Remembering the Asian financial crises
The Asian financial crisis of 1997–98 was the result of a combination of factors.
Though the economic conditions in Nigeria may still be far from the threshold of conditions which sparked the crisis, there is need to more effectively monitor international financial flow and hot money movements to prevent similar occurrence in Nigeria.
In summary, the crisis can be understood as a “crisis of success,” caused by a boom of international lending followed by a sudden withdrawal of funds.
In the early 1990s, there were elements at play in the Asian economy which started the storm. Between 1993-1995, foreign debt-to-GDP ratios in the region rose from 100% to 167% in the four large ASEAN economies. Countries like Indonesia, Thailand and South Korea had large current account deficits financed by hot money flows. Like its currently playing out in Nigeria, hot money in Asia was attracted by high interest rates which the region offered.
The result of relentless flow in funds was that there was a booming economy and booming property markets encouraged expansive borrowing by firms.
But changes in the American economy tilted the equation as the United States increased interest rates in the late 1990s to reduce inflationary pressures which it was grappling with. Higher interest rates in the United States made the East less attractive. As hot money flows into the East Asia dried up, currencies started to fall and governments in the region struggled to keep exchange rates at their fixed level against the US Dollar.
Net private inflows dropped from $93 billion to-$12.1 billion, a swing of $105 billion on a combined pre-shock GDP of approximately $935 billion, or a swing of 11 percent of GDP. Of the $105 billion decline in inflows $77 billion came from commercial bank lending. Direct investment remained constant at around $7 billion. The rest of the decline has come from a $24 billion fall in portfolio equity and a $5 billion decline in nonbank lending.
The result was a region scrambling to save its economy. Thailand was the first to have to float the Thai Bhat, this caused a rapid devaluation, which triggered a loss of confidence throughout the Asian economies. Soon, other countries were forced to devalue as investors wanted to get out of Asian currencies. The devaluation caused debt to be even more difficult to repay and countries started to default. At this stage the IMF intervened to try and stabilise the crisis. However, their intervention has proved very controversial, with many arguing that their intervention made things worse.
According to some analysts, the IMF insisted on fiscal restraint – lower spending, higher taxes and privatisation. This contractionary fiscal policy caused the economic downturn to exacerbate and the economy plunged into recession. Bankruptcies increased and there was a flight of capital.
Economists such as Joseph Stieglitz and Jeffery Sachs emphasised the importance of market sentiment in increasing the magnitude of the problem. The initial problem was containable but because confidence evaporated there was a flight of investors – like a classic bank run causing an unstoppable downward momentum.
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