Asian financial crisis

The Asian Crisis was a period of financial crisis that led to currency devaluation and other events impacting several Asian markets. It began in July 1997 and basically had an adverse impact on the economies of East Asian countries. The crisis began in Thailand as Thailand’s currency Thai baht collapsed after the Thai government was forced to float baht. The baht had been pegged against the U.S. dollar for the past 13 years.  In order to save baht, the Thai government used its foreign exchange reserved to purchase Thai baht. The Thai government also raised key interest rates from 10% to 12.5%, but this measure only added to the misery of the Thai government. Due to the lack of foreign currency to support its fixed exchange rate , the Thai government retaliated by cutting its peg to the U.S. dollar. As the baht depreciated, the Thailand financial crisis swelled up. The Thailand Set stock market index ultimately declined from 787 in January 1997 to a low of 337 in December of that year, with already a 45% decline in 1996.

Thailand, Indonesia and South Korea were the worst affected by the crisis. Philippines, Hong Kong, Singapore, China, Japan and Taiwan were also impacted by the crisis. Because of the Asian crisis, IMF(International Monetary Fund ) made a commitment of $110 billion in short term loans to Indonesia, South Korea and Thailand. As a condition for the loans, IMF imposed two measures on the countries: (i) fiscal discipline and better financial reporting from the banking sector, and (ii) cuts in public spending and higher interest rates. But, economists have argued that the fiscal adjustments made by IMF were unnecessary and strict.

As a result of the Asian crisis, the nominal U.S. dollar GDP of ASEAN fell by $9.2 billion in 1997 and $218.2 billion (31.7%) in 1998. In South Korea, the $170.9 billion fall in 1998 was equal to 33.1% of the 1997 GDP. Many businesses collapsed, and as a consequence, millions of people fell below the poverty line in 1997–1998.

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