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The purpose of our paper “A closer look to Southeast Asian financial crisis in 1997 and the lessons for Vietnam” is to analyze the causes and consequences of the East Asian financial and currency crisis with the view to discovering whether intrinsic instabilities in the international capital markets helped either set it in motion or deepen the crisis, particularly in Thailand, Malaysia, Indonesia, the Philippines and Korea, from which lessons and recommendations for Vietnam to deal with upcoming financial crises are withdrawn.
FOREIGN TRADE UNIVERSITY FACULTY OF FINANCE AND BANKING International Finance Essay A CLOSER LOOK TO SOUTHEAST ASIAN FINANCIAL CRISIS IN 1997 AND THE LESSONS FOR VIETNAM Lecturer: PhD Mai Thu Hien Students: Tạ Đình Việt Anh – 1214150010 Nguyễn Hải Anh – 1212150008 Chu Minh Lan – 1217150068 Nguyễn Khánh Linh – 1217150070 Hanoi, November 12th 2015 TABLE OF CONTENTS 2|Page INTRODUCTION After years of economic stability, various Southeast Asian countries experienced their currencies under pressure in 1997 as an effect of the appreciation of the dollar against the Yen A number of Southeast Asian countries had maintained a currency peg against the US dollar and experienced a deteriorating current account position as well as an increasing foreign debt burden in the process (Dornbusch, 1998) To almost all observers, these developments came as a surprise The 1997 crisis was largely unexpected Warnings of fragile financial systems in the region seem to have been few and appeared at a time when the crisis had almost been under way already Therefore, The East Asian financial crisis is remarkable in several ways The crisis hit the most rapidly growing economies in the world and prompted the largest financial bailouts in history It is the sharpest financial crisis to hit the developing world since the 1982 debt crisis It is the least anticipated financial crisis in years (Radelet and Sachs, 1998) Few observers gave much chance in early 1997 that East Asian growth would suddenly collapse The crisis has also raised serious doubts about the International Monetary Fund’s (IMF’s) approach to managing financial disturbances originating in private financial markets From the aforementioned features, the purpose of our paper “A closer look to Southeast Asian financial crisis in 1997 and the lessons for Vietnam” is to analyze the causes and consequences of the East Asian financial and currency crisis with the view to discovering whether intrinsic instabilities in the international capital markets helped either set it in motion or deepen the crisis, particularly in Thailand, Malaysia, Indonesia, the Philippines and Korea, from which lessons and recommendations for Vietnam to deal with upcoming financial crises are withdrawn The structure of our research is divided into two main parts The first part focuses on the causes, occurring and consequences of the East Asian crisis on several Southeast Asian countries including Thailand Malaysia, Indonesia, Philippines along with Korea and Hong 3|Page Kong This part also analyses the solution to escape from this financial crisis of such countries The second part of our paper draws lessons learnt from this crisis so that countries may have appropriate methods to prevent and handle similar crises in the future We also suggest several recommendations for Vietnam from this crisis to better the financial market and risk management in the last part of our paper 4|Page I A closer look to Southeast Asian financial and currency crisis in 1997 Causes of the crisis 1.1 Subjective causes 1.1.1 Week macroeconomic foundation and imbalanced economic growth Assessing the developing level, though different, but overall Thailand and some Southeast Asian countries’ economies saw an overheating economic growth at the average rate of 7.5-8% in the previous years which latently signaled the imbalances leading to the financial crisis First of all, the inner imbalance was exposed through the contradiction of the rapid growth rate to put upward pressure on prices due to the growing cost of production and business Thailand's consumer price index rose rapidly, reaching 5.6% in 1996 compared to 3.4% in 1993 The government must, therefore, increase the minimum wage to the average of 8.5%/ year; meanwhile, labor productivity increased on average of only 3% (Jungjaturapit, 2008) This feature happened similarly in Malaysia, Indonesia and Philippines On the other hand these countries had to raise foreign loans to compensate for the domestic shortage in order to speed up the modernization of production and increase the investment in infrastructure 1.1.2 Deficit in current account Except for Indonesia who partly relied on oil export, Thailand and Malaysia both fell into deficit of current accounts at an alarming rate According to analysis of the IMF, if the deficit was above 5% of GDP, the country would be pushed into recession Current account deficit also implied that Southeast Asian economy had been seriously imbalanced From 1995 onwards, deficit of current account in Thailand was 8.1% and 8.2% of GDP in 1995 and 1996 respectively Similarly in Malaysia, the deficit was 9.7% of GDP in 1996 This is the deficit level at which Mexico encountered when crises exploded in 1994 Meanwhile the deficit was of 4% GDP in Indonesia and 3.2 % GDP in Philippines in 1996 (Eichengreen, 1998) 5|Page The main reason causing the situation of current account deficit was that the sharp decline in exports of such countries from 1995 which severely worsened the deficit of current account and balance of payments deficit had forced these countries to borrow short-term loans abroad to offset domestic expenditures 1.1.3 The flow of foreign investment Loose monetary policies and financial liberalization in the US, Europe and Japan in the late 1980s led to an excessively high global liquidity situation Investors in the aforementioned monetary center of the world sought to change their asset portfolio by transferring capital abroad Meanwhile, Asian countries had implemented policies of capital account liberalization Interest rates in such Asian countries were higher than in developed countries Therefore, international capital flows were flowing massively into Asian countries In addition, the promotions of investment and implicit protection of the government for financial institutions also contributed to the situation where Asian companies borrowed money from bank regardless of risks in the while commercial banks also borrowed foreign loans regardless of even higher risks, but mostly short-term debt and non-insurance debt (The phenomenon of asymmetric information leads to adverse selection and moral hazard.) (Stephany and Stephan, 1999) Table – Foreign loans (in percentage of GDP) Thailand Indonesia Malaysia Korea 1991 36.9 65.1 39.9 13.6 1992 36.2 66.4 36.4 14.4 1993 37.1 58.9 38.7 14.4 1994 43.1 57.4 36.9 15.3 1995 42.4 55.8 38.5 18 1996 54 51.8 40.1 23 1997 61 60.9 31.2 28.4 1.1.4 Reluctantly-retained foreign exchange rate If the above issues are the root causes of the crisis then the policies of "pegging" among regional currencies against the dollar creating reluctant exchange rate system was a major 6|Page cause leading to the serial devaluation of these regional currencies Despite the onset of floating of the Thai baht leading to the spillovers effect onto the Philippines Peso, Malaysia Ringgit and Indonesia Rupiah, in fact in some extent, the local currency had already been depreciated confronting the increasing trend of the dollar (Lionel, 2014) In theory, the fixed exchange rate regime under the Bretton Woods system, had positive implications on the stabilization of local currency flow and support economic growth However, if overusing a fixed exchange rate in the context that local currency had been dropped against other strong currencies as well as economic structure was imbalanced it might lead the economy to a greater risk of crisis Back to 1996 when the symptoms of the current account deficit had just appeared, Thailand and other Southeast Asian countries should have implemented the policies to float the domestic currency to return them to their real value, in combination with tightening fiscal policies, the risk of crisis might have undoubtedly been stamped out But instead, the governments of Southeast Asian countries imposed artificially managed foreign exchange rate policies to retain their value so as to attract foreign investment to cover the hole of the current account and inflation Thailand and some Southeast Asian countries had fallen into the Impossible Trinity in economy They had pegged their domestic currencies value to the US Dollar and at the same time allowed the free flow of capital (capital account liberalization) The rapid growth of Southeast Asian economies in the 1980s and the first half of the 1990s had created pressure on increasing value of domestic currency To defend the fixed exchange rate, the central banks in Southeast Asia had implemented loose monetary policies The result of such actions was an upward pressure on inflation due to the increase in money supply Sterilization policy was then imposed to ease the inflation, however, it also promoted the capital inflows into these countries’ economies In the mid-1990s, South Korea had a relatively stable macroeconomic foundation except one issue that the Korean Won’s value constantly rose with the US Dollar’s in the period 7|Page after 1987 This was the main cause of the weakening in South Korea’s current account as prices of Korean export commodities on international markets increased In this context, Korea had pursued a loose pegged exchange rate regime and capital account liberalization (Kim, 2006) Thus, the current account deficit was offset by foreign borrowings of Korean banks that were mostly short-term debts and non-insurance debts 1.1.5 A weak financial system and loss of confidence issue The most costly lesson for each country’s economy was that if they only paid attention to temporary growth without consolidating the whole financial system, the inevitable consequence would be the deficit of state budget, increasing inflation, and sooner or later the economy would fall into crisis Bank financial system is a very sensitive and risky field, in which just an injury could cause a major disturbance in the process of economic regulation Too long maintaining of fixed exchange rate had created gaps in the banking systems of these countries The result of weak banking system was the operational loopholes through which currency speculators took advantage to buy foreign currency loans for profit The appreciation of the Japanese Yen against the US Dollar encouraged commercial banks rush to buy the Yen and then resell them to buy US Dollar to earn the exchange difference The phenomenon of capital loss due to currency speculation had become increasingly serious In order to sustain the growth and fixed exchange rate, commercial banks continued to borrow money from foreign banks which led to a dangerous limit where the debt ratio far exceeded the foreign currency reserves IMF experts said the debt ratio / foreign exchange reserves in Thailand, Indonesia were approximately times, in Philippines was times, and especially Malaysia's foreign currency reserve was at the lowest of 10 billion USD (Pablo, 2000) It was even more dangerous when foreign investors withdrew their investment capital urgently, seeing the instability of the regional economies 8|Page Due to capital losses and non-performing real estate market, a mass of commercial banks in the region had gone insolvent Typically in Thailand, the ten largest banks were on the verge of bankruptcy Domestic and foreign investors began losing their faith which led to the syndrome where a series of capital withdrawal from banks happened had undermined the stock market in these countries After the resignation statement of the Minister of Finance at the end of June, 1997 A Vinavan when the crisis occurred, the business investors’ loss of confidence made Bangkok stock markets fall to the lowest level with only 482.97 points, declined 14.75 points from the middle of such month (Pablo, 2000) The speculators dumped their stocks and transferred money abroad to buy US dollars 1.2 Objective causes 1.2.1 The decline of global trade market and unfavourable changes of the world economy From 1995, the economic growth of industrialized countries decreased leading to the decline in the aggregate demand In particular, these countries were major trading partners who stimulated the superheated growth towards export of Southeast Asian countries The main export products of the region (electronics, fibers, textiles) were facing the risk of the world market’s saturation In 1996, the international semiconductor market fell into a sharp recession; therefore, their prices fell more than 80% IC The Japanese and Southeast Asian Newly Industrialized Countries (NICs)’s electronic products’ sales fell more than 40% on the world market On the other hand, the attractiveness of the Southeast Asia market towards the US and Western European partners were declining comparing to the Chinese, Eastern European and the US Latin market Japan was also in confusion about the large loan contract to the negative fluctation of the financial market area As reported by D.M Green Fell Banks, more than half of Thailand's 70 billion USD banks’ debt was from Japan and mainly was hot borrowing Thus, when interest rates rose, not only the cost of borrowing increased but 9|Page the capital flow into Thailand would also be reduced or reversed and led to a liquidity crisis in Thailand and also pressured the Philippines Peso and Indonesia Rupiah Japan, one of the largest export market of Asian countries, had been stagnant since the early 1990s The Chinese Yuan had been undervalued compared to the US Dollar since 1994 along with many other factors made the export products from China cheaper than the same types of export products in Southeast Asia Meanwhile, the US economy was recovering after the recession in the early 1990s and US Federal Reserve System under the leadership of Alan Greenspan began to raise US interest rates up to curb the inflation This action made the US market become a more attractive investment market than those in East Asia, and therefore attracted lots of short-term capital flows through higher short-term interest rates and US Dollar’s appreciation And because the Southeast Asia currencies were pegged to the US Dollar, the export of such countries became less competitive From the spring of 1996, growth in Southeast Asia's exports dropped quickly, weakening their current account 1.2.2 Simultaneous speculative attacks and capital withdrawals The direct cause of the East Asian financial crisis in 1997 was the simultaneous speculative attacks and capital withdrawals from Asian countries When detecting signs of deterioration of financial-banking system of the region, many foreign speculators had intensified their monetary speculations Many speculators, in total of 2300 private credit funds in the US whose assets were worth of more than 100 billion USD had jumped into the regional market in July and August, 1997 Apart from funds controlled by Soros, there were other credit funds like Tiger, Orbis, PUMAR, Panther and Jaguar They bought the Thai Baht then Philippines Peso, Malaysian Ringgit, Indonesian Rupiah and even Singaporean Dollar at the estimated total of 10 to15 billion US dollars for speculations (Giancarlo et al, 1998) Moreover, the central banks’ foreign exchange reserves depleted made speculative attacks even longer 10 | P a g e not be reduced, providing free medical services to the poor in the state health centers, food supplements for children and pregnant women, etc Foreign debt, bank rates Thailand Malaysia Indonesia Philippines Korea Foreign debt (billion USD) 1996 1997 1998 4,8 5,6 8,1 3,8 2,8 7,0 6,6 11,6 47,0 7,1 7,3 10,3 5,0 9,5 6,7 Bank rates (%) 1996 1997 1998 19,5 -9,1 -9,5 9,5 2,7 10,8 -0,6 43 45 47 23,9 -9,2 2.5 Philippines After the crisis broke out in Thailand, on rd July, Philippines’ central bank has tried to intervene in the foreign exchange market to defend the peso by raising short-term interest rate (overnight lending rate) from 15% to 24% The peso has depreciated seriously, from 26 pesos to eat a dollar to 38 in 2000 and to 40 by the end of the crisis The financial crisis intensified the political crisis related to the scandal of President Joseph Estrada Due to the political crisis, in 2001, Integrated PSE index of the Philippines stock market fell to around 1000 points from a high of 3,000 points in 1997 It involves 20 | P a g e additional peso devaluation The value of the peso was restored only after Gloria Macapagal-Arroyo became president 2.6 Hong Kong On October 1997, Hong Kong Dollar was attacked by speculators The currency US Dollar which is based on the exchange rate 7.8 HKD / USD However, inflation in Hong Kong is higher than in the US This is the basis for speculators to attack Thanks to the massive foreign currency reserves amounted to $ 80 billion at that time equivalent to 700% of the money supply M1, or 45% of the money supply M3, so the Hong Kong Monetary Authority has dared to spend over $ billion to protect its currency The stock market is becoming more fragile From October 20 to October 23, Hang Seng Index fell 23% On 15 th August 1998, Hong Kong raised the overnight lending rate from 8% up to 23% and immediately lift shot up 500% Also, the Hong Kong Monetary Authority started buying the component stocks of the Hang Seng Index to decrease pressure off stocks The agency and Mr Donald Tsang, the then Finance Minister and later as Head of Hong Kong Special Administrative Region, has publicly declared war on speculators The government has bought about 120 billion Hong Kong Dollar (US Dollar equivalent of 15 billion) of securities Later, in 2001, the government sold the securities and gain the profit of about 30 billion Hong Kong Dollar (about billion US dollars) The speculation against the Hong Kong Dollar and the stock market of this country was stopped in September 1998 mainly due to speculators aggrieved by policies to regulate foreign capital flows of the Malaysian government, and by the collapse of the bond market and the currency in Russia Dollar exchange rate anchor between Hong Kong and the US Dollar is also conserved at 7.8: 21 | P a g e The effects of the crisis 3.1 Negative effects The crisis has caused serious macroeconomic influences, including currency devaluation, the stock market crash, property prices in some Asian countries Many businesses went bankrupt, leading to millions of people were pushed below the poverty line in 1997-1998 The countries most severely affected are Indonesia, Korea and Thailand It marked the end of the period of rapid growth, prolonged and relies on foreign sources of w countries in the region, will now move to stage peaceful, prudent and rely on their own strength The crisis caused losses to the Asian country at least US $ 300 billion, with approximately 20% of the GDP of the country in crisis and general damages to $ 500 billion worldwide The economic crisis reduced the living standards of workers (due to inflation) also led to political instability with the departure of Suharto in Indonesia and Chavalit Yongchaiyudh in Thailand Anti-Western Sentiment increased with the harsh criticism against George Soros and the International Monetary Fund Islamic movements and breakaway thrive in Indonesia's central government when it weakens The foreign investor confidence declining, FDI flows into Asia descending, they invest more timid and cautious when investing elsewhere The currency devaluation increased the cost of debt service and debt burden of the company led to mass bankruptcy situation of the real estate bubble burst, banks suffer fall into a pile of bad debts to keep a large amount of assets depreciated and difficult to sell A long-term effects and serious, that is GDP and GNP per capita measured in US Dollar equivalent purchasing power decreases Depreciation is the direct cause of this phenomenon CIA World Fact Book Bench said per capita income in Thailand fell from $ 8,800 in 1997 to $ 8,300 in 2005, down from $ 4,600 Indonesia down $ 3,700, down from $ 11,100 Malaysia down 10,400 USD The crisis not only increases the number of unemployed in the country area (doubled in 1998 in Thailand, South Korea and Indonesia ) but also their trading partners by downsizing imports for terrorist crisis 22 | P a g e The crisis not only spread in East Asia where it contributes to the financial crisis and the Russian financial crisis of Brazil Some countries are not in crisis, but the economy also adversely affected by lower export and by FDI 3.2 Positive effects The Asian crisis in 1997 is not only completely harmful and in a certain extent, it is the first stop to open a new promising phase First, the transition to a flexible exchange rate policy will help the government reduce the amount of foreign currency interventions to keep currency rates as the previous time, help increase national reserves and long term, with the same substance cheap currency will encourage and increase export competitiveness, thereby improving the financial balance of the country Second, many countries like Thailand, Indonesia, Korea, the Philippines will receive the amount of official international credit in large quantities in order to serve the objectives of reform and economic development The crisis helped reorienting and improving investment structure, more healthy national financial system, creating pressure for the business owner must change to adapt to the new situation, to promote the production of new products export competitiveness higher Inefficient expenditures will be cut, the individual projects are encouraged, the process of privatization, reducing the State sector, reduce monopolies and government subsidies are widely promoted, more positive Third, the crisis is an opportunity for the government and people as well as financial institutions complementary monetary policy shortcomings and the institutional elements of human thus creating the momentum built New poles for economic development and social sustainability at the national, regional and international as an organic whole The process of liberalization and globalization will be pushed to a new step, in part because of the economic adjustment program extensively in this direction in the area of countries after "pill of IMF"; partly thanks to the careful preparation and more appropriate than in each country; another part by the appearance of a mechanism to promote and monitor new 23 | P a g e regional, the addition of the IMF and regional financial institutions, as well as a result of the cooperation between regional countries in efforts to overcome the crisis In addition, the impact of the crisis was reflected in the work certain shifts roles and positions of political and economic traditions of the great powers in the region such as Japan, America, Europe as well as the ASEAN itself as a community Solutions to extricate form Southeast Asian financial and currency crisis 4.1 International level 4.1.1 Assistance from international organizations The emergency and tremendous financial support from the international community through the organization, coordination and supervision of the International Monetary Fund (IMF) were extremely important and it had the most powerful and instant effects to conquer the crisis, avoided the widespread disruption and prolonged consequences, both inside and outside of each country The specific ones are the “Programs for emergency relief package” that the IMF has continually deployed to Thailand, the Philippines, Indonesia and South Korea, with the total value of hundreds of billions of dollars The international organizations, for examples, IMF, OECD, also called and implemented plans to strengthen technical and information support and counseling in order to improve the institutional capacity of the country included in the crisis In addition, the IMF added its function through the formation of a new regional monitoring structure, which is more appropriate for Asia 4.1.2 International support The international support was also shown at the agreement between the debtors and creditors on the moratorium, debt swap and debt guarantee to improve the debt situation of the countries in crisis The international assistance is also the ask the large market like the USA, the EU to open the doors for exports of the countries in crisis, in order to help improve the balance trade and their foreign exchange earnings 24 | P a g e 4.2 Regional level 4.2.1 Strengthening regional cooperation From the beginning months when the crisis occurred, the regional countries have offered some ideas to coordinate to create synergy to overcome the crisis These ideas have been concretized by the establishment of regional financial – currency institutions like the Asian Credit Fund, the ASEAN multilateral compensatory bank; or the agreements between the ASEAN Finance Ministers on encouraging the use of the same currency in paying intraASEAN trade transactions on the basis of bilateral agreements, but taken USD as a reference value of exchange rates between currencies In addition, there are other efforts to promote intra-regional economic cooperation in order to alleviate the difficulties caused by the crisis, such as direct exchange line pickup, finishing fast ASEAN Investment Area 4.2.2 The establishment of the ASEAN financial supervision mechanisms One of the causes of the crisis is the weakness of the financial system - banks and the executive management of the economy have not kept up the pace of liberalization, globalization Therefore, to overcome the crisis, ASEAN countries needed to coordinate actions to achieve high efficiency and quickly brought the regional economy recover So ASEAN monitoring mechanism has been formed with the aim to exchange information and discuss the economic situation - financing of the Member States, thereby giving an early warning system to enhance stability macroeconomic and regional financial systems In addition, a monitoring mechanism will also help ASEAN policy proposals and encourage unilateral action or exercise to prevent crises, monitoring and discussing the economic situation - global finance can image awarded to the region and the countermeasures of each country and region 4.2.3 Gradually loosen fiscal-monetary policy In the early days when the crisis broke out, the regional countries urgently adopted temporary solution to prevent speculation and stabilized the currency, reducing the pressure of foreign debt maturity and the withdrawal of foreign capital by primarily 25 | P a g e measures such as raising interest rates, tightening credit, the discipline of financial tightening, exchange controls, closed numerous credit institutions operate inefficiently However, this solution again as counterproductive, making enterprises difficult to access credit funds, increases "thirst capital" of them, directly affects the ability to maintain operations, competitiveness and their ability to repay Meanwhile, the wave of interest rate reduction, anti-deflation, stimulated overall growth launched by the US was supporting the G7 countries and widely responded across the globe have which rate countries in the region should convert into the measures to encourage recovery and growth Interest rates have been reduced, the credit has been easing, tax cuts and financial assistance from the State to the enterprise increased appropriately 4.2.4 Exchange rate Most countries gradually abandon extremist attitudes in dealing with exchange rate issues The fixed rate and floating rigid currency are absolute and cannot lead to the desired goal, which is a stable solid currency base of each country In addition, competitive monetary dumping actions definitely caused damage to other areas and create extremely dangerous spiral devaluation across countries Therefore, this issue is also being reconsidered in earnest at the level of the entire region 4.2.5 Strengthen market principles in business The market principle is increasingly ASEAN countries thoroughly and fully implemented for the operation over the economy Because governments increasingly aware of the risks of deep intervention into business areas causing credit page is brought groundless economic level for companies and government corruption protection and development status extremists a certain industry sectors hurt the domestic market 4.2.6 Promote domestic resources and reduce the prospect of foreign attitude ASEAN waning attitude blame outside, to calm and objective in recognizing, repairing gaps "endogenous" in policy and institutional change ourselves before despatching the 26 | P a g e international situation Moreover, attitudes rely on foreign capital also eased to underestimate the role of internal resources 4.2.7 Awareness attitude market liberalization The ASEAN countries were adjusting perception and liberalization of financial markets, especially the separation of the issue of trade in goods and services from the international flow of capital can be seen as a new development on awareness and practice The countries in the region on the one hand is continuing to promote trade liberalization, on the other hand due diligence over the pace of financial liberalization to match the development of the domestic market and the ability to check government control 4.2.8 Improving and upgrading the investment environment Reconstruct and strengthen the confidence of domestic and foreign businessmen to market is a key area for the recovery and continued growth of each ASEAN country offers as well as the whole area Therefore, these countries is focusing on increasing the financial incentive regime for direct investment; reform of investment procedures; abolished, reducing the limits ownership or exclusive areas reserved for government investment or domestic investment; strengthen human resource training; coordinate create attractive investment climate for the region overall 4.2.9 The role of government - Improve effectiveness and efficiency of macromanagement: Put all the macro-management activities of the State on the basis of market principles and the rule of law, promote anti-corruption, and strengthen democratization socio-economic life of the country - Settlement of disputes for stability and common prosperity: Try to settle the dispute bilaterally and multilaterally, to rise above personal interests, national interests associated with regional interests, protect image of a united ASEAN community, stability and shared prosperity - Strengthen solve social problems: In the context of the crisis, in addition to addressing economic issues, social issues were also ASEAN countries due attention hon.Cac ASEAN countries received that the existence of a large number of 27 | P a g e workers with low wages and rising unemployment forces in terms of social security system has not developed to the threat to stability socioeconomic base Therefore, the budget expenditures for social purposes has been improved II The lessons learned from the financial and currency crisis in Asia Capital flows regulation tools Not coincidentally the two Asian countries less affected by the crisis most financial, China and India, are also the countries that not liberalize capital markets And among the countries that have liberalized capital market, also no coincidence that the best water control the effects of the crisis, Singapore, the water is the best legal system In the absence of control measures, many Asian economies have fallen into the state too dependent on financial resources very volatile from outside - it's short-term loans In late 1996, the East Asian countries had debt of European banks 318 billion, Bank of Japan $ 260 billion and US banks $ 46 billion, mostly in the form of short-term loans - less than year International Monetary Fund (IMF) said in the years prior to the 1997, the liabilities of Thailand accounted for 7-10% of GDP, while total foreign direct investment (FDI) accounted for only % GDP When a crisis occurs, the short-term funds disappear as quickly as appear, because no regulatory tools The need to develop appropriate legal frameworks As well as connecting the small town to the highway without first equipping them roads and appropriate traffic police to monitor compliance with the rules, it would be reckless to open economies of developing countries with international capital markets without building appropriate legal systems and trained staff integrity The banking system with lax oversight in the years preceding the 1997 has led to the excessive development of credit markets in many Asian countries, including Indonesia, Malaysia, Philippines, South Korea and Thailand, scissors according excess investment in some economic sectors The credit excess also leads to wastage, with the race to own the 28 | P a g e world's tallest building in Asian countries as an example Worse, the "excess money" also fueled the growth of the bubble real estate market, which fell back to surplus of credit, as banks lend more than the real value of assets Mortgage The result is that when the "bubble" burst, banks suffer the consequences The banking system with lax supervision allowed banks also have working capital ratio is inappropriate According to data from 1997, Bank for International Settlements (BIS), the Philippines (17%), Hong Kong (18%) and Singapore (19%), this rate is much higher than the international minimum standards The risk of excess capital Governments of emerging economies cannot much to prevent "flooding" because the source of the imbalance in the international financial markets are not under their direct control The Asian financial crisis is not only due to the "negligence" of Asians caused Treasurer of most Asian economies are in balance or surplus, and no inflation The crisis occurred largely due to changes in the pattern of activity of international financial intermediation First, the significant expansion of international liquidity in the 90s has increased competition in the financial services industry worldwide Thus, the CFO must seek higher profits, through venture capital projects The second is the macroeconomic policies of the major economic powers play an important role in the expansion of international liquidity For example, in the US, the budget deficit decreased while the productivity increases have led to lower inflation rate and therefore lower interest rates Nothing surprising Asian capital inflows increase, because interest rates are higher in Asia, while Asian countries find borrowing shall be converted in US dollars or Japanese yen profitable than copper domestic money However, this state of imbalance cannot last The capital increase has increased the pressure on the exchange rate increases, thus exacerbating the trade deficit situation And 29 | P a g e when markets create devaluation pressure, the situation worsened due to the sudden withdrawal of foreign investors Asian financial markets tanked III The lessons learned for Vietnam from the financial and currency crisis of Asia Financial crisis - currency in the region (starting from Thailand and spread to Indonesia, South Korea ), Vietnam has not been drawn into the vortex of the crisis due to the wide open yet and the owner response "stop ahead" But the impact of this crisis is not small in some ways The amount of direct investment abroad registered decline (1997, 5591 million, in 1998, 5.100 million, 1999 was 2,565 million); the amount of capital made in 1998 - 1999 also decreased but less The growth rate of exports, imports plummeted GDP price growth also declined: in 1997 also increased by 8.15%, to 1998 GDP grew by only 5.76%, to 1999 increased by 4.77% only In the corresponding period, industrial growth Construction and services also fell (industry - construction 12.62% down from 8.33% and 7.68%, services 7.14% down from 5.08% and 2.25%) Consumer price growth is also higher (3.6% in 1997, then in 1998 also increased to 9.2%) International visitors were also declines, the amount of remittances in 1997 were also lower 1996 Due to actual crisis, we learned the lessons of Vietnam's economy: In essence, the Asian currency crisis was a foreign debt crisis, particularly private loans and short-term, lead to increased demand for dollars, exceeds supply and the currency devaluation quickly lead to loss creditworthiness So the first lesson is that Vietnam should have a strategy, planning and measures to manage and use foreign loans (ODA, short-term loans and long-term) a most efficient manner, and ensure loan repayment schedule Vietnam should have strict legal framework and management system of strict state control to foreign loans is increasing Foreign loan policies should encourage long-term oriented loans, limited and strictly manage the short-term capital; should be wary of short-term cash movements massively In economic development strategy as well as macroeconomic management, to maintain a relative balance between macroeconomic targets such as inflation, growth, exchange rates, interest rates, budget, balance of trade and balance of payment 30 | P a g e The macroeconomic policies should be operating a flexible, integrated and closely cooperate and complement each other - Selection of a centralized and consistent with the priority objectives in the development process (select regions, industries, products, markets, size of projects and the growth rate) State must have investment-oriented society in a logical structure - Continuing to innovate and open up the economy, building the modern market economy, internationalization of the economy and promote internal strength to growth and sustainable break, coping well with the "shocks" from outside - The deficit of the current account balance is an issue that needs regular attention and take measures to adjust accordingly Experience from countries: Malaysia, Indonesia shows that, although the rate of current account deficit lower than the GDP of Thailand; although foreign currency reserves are relatively large, but also not prevent a chain reaction of financial crises in Thailand - The development of a market economy must go hand in hand with building a strong banking system, which experienced in adjusting monetary policy in market economies - In an effort to promote economic growth and integration with the international financial markets, the expansion of capital markets in each country is essential However, the expansion of the capital market door does not mean completely loose Each country must maintain a reasonable rate: The ratio between domestic capital and foreign loans The ratio between short-term loans, medium and long term while foreign capital call If large proportion of short-term capital stability and fragile not be a problem are extremely sensitive to the domestic money market with negative performance The withdrawal shall simultaneously and massively disruptive factor is the domestic capital market 31 | P a g e The relationship between tenor and object of investment If the loan term is short, but the pharmaceutical investment in real estate, a property market stalemate, the ability to repay overdue debts will be hard and will grow, causing instability in the financial system 32 | P a g e CONCLUSION The novelty of the East Asian financial crises lies in the fact that they were related to nonconventional adverse macroeconomic fundamentals: imprudent financial liberalization, over-indebtedness in short-term liabilities, and excessive domestic investment in manufacturing sectors with excess capacity and in non-tradable sectors The financial crisis in East Asia has not only been disastrous for the economies of countries in this region, but it has also put the global financial system under tremendous stress The asymmetric information analysis of this crisis presented here provides several important lessons First, there is a strong rationale for an international lender of last resort Second, without appropriate conditionality for this lending, the moral hazard created by the operation of an international lender of last resort can promote financial instability Third, although capital flows did contribute to the crisis, they are a symptom rather than an underlying cause of the crisis, suggesting exchange controls are unlikely to be a useful strategy to avoid future crises Fourth, pegged exchange-rate regimes are a very dangerous strategy for emerging market countries and make financial crises more likely The Asian financial crisis may well be a blessing in disguise for the region It has provided an opportunity to review things in a fundamental way And, intellectually, it has put to rest the idea that there are new laws of economic growth that have been uncovered by the Asian miracle Hopefully, what we have learned from this crisis will help us, especially Vietnam avoid repeating the mistakes which have been so costly in this recent episode 33 | P a g e REFERENCES Cao Hongliu, 2000, An Analysis of the Hong Kong Economy after the Financial Crisis Dornbusch Rudiger W., 1998 "After Asia: new directions for the international financial system", Federal Reserve Bank of Boston, vol 42(Jun) Eichengreen Barry, 1998, “Understanding Asia’s Financial Crisis”, Saint John’s University Giancarlo Corsetti, Paolo Pesenti, Nouriel Roubini, 1998, What caused the Asian currency and financial crisis? Part II: The policy debate, Yale University and University of Rome III Jungjaturapit Kuejai, 2008, “Has Thailand Learned from the Asian Crisis of 1997?” Khor Martin, 1999, The economic crisis in East Asia: Causes, Effects, Lessons, Third World Network Kim Kihwan, 2006, “The 1997-98 Korean Financial Crisis: Causes, Policy Response, and Lessons”, the High-Level Seminar on Crisis Prevention in Emerging Markets Organized by the International Monetary Fund and the Government of Singapore Lionel Artige, 2014, “The East Asian Financial Crisis: 1997-1998”, University of Liège Marcus Noland, 2009, The Philippines in the Asian financial crisis : How the Sick Man Avoided Pneumonia, 10 Pablo Bustelo, 2000, The Impact of the Financial Crises on East Asian Regionalism, Group of East Asian Economic Studies Complutense University of Madrid 11 Radelet Steven and Jeffrey Sachs, 1998, “The Onset of the East Asian Financial Crisis”, NBER Working Paper No 6680 12 Stephany Griffith-Jones and Stephan Pfaffenzeller, 1999, “The East Asian Currency Crisis: A Survey of the Debate on its Causes and Possible Solutions” 34 | P a g e [...]... the situation worsened due to the sudden withdrawal of foreign investors Asian financial markets tanked III The lessons learned for Vietnam from the financial and currency crisis of Asia Financial crisis - currency in the region (starting from Thailand and spread to Indonesia, South Korea ), Vietnam has not been drawn into the vortex of the crisis due to the wide open yet and the owner response "stop... control The Asian financial crisis is not only due to the "negligence" of Asians caused Treasurer of most Asian economies are in balance or surplus, and no inflation The crisis occurred largely due to changes in the pattern of activity of international financial intermediation First, the significant expansion of international liquidity in the 90s has increased competition in the financial services industry... was nearly 1.18 times the foreign exchange reserves of the country Thailand has lost the ability to pay foreign debt payments since 1995 Since the beginning of 1997 to March 1997, residents and investors started withdrawing their capital in the form of money out of the banks and financial companies, forcing the government to close down the stock market on March, 3rd 1997 and required all financial institutions... crisis In addition, the impact of the crisis was reflected in the work certain shifts roles and positions of political and economic traditions of the great powers in the region such as Japan, America, Europe as well as the ASEAN itself as a community 4 Solutions to extricate form Southeast Asian financial and currency crisis 4.1 International level 4.1.1 Assistance from international organizations The. .. political instability with the departure of Suharto in Indonesia and Chavalit Yongchaiyudh in Thailand Anti-Western Sentiment increased with the harsh criticism against George Soros and the International Monetary Fund Islamic movements and breakaway thrive in Indonesia's central government when it weakens The foreign investor confidence declining, FDI flows into Asia descending, they invest more timid and. .. package” that the IMF has continually deployed to Thailand, the Philippines, Indonesia and South Korea, with the total value of hundreds of billions of dollars The international organizations, for examples, IMF, OECD, also called and implemented plans to strengthen technical and information support and counseling in order to improve the institutional capacity of the country included in the crisis In. .. institutions to increase cash reserves and announced 10 financial companies active in 12 | P a g e removing abnormal condition (Unico Housing Co.Ltd, Themes- Fuji, Royal International, Sri Dhana, etc.) On March 4th and 5th 1997, over 21.4 billion baht was withdrawn from banks and finance companies On May 14th and 15th 1997, the Thai baht was attacked large-scale speculation In 13 years, the Thai baht exchange... enhance the interests of ASEAN in this period Incidentally on the same day, the Central Bank of the most affected countries by this crisis met in Shanghai in the Executives' Meeting of East Asia and Pacific Central Banks (EMEAP), and failed to give a measure for a new lending arrangement A year earlier, the Finance Ministers of these countries also attended the 3 rd Asia-Pacific Economic Cooperation... to actual crisis, we learned the lessons of Vietnam' s economy: In essence, the Asian currency crisis was a foreign debt crisis, particularly private loans and short-term, lead to increased demand for dollars, exceeds supply and the currency devaluation quickly lead to loss creditworthiness So the first lesson is that Vietnam should have a strategy, planning and measures to manage and use foreign loans... Markets Organized by the International Monetary Fund and the Government of Singapore 8 Lionel Artige, 2014, The East Asian Financial Crisis: 1997- 1998”, University of Liège 9 Marcus Noland, 2009, The Philippines in the Asian financial crisis : How the Sick Man Avoided Pneumonia, 10 Pablo Bustelo, 2000, The Impact of the Financial Crises on East Asian Regionalism, Group of East Asian Economic Studies ... “A closer look to Southeast Asian financial crisis in 1997 and the lessons for Vietnam” is to analyze the causes and consequences of the East Asian financial and currency crisis with the view to... Crises on East Asian Regionalism, Group of East Asian Economic Studies Complutense University of Madrid 11 Radelet Steven and Jeffrey Sachs, 1998, “The Onset of the East Asian Financial Crisis ,... unemployment in times of crisis Thailand Malaysia Indonesia Philippines Korea 16 | P a g e Economic growth (%) 1996 1997 1998 6,7 -0 ,4 -8 ,3 8,2 7,0 2,0 7,8 4,6 -1 3,7 5,8 5,2 -0 ,5 7,1 5,5 -5 ,8 Unemployment