In the Asian Financial Crisis of 1997, the IMF Packages (US$) to bail out:
Korea was US$ 57bn (Dec 3, 1997)
Thailand was US$ 17.2 bn (Aug 20, 1997)
Indonesia was US$ 43.0 bn (Oct 31, 1997)
The present financial crisis that started in 2007 in US is spreading globally. It is so much bigger. It has spread to Europe. Will Asia be affected too? Will we be revisited by another financial crisis?
Could it happen again?
The possibility of having another 1997-type crisis continues to create concern among policy-makers. The reason is no other than the disruptive effects of capital flows, especially in the emerging markets.
Statistics will show why such fear still exists. During the Asian Financial Crisis, a crude estimate of private capital that flowed into the five troubled countries of South Korea, Thailand, Indonesia, Malaysia and the Philippines was almost US$ 100 billion in 1996, which was one third of worldwide flows into the emerging markets (estimated at over US$ 295 billion). That was a five-fold increase over the 1990-1993 average.
When it suddenly reversed to an outflow of US$ 12 billion the following year, it had a devastating effect on these economies. Recent statistics from the Institute of International Finance reveal a staggering fact: net private capital flows was at a high of US$ 502 billion in 2006 after a record US$ 509 billion in 2005. The amount in 2007 might be slightly lower, but still well above the level of the heady days of 1990s.
Net portfolio of equity which recorded an outflow of nearly US$5 billion in 2002 reversed to inflows of US$ 39.1 billion in 2004 and to US$69.7 billion in 2006. Imagine what this amount of flows can do to emerging economies if it were to reverse and flow out.
What was seen in 1996-97 in Asian markets was an extraordinary change in confidence, what John Maynard Keynes termed as the "animal spirit". Such reversals in sentiment are quite common, even in developed economies, but the magnitude of such incidents is greater in emerging economies because foreign investors tend to lump them together without differentiating each country.
Even when investors are able to differentiate between the fundamentals, they do not think it is logical not to follow the herd mentality as they may still incur huge losses if they do not do so.
Because of the volatility of foreign capital flows, manoeuvring macroeconomic policies becomes a difficult task for emerging economies. Excess liquidity created by huge inflows tends to cause an increase in interest rates, which in turn attracts more capital into the country.
Another policy-makers' concern over capital flows is related to the devastating socioeconomic and political effects of the Asian Financial Crisis. Economic malaise then caused a rapid increase in suffering and poverty level as millions of people were thrown on the streets without a job.
The current global economic and financial conditions are similar to the situation in the heyday of the late 1990s. Because of massive liquidity induced by extremely low interest rates in some developed countries like Japan and US, particularly during the 2001 recession, global equity and bond markets boomed.
There are of course other reasons. Some countries which are preventing their currencies from excessive appreciation find themselves saddled with huge foreign reserves following huge surpluses in their current accounts.
While some countries try to avoid a build-up in liquidity, some only exercise partial sterilisation through issuance of bonds. As a result, the massive liquidty makes its way into the stock and property markets, causing an asset bubble. Not surprisingly, stock market indices in the US, China and many countries in Southeast Asia hit new historical highs last year. Valuations were rich and in a country like China, and its price-earnings multiples look horrendous.
At the same time, mounting reserves from China and Japan ended up in the US treasury market, causing yields to drop significantly.
Ref:
Malaysian Business July 16, 2007
http://fusioninvestor.blogspot.com/2008/10/usd-596004000000000.html
US$ 600 trillion
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