AFC Flashcards
When did the ASEAN free trade area become active, and what did it mean?
1993, committed asean members (Philippines, Thailand, Singapore, Indonesia, Malaysia, Brunei) to reducing trade barriers with each other
When did Vietnam join ASEAN
1995 (after doi moi)
How did the more developed countries view the emerging SEA market
- Huge potential for production of goods due to untapped young labour market and low labour costs
2 market for the export of western or jap or Korean products
Who were the 4 worst affected southeast Asian economies
- Indonesia
- Malaysia
- Thailand
- Philippines
How did the net capital inflow/outflow of the 4 worst affected economies of the AFC change from 1996 to 1997
Net inflow of 93 billion reversed to net outflow of 12billion
How did the growth rate of Thailand change from the AFC (from 1996 to 1997 to 1998)
6.4% growth in 1996 to 0% in 1997 to -8% in 1998
How did the growth rate of Indonesia change due to the AFC (from 1997 to 1998)
8% in 1997 to -15% in 1998
When and what signalled the start of the AFC
2nd July 1997
- Thai govt announced weakening of the baht to USD (after attempts to defend it that cost 15 billion0
- signal of the inability of the Thai government to maintain value of baht
On the day of the announcement that signalled the start of the AFC, by what percentage did the Thai baht fall by
16%
What was the rate of depreciation of the Indonesian rupiah and Thai bhat from 1997 to 1998
84%, 55% respectively
What were the exact causes of the AFC (6)
- Financial liberalisation without supervisory and regulatory capacities
- Negative impact of financial policies on growth
- Over dependence on foreign short term loans and NPLs
- Weakness in industrial strategy
- Crony capitalism
- Investor psychology, speculation, contagion effect
What were some forms and side effects of financial liberalisation without supervisory and regulatory capacities (4)
- Offshore borrowing
- Facilitated inflow of foreign capital and investment - not channeled to productive use
- Increase in number of banks - hard for oversight
- Increased potential for corruption
What were the negative impact of financial policies on growth (2)
Fixed exchange rate:
- implicit guarantees of exchange
- stimulated foreign borrowing in fixed-income securities with short maturities e.g. bonds
- foreign exchange risk incurred (volatility of forex currencies)
- 1995: usd appreciated - sea currencies also appreciated, loss of competitiveness, implicit hedging decreased
- SEA had to maintain peg, but decreased exports made it harder
High domestic interest rates:
- attracted foreign investment, encouraged foreign borrowing - not hedged against forex risk
In 1977, what percentage of outstanding loans to Thailand, Malaysia, and Indonesia were short term
66% (Thailand), 59% (Malaysia), 56% (Indonesia) respectively
By 1996, which countries had current account deficits
All 4 of the most affected economies (Thailand, Malaysia, Philippines, Indonesia)
What was the underlying reason behind the misallocation of resources on a large scale pre AFC
Cronyism
- governments had the vested interest and power to prevent some companies from being liquidated
- stems from unsound financial management
What were the 2 largest problems that the Thai economy faced pre AFC (right before)
- currency appreciation -> CA deficit could not be ratified
- property bubble that was on the edge of bursting
Explain the property bubble in Thailand pre AFC
- caused by economic boom of 1980s-90s
- prices of office spaces rose
- investment into property market rose, demand rises further
- borrowed funds used for property investment
- supply for property increased -> oversupply
- prices fell, property developers unable to pay back loans
In 1996, what percentage of all commercial loans in Thailand went to property
20%
Who defaulted a massive property loan of what amount in Thailand
Somprasong land
3.1 billion loan
Why did retail and institutional traders short the baht pre AFC
Growing USD denominated debt -> anticipation of big bear market
What compounded the declines in the property and stock market during the AFC
International capital moving out of the SEA countries during AFC
How much left the Asian markets due to domestic elites fleeing in the 1st year
200 billion
How much did the Bank of Thailand spend to defend the currency
6.8 billion forex reserves initially, 23 billion to defend forward positions
By October 1997, how much had the baht fallen by
60%
How did the Thai government resolve the AFC and prevent further ballooning
Chuan leekpai: complied with IMF rescue package after some decision paralysis
Explain the contagion effect
- Thai’s crisis led to a reevaluation of neighbouring countries by investors and their fundamentals
- saw similar symptoms, so shorted the rest of them as well (institutions that were high lev. and poorly regulated
How did Indonesia address (or did not) address the AFC
Indonesia government lacked resolve in clearing cronyism, currency slide worsened
What factor laid the foundations for the AFC
Governments and their policies - left them vulnerable internally and externally
