Department Of Management

Sciences

Cross Cultural Management

Assignment # 02
On
South Asian Financial Crisis

Submitted to: Sir Adnan Shoaib

Submitted by: Azeem Bhatti
Roll # 036
 BBA-08
The Asian financial crisis

The Asian financial crisis is considered to have started on July 2, 1997 with the
devaluation of the Thai baht and ask IMF for assistance. Malaysia abandons the peg and
blames the speculators on July 14 Philippines seek assistance from IMF and Indonesia
floats on August 14, go to the IMF on October 8, Repeated speculative attacks on Hong
Kong dollar unsuccessful, but stock market plunges between October 20-23.Global stock
market decline on October 27.South Korea devalue Nov. 28 and ask for IMF assistance
and then its spread over other Asia countries.
The Asian financial crisis involves four basic problems or issues;
1 A shortage of foreign exchange in Thailand, Indonesia, South Korea and other Asian
countries that has caused the value of currencies and equities to fall dramatically.
2 Inadequately developed financial sectors and mechanisms for allocating capital in the
troubled Asian economies,
3 Effect of the crisis on both the United States and the world.
4 The role, operations, and replenishment of funds of the International Monetary Fund
Causes of the crisis in 1997
There are 2 main theses as to the causes of the crisis.
1. Weakness of Macro-Economic fundamentals
The basic weaknesses in the Macro-Economic fundamentals itself led to Low
productivity and competitiveness with other regions of the world. Inadequate supervision
of financial institutions and lack of adequate disclosure by the corporate world further
worsened the situation. Weak governments lacked the political autonomy or will to enact
the deflationary policies necessary to reduce current account deficits and domestic asset
bubbles. They also contributed to the cronyism and ethical problem that encouraged over
borrowing, over lending, and over investment in the private corporate sector as well as in
state projects.
2. Overvalued Exchange Rate & Openness of Capital Account
Overvalued exchange rates tied to an appreciating U.S. dollar led to large current account
deficits and inadequate or declining long-term capital inflows. This resulted in heavy
dependence on short-term external debt and the depletion of foreign exchange reserves.
The Opening up of Capital Account led to local financial institutions over borrowing
more from foreign sources. All this made currency devaluation inevitable and attracting
speculators eager to benefit from it. Borrowed Short-Term funds were invested in the
Stock market and in Real Estate. The overall quality of investments declined with
reduction investor confidence which was a result of bad news that the export market had
slowed down.
The Role of IMF
The IMF was called in to provide financial support for three of the countries most
seriously affected by the crisis: Indonesia, Korea, and Thailand. The strategy to address
the crisis had three main components;
Financing
Some US$35 billion of IMF financial support was provided for adjustment and reform
programs in Indonesia, Korea, and Thailand, with the assistance for Indonesia being
augmented further in 1998-99. Some US$85 billion of financing was committed from
other multilateral and bilateral sources, although not all of this financing actually
materialized.
Macroeconomic policies
Monetary policy was tightened to halt the collapse of the countries' exchange rates--
which went well beyond what might have been warranted by fundamentals and to prevent
currency depreciation.
Structural reforms
Steps were taken to address the weaknesses in the financial and corporate sectors. Other
reforms were intended to alleviate the social consequences of the crisis and set the stage
for a resumption of growth.
Effect of Asian Financial Crisis on Pakistan
Pakistan’s economy has been under strain due to excess demand pressures that have been
building since 2004. The combined effects of global food, fuel and financial crisis took
quite a toll on the economy as the current account balance and fiscal deficits increased,
inflation surged and growth slowed. Fortunately, strong corrective actions have been
taken over the past few months including an IMF program in November that is helping
stabilize the Pakistani economy. Macroeconomic imbalances are showing signs of
improvement while inflation is easing. But economic growth has taken a hit, with growth
slowing down from 7.3 percent during 2004-07 to 5.8percent in 2008 and projected to
slide to around 3 percent in 2009. The scope for counter cyclical fiscal policy is limited at
this time, but Pakistan is taking measures to protect social spending to help reduce the
adverse effects of the crisis on the poor.