Name: Course: Tutor: Date: The Asian Financial Crisis Introduction The Asian financial crisis of the late 1990s which is also known as “Asian Contagion” is one of remarkable disasters to hit major growing economies across the world. Noble and Ravenhill (1) argues that this crisis resulted in one of the biggest financial bailouts that have been recorded in history…
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In addition, the crisis brought doubts on the International Monetary Fund’s (IMF) approach in its efforts to dealing with financial imbalances within the private financial markets. It is also clear that the financial crisis can be attributed to panic of local and foreign investors and its role in enhancing the situation (Noble and Ravenhill 2). The Asian economies were at the height of success due to their fast growth and immense gains on the living standards their populations enjoyed. They were basically experiencing sensible fiscal polies and even high rates in private saving which was enticing to the world. There was no prediction that these countries would ultimately fall suddenly into a deep financial crisis in the post war era. Many questions were raised by economists on the causes of the crisis and whether or not they became victims of their own accomplishment. The abundance success may be one of the reasons that also led to their down fall but it also shows that structural and policy misrepresentations among the countries in this region played a role in the crisis. The 1997 financial crisis is therefore, a combination of many factors including market over response, which led to a drop in exchange rates, property prices, and economic stability (Noble and Ravenhill 2). Causes of the Asian Financial Crisis The financial crisis in East Asian countries began immediately after the huge high savings and vigorous growth they enjoyed. Since the 1980s, this fast growth was followed by high increment in asset values, increasing property and stock prices, and even in some instances a growth in temporary borrowing from oversees. In the mid-1990s, a tremendous emergence of external shocks specifically the devaluation of major currencies largely impacted export returns. This meant a decline in economic growth as property prices increased in most Asian economies. The devaluation of the currencies begun in Thailand after the decline of the Thai Bhat and this made investors to lose confidence in the Asian markets. The events in Thailand forced many investors to reassess their lending and evaluate the robustness of the region’s currency. This led to a huge wave of currency depreciations while stock, asset and market fell starting with Southeast Asian and then followed closely by the entire region. The year that followed the devaluation of the currency, most of the affected currencies fell as low as 35% to 83% against the United States dollar. There were even records of serious fallout as big as 40% to 60% decline against the U.S. dollar and the Asian financial crisis became a reality (Noble and Ravenhill 2). In Southeast Asia, there was record of capital inflows in the major East Asian upcoming economies that grew from 150 billion U.S dollars in the 1980s to 320 billion U.S dollars in the early 1990s. Private companies were doing excessive borrowing form the foreign capital economies mostly for short-term needs instead of looking for long-term earnings for productive security. The main capital inflows were meant for bank loans and even direct immediate foreign investments (Matsumoto 4). The huge capital flows resulted in increase in prices especially for non-tradable goods while the abundant foreign investment caused the currency to appreciate but decreased
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