Causes Of AFC

Question 1

Foundational causes

Answer 1

1) lack of transparency and disclosure
2) premature financial liberalisation
3) weak financial system

Question 2

Short term factors

Answer 2

1) fixed currency rate
2) current accounts deficit
3) over inflated asset prices

Question 3

Trigger

Answer 3

Speculative currency attacks in thailand

Question 4

Contagion

Answer 4

Subsequent currency attacks in other southeast asian countries - malaysia, Indonesia, singapore

Question 5

What is premature financial liberalisation?

Answer 5

• granting banks too much freedom in borrowing and lending decisions
• banks borrow too much from international banks (USA) which have lower interest rates.

Leads to high external debt run and high foreign liability

Eg. Bankok international banking facility (BIBF) in 1993 to facilitate loans from US to thai banks

Question 6

What is lack of transparency and lack of disclosure

Answer 6

• high level of corruption and nepotism. Banks lending to people with connections and high ranking politicians
Eg. Liem groups had its own bank Liem bank to withdraw funds and obtain state line credit
• banks not disclosing bad debt to central bank promptly
Eg. Thai banks could carry bad debt for up to 12 months before disclosing to central bank

Question 7

What is weak financial system

Answer 7

Lack regulatory measures to detect possible financial problems like fluctuating exchange rate
Lack of checks and balances on who banks can lend to. Led to high level of corruption and non competitive provision of funds

Eg. Bankok Bank of Commerce (BBC) which lent to high risk ventures such as to corrupt politicians and stock market speculators.

[OPPOSING CS] : SG’s MAS which had a rate centred monetary policy to detect and manage a floating exchange rate.
+ Corrupt practices investigation bureau (CPIB) to detach corruption in private and public sector

Question 8

Impact of fixed exchange rate

Answer 8

Banks believed fixed exchange rate will remain forever. Eg (1usd =20baht). Borrowed a lot from US banks and expected to pay back same amount.

Banks borrowed a lot of short term loans to lend out. High foreign liability.
Eg. Thailand: 66% of outstanding loans were short term. 59% (indo) 56% (msia)

Did not hedge by maintaining foreign currency as they believed fixed exchange rate will stand.

Question 9

Impact of current accounts deficit

Answer 9

SEA countries had high exports but also high imports due to imports of capital goods like machinery and telecommunication equipment.
Had to borrow to fund high imports

Eg. Current accounts deficit in thaialnd was 8.5% of gdp.

Question 10

Impact of over inflated asset prices.

Answer 10

Property developers predicted a boom in property due to increased migration to urban areas (bangkok) -> led to overvalued properties which deemed the property market to be huggly profitable
Investors and banks lent money to property developers.
High supply of properties led to drop in prices. Many propertues remained vacant. Developers unable to pay back loans

Eg. Somprasong land defaulting on $3.1bil loan. PROPERTY BUBBLE BURST

Question 11

Currency attacks

Answer 11

Currency speculators and investors saw the site state of economy. Predicted thai government will not be able to hold fixed exchange rate for much longer. Eg. $6.8 billion used in first half of 1997 to buy baht using foreign reserves. Drained by june 1997

Baht allowed to float. Baht dropped by 60%. Currency speculators continued profiting from drop.

Question 12

Impact on currency (June 1997 to july 1998)

Answer 12

Indonesia ( drop of 80%)
1usd =2400 to 1usd= 14200

Thailand (drop of 40%)
1usd =24.5 to 1usd = 41

Malaysia (drop by 45%)
1usd = 2.48 to 1usd = 4.88

Philippines (drop by 37%)
1usd = 26.3 to 1usd = 42