Productive Efficiency of Chaebols and Non-Chaebol Firms in Korea
Key Points Origins of the crisis Thai Baht Economy of S. Korea and Indonesia The Chaebols ...
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Transcript of Key Points Origins of the crisis Thai Baht Economy of S. Korea and Indonesia The Chaebols ...
Key Points
Origins of the crisis Thai Baht Economy of S. Korea and Indonesia The Chaebols Beginning of the collapse Seoul Stock Exchange Default and bailout IMF response
Origins of the Southeast Asian Financial Crisis Thailand
Fixed exchange rate to the US dollar
Easy credit from Western and Japanese banks
Massive foreign debtHuge real estate bubbleReal GDP grew at 9% a year
from 85 to 96
Thai Baht
○ Pegged at 25 baht to $1 USD May 1997 – Investors started to short
the baht June 1997 – Baht was forced to float Devalued to 56 baht per $1 USD by
early 1998
Consequences
Housing bubble burst Resulted in massive
layoffs in finance, real estate and construction
Stock market plunged by 75%
$17 billion bailout package from IMF Subject to IMF conditionality
Economy of South Korea
11th largest economy at the time Dominated by chaebols
Multinational conglomerates
Implicitly backed by the government
The Chaebols
Aggressive expansion to compete with Western MNC’s
Led to overleveraging and negative returns Banks were burdened by non-performing
loans
Beginning of the Collapse
July 1997 – Kia Motors asked for emergency loans from the government Was later absorbed by Hyundai
Daewoo collapsed and was sold to General Motors
Moody’s lowered South Korea’s credit rating from A1 to A3 then to B2
Seoul Stock Exchange
Dropped 30% in November 1997 Massive capital flight Korean won lost half its value to the dollar from
1997 to 1998
Default and Bailout
Korea was about to default on its foreign debt Korea was given $55 billion in new loans and
credits by the IMF It was the largest bailout in history up to that point.
IMF response
Structural Adjustment Programs Reduce government spending Let insolvent financial institutions fail Raise interest rates Restore confidence in the currency
Who’s to Blame?
Most Koreans blame the IMF for the crisis and refer to it as the IMF crisis
Was the IMF truly to be blamed?
Indonesia: Country in Southeast Asia and Oceania 17, 508 islands, 6,000 are populated Area-742,050 sq mi Population around 230 million World’s 4th most populous country Capital city-Jakarta
Republic of Indonesia
Economy of Indonesia
Largest economy in Southeast Asia GDP: US $932.1 billion Member of G-20 major economies Market-based Over 164 state-owned enterprises
Beginning of the collapse Depreciation of rupiah
Rp 2,600/$1 (Aug 1997) fell to 11,000/$1 (Jan 1998)
Public debt reaching $60 bn USD Real GDP contracted by 13.7% Inflation of 77% in 1998
Initial Response
Float the rupiah Raise key domestic interest rates Tighten fiscal policy
IMF Response
Rescue package of $23 billion Financial sector restructuring Stabilizing the rupiah
Retention of a tight monetary policy Flexible exchange rate policy
Source: International Monetary Fund - 2009 World Economic Outlook
Source: International Monetary Fund - 2009 World Economic Outlook
Questions?