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The Asian Financial Crisis — 1997 to 2000

Contagion Across Asia in 1997

Explain why investors pulled money out of the Philippines, Malaysia and Indonesia in 1997, how the pressure reached Korea, and why the Philippines came through better.

Before you start

What you'll be able to answer

  1. Why did investors pull money out of Thailand's neighbours too?
  2. How did the pressure reach Korea by the end of 1997?
  3. What happened to the money flowing into Asia, and why did the Philippines come through better?

Where this sits

The Asian Financial Crisis — 1997 to 2000 · this module is lit

  1. 2 Jul 1997Thailand stops holding the baht at a fixed rate to the dollar and lets it float
  2. 14 Aug 1997Indonesia lets the rupiah float
  3. 20 Aug 1997The IMF approves a loan of about $3.9 billion for Thailand
  4. Nov 1997The IMF approves a loan of about $10.1 billion for Indonesia
  5. Nov 1997Indonesia closes 16 banks
  6. 4 Dec 1997The IMF approves a loan of about $21 billion for Korea
  7. 24 Dec 1997Korea's programme is speeded up
  8. 21 May 1998President Suharto of Indonesia resigns
  9. Aug 1998A crisis in Russia spreads panic beyond Asia
  10. 1-2 Sep 1998Malaysia brings in rules on money leaving the country
  11. 1999Growth returns in most of the region

On 11 July 1997 the Philippines loosened its hold on the peso

On 2 July 1997 Thailand let its currency, the baht, float: the market, not the central bank, would now set its price. Traders began selling the Philippine peso at once. Nine days later the central bank of the Philippines widened the band, the range within which it held the peso against the US dollar, and did not say how wide the new band was. Indonesia widened the band for its rupiah the same day. Contagion, trouble spreading from one country to others, had begun.

Predict first

In June 1997 one US dollar bought about 26 Philippine pesos. By January 1998, how many pesos did a dollar buy?

Investors pulled money from the neighbours too

Investors who had lent to Thailand looked again at its neighbours. Where they saw the same short-term dollar debts and weak banks, they pulled money out. A short-term debt must be repaid or renewed within months, and lenders can refuse to renew. An account by the International Monetary Fund (IMF), which lends to countries that cannot pay their foreign bills, says the crisis spread to economies that investors believed had similar problems.

The Bank for International Settlements (BIS), the central banks' own bank, adds a sharper point. In its view the first wave came mainly because investors tended to group Indonesia, Malaysia and the Philippines with Thailand, and only partly because their economies were alike. Even before the crisis, share prices in those three countries had tended to rise and fall with share prices in Bangkok from week to week.

Three currencies under pressure in July and August

Within weeks of the float the Philippine peso, the Malaysian ringgit and the Indonesian rupiah came under pressure. The three countries answered in different ways. The Philippines widened the peso's band and, according to the BIS, kept its short-term interest rates high for longer than Malaysia or Thailand did. Malaysia let the ringgit drop rather than spend heavily to hold it, and by the end of July the ringgit had fallen by 4.8 per cent. On 14 August Indonesia let the rupiah float.

Malaysia and the Philippines had one strength that Thailand lacked. Their reserves, the dollars and other foreign money their central banks hold, were larger than their foreign debt due within a year, Malaysia's by a wide margin, according to the BIS's figures.