that the crisis infected all the countries of the area. One of the most important examples is Japan, who was in charge to give a solution to the problem in the start, has become clearly a part of the problem. There are two countries that have a special commercial and financial importance in Asia. They are South Korea and Hong Kong (which is not a country yet).

Before July in 1997, all the experts trusted that the economic stability in Hong Kong was guaranteed.

One year and a bit more later, the economic situation has fallen so down that Hong Kong is going to his worst recession in the last 50 years.

In the start of the south−west Asian crises, nobody though that the crises could affect Hong Kong, because it only had a little current deficit and, moreover, it had the guarantee of its great reserve of foreign exchange.

But the situation became worst and the Hang Seng index had the worst drop in all the history and the local government was forced to increase the rates in order to reduce the currency pressure, in an instability context.

The high rates reduced the bank lending, reducing at the same time the private wasting and provoking a hard reduction in the ground price. The building sector began to be affected and the quotations of the building enterprises fell down in the 48%.

Moreover, the tourism profits decreased because the number of tourists fell down in the 70%.

The government adopted a couple of measures in order to alleviate the difficult economic situation:

  • The suspension, until April 1999, of any selling of public property ground.
  • A more important injection of solvency in the banking system.
  • A reduction of the building taxes.
  • More facilities for the tourists from the continent and Taiwan.

In the future, it seems that the situation of Hong Kong will depend, in short term and in midterm, on three external factors:

  • The necessary economic recovery of Japan, which is the 3rd most important market for the products made in Hong Kong and one of the most important destination for the foreign investing.
  • The recovery of the continental China economy.
  • An eventual devaluation of the Chinese currency. In that case, the fix rate of the Hong Kong dollar in relation to the American dollar probably would be in danger.

In spite of this, the suitable geographic situation of Hong Kong, its excellent transporting and

telecommunication structures and the qualified handiwork, are some of the advantages that has Hong Kong in order to initiate the recuperation.

Another country which has an important role in this situation is South Korea. Its situation in the crisis is specially interesting because of the importance of Korea in the world economy (we have to say that is the sixth most important commercial country in the world).

The situation of the country has changed very much. Few years ago it had an agrarian economy, affected by a massive poverty and nowadays it’s an industrialized and developed country.

Since the early nineties the Korean economy has challenged to some difficulties. The two more important are: −The simultaneous commercial competence of China, the Asian south−west and Japan.

−The activities of some groups of enterprises (chaebol), which were competitive and internationalized, but they were too extended and too indebted.

Some of the manifestations of the Korean crisis have been:
  • Devaluation of the currency.
  • Diminution of the foreign exchange reserves.
  • Rising of the rates.

All this circumstances made the government ask for the IMF help. The reason of the increase of the crisis is that the trustless of the markets has discovered serious structural deficiencies (solvency problems in the big enterprises and the most important financial entities).

Many big enterprises asked massively for the banking sector help and the trouble appeared when this kind of help became more expensive because of the devaluation of the Korean currency and the resistance of the international banks to offer solvency to the local entities.

The result of this situation was an important solvency crisis of this entities, creating a big number of uncobrable duties and a big disquieting situation.

Summarizing, we can say that the Korean crisis it’s different to the crises of other countries of the Asian south−west (their crises is in the payments balance). The Korean crises is a crises of solvency of the enterprises and the national financial entities.

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