The 1997 – 1998 The 1997 – 1998 Asian Financial CrisisAsian Financial Crisis

Spill over effect on the United StatesSpill over effect on the United States

Nguyen Manh Linh Vietnam

Sukkasem Lomathmanyvong Laos

Wang Xiang China

Andi Riza Indonesia

ObjectivesObjectives

THE MAJOR CAUSES OF THE CRISIS

SPILL OVER EFFECT ON SPECIFIC COUNTRY: United State of America

General OverviewGeneral Overview The most important effects of the Asian crisis on the

US economy worked through international trade: In 1996, US trade with East Asia accounted for 30% of export,

and 40% of import of goods

In 1997 export of good and service to East Asia represented 11.9% of U.S. GDP (only 4.8% in 1960)

Capital transfer, Investments

Asian financial crisis exerted mixed effects on US employment and economic activities, depressed some sectors and stimulated other sectors

Reduced export ( by 12% in 1998 !)

Increased Import

Domestic demand boosted (lower commodities price)!

Lower interest and inflation rates !

Access to financing in AsiaAccess to financing in Asia

Companies in Asia tend to rely more on bank borrowing than on issuing bonds or stocks

Government preferred development financial baking system with banks => can control and regulate who access to loan.

Well-connected with bank and government tend to have best access to financing

Private sector debt and poor loan qualityPrivate sector debt and poor loan quality

Borrowed short-term loan for long term projects like infrastructure and real estate development.

Type of borrower has shifted away from the government and central banks to banks and non-bank private sector

Exchange rate fluctuate only within narrow band and has been aligned with dollar

Maturity DistributionMaturity Distribution

PhilippinesIndonesia SouthKorea Thailand Taiwan

0

10

20

30

40

50

60

70

80

90

(Proportion of loans with maturity one year or less at the end of 1996)

6268

84

6550

Causes of the crisis (1)Causes of the crisis (1)

Inadequately development financial services sector

Lack of control and sufficient regulations in capital market

Close alignment between the local currency and US dollar

Causes of the crisis (2)Causes of the crisis (2)

Weakening Economic performance and balance of payment difficulties

Currency speculation

Technological changes financial market

Lack of confidence in the ability of the governments in questions to resolve their problems successfully.

Why United State ?Why United State ?

American is major investor in the region

Financial market is interlink and U.S financial market is most efficient one

The currency turmoil effect the U.S. imports, exports and value of US dollar

US activities in IMF: Funding and legislative issues in operation

Spill over mechanism (1)Spill over mechanism (1)

Macroeconomic level

Economic growth

Flows of trade

Capital flows

Exchange and interest rates

Spill over mechanism (2)Spill over mechanism (2)

Microeconomic level on each industry

Competition

Price

Demand

Business opportunities

Revenues and profits of firms

MACROECONOMIC MACROECONOMIC PERSPECTIVESPERSPECTIVES

Macro Economic Macro Economic performance indicatorsperformance indicators

GDP growth rate Export/Import Capital flows Inflation/Consumer price index Interest rates Exchange rates

Devaluation of currenciesDevaluation of currencies

10014

0

2000

4000

6000

8000

10000

12000

1996 1997 1998 1999 2000

3.92

2

2.5

3

3.5

4

4.5

1996 1997 1998 1999 2000

MalaysiaIndonesia

Devaluation of currenciesDevaluation of currencies

41. 36

20

25

30

35

40

45

1996 1997 1998 1999 2000

40. 89

20

25

30

35

40

45

50

1996 1997 1998 1999 2000

PhilippinesThailand

682.1911.9

-229.8-400-200

0200400

600800

10001200

1990 1992 1994 1996 1998

Export Import Balance

Trade BalanceTrade Balance(Billions U.S.Dollar)(Billions U.S.Dollar)

Current AccountCurrent AccountAsian countries group is third trade partner

of United States after EU and Japan

1

-2.5

3.2

-5

-3

-1

1

3

5

1986 1988 1990 1992 1994 1996 1998 2000

Per

cen

tage

of

GD

P

EU USA Japan

-7,041.70

-10,043.00-8,197.80

-14,000

-12,000

-10,000

-8,000

-6,000

-4,000

-2,000

019

93

1994

1995

1996

1997

1998

1999

Indonesia Malaysia Thailand

Trade deficit betweenTrade deficit betweenUSA- AsiaUSA- Asia

Million $

Why steady deficit …?Why steady deficit …?

Slowdown of Asia economies => Less demand for export

Drop in value of Asia currencies and appreciation of U.S.

Dollar => raise cost and price for export and decrease

those of import.

High unemployment rate in many Asia countries => Very

low wage for many labor intensive export

Surplus in capital account implied an rise in the deficit in

current account

FDI in United States FDI in United States (Millions $)(Millions $)

109, 264

193, 375

0

50, 000

100, 000

150, 000

200, 000

250, 000

300, 000

1993 1994 1995 1996 1997 1998 1999

Interest Rate Interest Rate

8.358.44

4.85.36

0

2

4

6

8

10

1994 1995 1996 1997 1998 1999

Pri me rate charged by banksOne year treasury bi l l

Interest rate Interest rate

Less demand for lending abroad Shift liquid capital from troubled Asia to

invest in United states Encourage domestic borrowing Steady grow of domestic home construction

and vehicle sale (deposit selling) Positive effect for economic growth !!!

Consumer Price IndexConsumer Price Index

1.6

2.3

0

0.5

1

1.5

2

2.5

3

3.5

1994 1995 1996 1997 1998 1999

Lower inflation Lower inflation

Low price of goods as result of competion between domestic and export one

Low price of oil because of falling demand

in Asia of oil and other commodities

Higher purchasing power

Inflation RateInflation Rate

1.88175818

1.000860669

0.501206609

-1

0

1

2

3

4

5

6

1986 1988 1990 1992 1994 1996 1998 2000

Per

cent

age

EU USA Japan

Oil Price at Crisis PeriodOil Price at Crisis Period

Fallen 30% to end of 1997

10

15

20

25

30

35

Jan-92

Jan-93

Jan-94

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Do

llar

s p

er B

arre

l

Down price

United States Personal IncomeUnited States Personal Income( Per Capita )( Per Capita )

25,93227,195

0

5,000

10,000

15,000

20,000

25,000

30,000

1993 1994 1995 1996 1997 1998 1999

Blessing… or Curse…(1)Blessing… or Curse…(1)

Forecaste U.S. Economic grown with slowdown pace

from 3.8% in 1997 to 2,5% in 1998:

Losess in loan and financial intrument in troubled Asia

Steady deficit in balace of trade

Bad status of U.S. subsidiaries and direct investment

projects in Asia

Contribution of the States to IMF to deal with the crisis

(1.8 billion of U.S. Dollar)

0.027

0.044

-0.025

-0.04

-0.02

0.00

0.02

0.04

0.06

0.08

1986 1988 1990 1992 1994 1996 1998 2000

Ann

ual g

row

th r

ate

EU USA Japan

Real Growth Rate of GDPReal Growth Rate of GDP

Blessing… or Curse…(2)Blessing… or Curse…(2)

In fact, there is positive effect. The grown rate up to 4.2%

in 1997 from 3.6% in 1996 and continuosly raised to 4.3%

in 1998:

Increase capital inflow

Eased the upward pressure on U.S. interest rate

Encourage domestic business grow

Economies of Asia countries are more open

Opportunities to takeover companies with bad financial

condition in Asia

S & P 500 IndexS & P 500 Index

1,229.20

970.4

0

200

400

600

800

1000

1200

1400

1600

1990 1992 1994 1996 1998

MICROECONOMIC MICROECONOMIC PERSPECTIVESPERSPECTIVES

Major sectors affected (1)Major sectors affected (1) Creditors and investors in Asia suffered loses:

U.S. bank, pension funds, and investors suffered loses

Exporters to Asia faced declining demand: U.S. makers of major export items (heavy equipment, aircraft,

manufacturing machinery and agricultural commodities)

Producers of commodities used in the manufacture of products in Asia: e.g. chemicals, cotton,copper, and rubber

Businesses competing with import from Asia faced increasing competition and downward pressure on prices: e.g. automobiles, apparel, consumer electronics, steel, etc.

Major sectors affected ( 2 )Major sectors affected ( 2 ) Labor engaged in manufacturing competing products

hurt by Asian depreciation

Businesses that sell import from Asia gained opportunities: distributors and retailers of products from trouble Asian

economies (e.g. Korean automobile dealers)

U.S. MNCs seeking market access in Asia, particularly

in financial sectors gain opportunities: lessened entry barriers acquisition of existing firms that needed restructuring and

recapitalization at relatively low prices

Major sectors affected ( 3 )Major sectors affected ( 3 )

U.S. MNCs with manufacturing subsidiaries in Asia

faced difficulties and stagnation:

60% of their output is sold in the region, local sales stagnated

excess capacity

rising costs of import in countries with depreciated currencies

falling price of finished export to U.S. and other hard currency

markets

Industries that use components from Asia benefit on

lower costs of production

Implication of The Asian crisis Implication of The Asian crisis for the U.S Economic Sectorsfor the U.S Economic Sectors Sectors reviewed:

Financial Agriculture High-tech Textile Steel Paper

Claims on Asian Countries by Claims on Asian Countries by United StatesUnited States

18%

8%

13%

11%

17%

33%

Indonesi aSouth KoreaMal aysi aPhi l i ppi n e sTai wanTh a i l a n dailand

Financial sectorFinancial sector

Citicorp:– Net income dropped from $224 m in 1996 to 218 m in

1997 J.P. Morgan:

– Reported NPL of $587 m of its total $5.4 billion in loan, swaps, and debt investment in Indonesia, Thailand and S. Korea

– Considered about 60% of its allowance for creditr losses of $1.08billion to be related to exposures in these three countries

Hi-Tech industry (1)Hi-Tech industry (1)

Financial crisis caused U.S. high-tech exports to decline nearly 3%, or $3.6 billion, in the first nine months of 1998 (Source: American Electronics Association, AEA)

Export activity was slowest in the third quarter, contrasted against the first half of the year, when exports were down only 0.5%. Compared to the third quarter of 1997, exports

were off 8%, the AEA said. U.S. high-tech merchandise exports decline first time in this

decade (William T. Archey, AEA president and chief executive)

Hi-tech industry ( 2 )Hi-tech industry ( 2 ) For the first nine months of 1998:

Electronics exports to Mexico grew nearly 10%, or 1.2 billion, the largest dollar gain.

China bought 40% more electronics goods from the U.S., an increase of $612 million.

Exports to Europe and Canada, two major U.S. high-tech export destinations, grew 2.5% and 1.8% respectively.

Electronics exports to Brazil, the United States' largest South American trading partners, were down nearly $500 million in the first nine months. Exports to South America as a whole increased 1% during the period.

U.S. high-tech exports to Asia, excluding China, were off nearly 15% for the nine-month period. Electronics exports were down 70% to Indonesia; 33% to Korea; 26% to Thailand; and 13% to Japan.

AGRICULTURE (1)AGRICULTURE (1)Why the Asian Crisis influence on U.S. Agriculture ? Changes in exchange rates of currencies relative to the U.S. dollar made U.S. agricultural products more expansive

Dramatically slower income growth and actual drops in income lowered

the purchasing power of Asian consumers

The international financial bailouts of some Asian countries required

change in trade policies

Economic problems in Asia are a drag on economic growth elsewhere.

this affects demand for farm goods in all markets, not just in Asia

AGRICULTURE (2)AGRICULTURE (2)

There are two effects in the U.S. agriculture :

- First, quantities shipped to Asia decline

- Second, the dollar prices of agricultural commodities

are lower than they would have been in all markets

In 1998, exports from U.S. to Canada and Mexico actually

increased over this period, however, in Asian markets we see

the dramatic impacts of income losses and exchange rate

declines

7.2Wine & beer-41.4Malaysia +0.4

Processed fruits & vegetables-23.4Thailand

8.1Nursery & cut flowers-41.1Indonesia-3.9Tree nuts-17.9Philippine0.8Fresh vegetables-4.2

United Kingdom

-12.5Fresh fruits-9.9-5.4Cotton-16.5China-2.0Dairy products-12.8Hong Kong-4.7Red meats (fresh/frozen)-19.8Netherlands-34.5-31.2Taiwan-13.7Feeds & fodder-22.1Korea-16.5Coarse Grains18.9Mexico29.6Rice3.3Canada-9.6Wheat-13.7Japan-9.5Agriculture Total-9.5World Total% changeCommodity % change markets

1999 U.S. Agricultural Exports Valued in 1998 Compared with 1997

TEXTILETEXTILE INDUSTRYINDUSTRY (1)(1) Prior to Asian crisis, the U.S. textile industry has proven itself a

global competitor, developed innovative new products and

dramatically expanded its export base

In 1997-1998, the currencies of almost all the major textile

exporting countries in Asia collapsed, causing a shock wave of

artificially low priced textile products to hit the U.S.

The results is U.S. textile products have plummeted since 1997,

U.S textile profits have evaporated, and last year, turned sharply

negative

Textile fiber consumption is down almost 30% since the

Asian crisis began

TEXTILE INDUSTRY ( 2 )TEXTILE INDUSTRY ( 2 )

Over the last 12 months, the U.S. textile crisis has intensified

as Asian currencies have continued to fall :

- over 100 textile plants in the U.S. have been closed

- textile industry employment was down nearly 60,000 , or

more than ten percent of the U.S. textile workforce

- In year 2000 was the first annual loss for the textile

industry in the more than 50 years

STEEL INDUSTRY (1)STEEL INDUSTRY (1) One of the most productive and cost effective in the world:

invested more than $35 billion in new plant and equipment since

1995 – far more than any other nation.

Labor productivity has increased by 174% since 1980.  During the

same time period, real wages (adjusted for inflation) for American

steelworkers have remained stagnant

Steel is still the backbone of industrial America: Nearly 2 million Americans are directly and indirectly employed

by the steel industry.

Key steel-consuming industries employ 6 million U.S. workers,

representing nearly 15% of the GNP.

STEEL INDUSTRY ( 2 )STEEL INDUSTRY ( 2 ) 14 steel companies have filed for bankruptcy since the crisis began in

1997.

By the end of 1998, the industry was operating at less than 65% of its capacity – the lowest operating level in more than 14 years.

Steel imports, which totaled less than 16 million tons in 1991, more than

doubled in 10 years to an annual total of nearly 39 million tons in 2000.

Prices for steel products have fallen below their low point during the Asian crisis.

More than 15,000 steelworker jobs have been lost since January 1998 – 8,400 in the last six months.

Wall Street has abandoned the U.S. steel industry, driving stock values so low that 40% of our steelmaking capacity could be purchased for just over $700 million – less than 10% of the cost of building new capacity.

PAPER INDUSTRYPAPER INDUSTRY In 1996, Harnischfeger Industries Inc, a paper making

equipment, agreed to sell $600 million of papermaking equipment to Asia Pulp and Paper Company Ltd, as part of that company’s broad expansion plan

But as the Asian Financial crisis swelled, Asia Pulp

and Paper has paid for only two of those machines.

And the other two units are not proceeding

Harnishfeger has lost its sales because of Asian

Financial crisis

CONCLUSIONSCONCLUSIONS

Both positive and negative impacts on United

State economy

Wider effect on specific industries at

microeconomic level

Impact was minor on macroeconomic level

International trade and capital market tied the world together

Sources of Information ?Sources of Information ?

IMF, WB, WTO, ADB websites

CRS Report for Congress

Countries Reports

www.thaieconwatch.com

www.house.gov

www.stern.nyu.edu

www.census.gov

www.usitc.com

www.mof.go.jp

www.harvard.edu

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