Exchange Rate Crises in South Asian Currency & World Impact

8/3/2019 Exchange Rate Crises in South Asian Currency & World Impact

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Exchange Rate Crisis

In South Asian Currency

& World Impact


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Exchange Rate Crisis In South Asian Currency & World Impact Project Foreign Exchange MarketTYBFM

INDEX

Khushbu Gosher 11

Kavita Jain 16

Pooja Jadhav 15

Priya Narsale 28


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Summary

During 1998, the world economy has entered a slowdown, which originated in South East

Asia. The Asian Crisis has caused severe economic turbulence in the economies of SouthEast Asia since the summer of 1997. There have been two distinct phases to the AsianCrisis: the first from July 1997 to December 1997, when the first international assistancewas provided, and the second since mid-1998, when the turbulence has spread beyond theregion as Russia, China and Brazil have shown signs of contagion. This crisis wasinitially a financial one as speculation caused funds to drain out of Thai and Koreancurrencies and stock markets. The crisis eventually caused economic growth rates tocollapse in several South East Asian countries.

Even before the summer of 1997, there had been doubts about the sustainability of certaineconomic policies followed by the South East Asian countries, especially the policy ofunofficially fixing their exchange rates to the US dollar. The appreciation of the USdollar that began in 1995, in particular against the Japanese yen, caused the South EastAsian currencies to also appreciate against third-party currencies. This resulted in lostcompetitiveness in export markets and worsening current account deficits. Manycountries found it increasingly difficult to fund their current account deficits. Eventscame to a head when, following an intense period of speculation in foreign exchange


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markets, the Thai baht was devalued in July 1997. Subsequent speculative attacks anddevaluations followed in Malaysia, Korea, the Philippines, Indonesia, Taiwan andSingapore. The financial crisis severely undermined public finances in a number ofcountries and prompted the IMF to organize a rescue package totaling $112 billion forThailand, Korea and Indonesia. Despite this support, interest rates rose sharply, causing

many companies to become bankrupt as the cost of borrowing rose. Foreign anddomestic investors withdrew funds. The region experienced a collapse in the level ofeconomic activity while the number of bankruptcies and level of private sector debtescalated.

After a period of apparent stability in world markets in early 1998, the crisis was re-ignited in mid-1998 and spread to markets in advanced economies, beginning with Japan.The threat to the rest of the world economy became more obvious to westerngovernments. The repercussions of the financial crisis in South East Asia have led to

falls in export orders, lower equity markets and cancelled inward investment. The crisishas prompted concerns about the health of the international financial system and thethreat of systemic risk. In addition to managing the rescue package, the IMF has playedthe leading role in encouraging change in the South East Asian economies, especially bydeveloping plans to restructure banks. However, the Asian Crisis has also led to proposals for longer-term measures to prevent such events in future. These proposalsinclude agreeing global standards for banking regulation, enhancing the quality ofeconomic statistics and improving the levels of information available to investors inemerging market economies.


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Meaning Exchange Rate Crisis

A situation in which the value of a currency becomes unstable, making it difficult for the

currency to be used as a reliable medium of exchange. The effect of a currency crisis can

be mitigated by sufficient foreign reserves. A currency crisis is a type of financial crisis.

Introduction - South Asia Before TheCrisis

The economies of East Asia at the centre of the recent crisis have been some of the mostsuccessful emerging market countries in terms of growth and gains in living standards.With generally prudent fiscal policies and high private saving rates, these countries had

become a model for many others. That this region might become embroiled in one of theworst financial crises in the post-war period was hardly ever considered - within oroutside the region - a realistic possibility. What went wrong? Part of the answer seemsto be that these countries became victims of their own success. This success had leddomestic and foreign investors to underestimate the countries economic weaknesses.During 1998, it became increasingly apparent that the global economy was headingtowards a period of slower growth, with a quarter of the world economy in recession andworld trade growth set to fall by two-thirds. These trends began with the Asian Crisis.The countries at the heart of the Asian Crisis are the same countries that had, for the previous two decades, shown spectacular economic growth that was the envy of the

world: Korea, Singapore, the Hong Kong Special Administrative Region (SAR), Taiwan,Thailand, Indonesia, Malaysia and the Philippines. Until the advent of the crisis in 1997,these Asian Tigers had been held up to developing nations as prime examples of how toprogress. Any doubts about their economic policies were easily dismissed, given theirspectacular record of economic growth.


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Factors Behind The Asian Crisis

The explanation for the Asian Crisis has been the subject of much argument. There is noeasy consensus to be reached on what lay behind the problems of these afflictedeconomies. As noted in the introduction, not so long ago, many aspects of theireconomies had been thought praiseworthy. It is possible, however, to make a distinction between underlying weaknesses in the South East Asian economies and the initialtriggers that brought events to a head.

A. Underlying Causes of the Asian Crisis

This section seeks to identify some of the underlying factors that made South Asiasusceptible to financial crisis. A number of structural weaknesses in these economieshave been suggested: South East Asias current account deficit, over-inflated asset prices,excess lending, corruption and macroeconomic policy mistakes.

Unsustainable Current Account Deficits

Most of the South East Asian economies in crisis had large current account deficits insome cases exceeding 5% of their GDP. These deficits were financed by attractinginflows of capital from abroad, often short-term capital. Inflows from overseas on such alarge scale were a new phenomenon.

During the 1990s, following financial deregulation and capital liberalization in the West,international institutions began to encourage developing countries to move towards freecapital markets as well. It was particularly welcome in South East Asia, because theforeign capital was ostensibly for investment.

The problem is not that the free movement of capital is a danger for developingeconomies rather that a country could become excessively dependent on foreign short-term capital flows.


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Over-Dependence on Short-Term Foreign Funds

The problem in the South East Asian countries was not merely allowing deleteriouscurrent account positions to build up, but of the form that they took. Driving a large

part of their capital inflows were lending booms, which led domestic banks in anumber of these economies to actively seek foreign funds from the West to financethe lending. The banks were motivated by the prospect of large profits, especiallyas they could take advantage of fixed exchange rates in order to reduce the cost ofthis borrowing. However, as the IMF has noted, the borrowing from foreign sourcesbecame excessive.

The same motives led blue chip companies to borrow excessively from overseas,rather than pay higher domestic interest rates. Even Asian borrowers with sound businesses would raise capital abroad to finance industrial development. Excessive

leverage in financial markets is most often the cause of extreme booms and crashesin South East Asia; the excessive leverage was in foreign liabilities.

South East Asian banks apparently overlooked problems as they were developing,causing the crisis to erupt suddenly. Existing loans collateralized withstock/property assets were already failing. Banks, both domestic and western, andregulators all seemed to overlook the risk that a high proportion of loans werebecoming valueless, i.e. ceasing to receive interest payments.

Poor Regulation of the E

conomy

A third contributory factor to the Asian Crisis has been the absence of an adequateregulatory framework for businesses, especially the banks, in South East Asia. Thisomission allowed unsound and possibly corrupt relationships to develop. Often,lending to the corporate sector by banks was actually taken out of the hands of thebanks and administered by governments.

It is debatable whether such Asian Values have contributed to South East Asiassuccess in the past or ultimately exacerbated the present crisis.


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Over-Inflated Asset Prices

Another weakness of the South East Asian economies that made them vulnerable to asharp downturn, if not crisis, was the unrealistically high asset values in most of the

South East Asian countries. The cause was that the money supply was growing tooquickly for the real economy to absorb. Excess credit was used to fuel speculative boomsin real estate, factories and the stock market.

MacroeconomicPolicy: Fixed Exchange Rates

Whereas the factors outlined above have been recognized as probably contributing in oneway or another to the crisis, there is less agreement amongst economists over the question

of whether the governments of the Asian Tiger economies made basic errors of policy inrunning their economies. The policy most intensely discussed is the decision tounofficially fix the value of their currencies to the dollar. The previous fifteen years hadseen the global debate over exchange rates move in favor of some type of pegged or fixedexchange rate.

Pegging domestic currencies to the dollar had important effects. In the early 1990s, thedollar fell against most currencies, especially the Japanese yen. By maintaining the pegwith the depreciating dollar, the governments of the Asian Tigers also effectivelydepreciated their currencies against third-party currencies. The cost of imports for the

South East Asian nations increased whereas their export prices fell in the Japanesemarket (their major trading partner). However, at the same time the Asian Tigers becamea favorite target for foreign direct investment by Japanese companies, who werethemselves under competitive pressure from the over-valued yen and wished to shiftproduction abroad.

These effects were reversed from 1995 when the dollar appreciated, yet again especiallysharply against the Japanese yen. Maintaining the fixed dollar-rate amongst the SouthEast Asian economies effectively caused their currencies to appreciate also. Althoughprimary import costs fell, the price of exports of the semi-manufactured goods in whichthe Asian Tigers specialized increased.

When the crisis was brewing, the appreciation of the dollar magnified perceptions oftrouble. It was evident that not only were these countries running large deficits, but thattheir strong currencies would make it harder to fund them.


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B. Initial Triggers of the Events in South East Asia

The weaknesses described above indicate that the afflicted South East Asian economies

were becoming increasingly vulnerable to a financial crisis. The onset of a financial crisisis often triggered by a specific event.

However, it is not always possible to identify any particular event as triggering a crisis. Afinancial crisis may simply develop from a small downturn that gathers pace and turnsinto a rout. This section outlines those factors that have been suggested as triggering theAsian Crisis: changed sentiment amongst domestic and foreign investors, excessivespeculation and contagion, all of which are inter-related.

Changed Sentiment

Amongst In

vestors in South East

Asia

In the increasingly free global market for international funds, sentiment clearly plays acritical role in sustaining the values of currencies and other assets, especially when valuesseem difficult to justify in terms of underlying economic fundamentals. At some point,investor sentiment begins to waver and the effects may be fast and cumulative. Thescales of effects caused by sudden shifts in investor sentiment were last witnessed duringa similar crisis in Mexico in 1994.

Speculation by Participants in the Currency Markets

Excessive speculation is also blamed as a trigger. Some argue that speculation bycurrency markets acts as a discipline on government policy. However, the damagingeffect that speculation, beginning in Thailand, may have had in the lead up to the AsianCrisis should not be underestimated according to the IMF.


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Contagion

A third factor initiating such a widespread crisis was contagion or spillover effectsbetween markets. The idea of contagion within and between financial markets is not new,

but the scale of such spillover effects during the Asian Crisis has been unprecedented.The conventional rationale for the events in South East Asia, in the wake of the attack onThailands currency, is that market participants re-assessed the risk factors associatedwith countries in similar positions. They looked at countries neighboring Thailand andsaw similar symptoms afflicting them. Financial markets, being inherently volatile, are prone to over react to changes in underlying variables. So, while the volatility of themarkets reaction may have been excessively severe, the crisis spread for entirely rationalreasons.


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Effects Of The Crisis On Economies

In The Region

This section looks at the effects that the crisis would be expected to have on theeconomies of the region and some of the consequences that have actually emerged. Fallsin equity markets, foreign exchange markets and rises in interest rates are the mostnotable financial effects. These changes then have an impact on the real sector of theSouth East Asian economies. Following table below gives an indication of the extent ofthese changes.


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Equity Markets

Stock markets serve as a barometer of opinion on the health of an economy. The concernsabout the South East Asian economies were reflected in sharp falls in the stock marketsin the eight countries affected (see Appendix I for graphs of the regions stock marketmovements since the Asian Crisis began). The greater the degree of concern over aparticular countrys plight, the greater was the consequent correction of its stock market.

The level of any stock market is ultimately dependent upon the prospects for continuedearnings/profits of the companies listed on the market. In periods when economicproblems are taking place, or even anticipated, stock markets would tend to fall to reflectthe lower expected profits. However, when investors lose confidence in the economichealth of an entire economy or a government to meet its foreign debts, they will seek tomove funds abroad into more secure assets. Financial companies which invest in largeportfolios will switch from holding stocks to holding hard currency or bonds issued bythe governments of the industrialized economies, particularly the United States. Duringperiods of financial turmoil, such government bonds are viewed as safe havens. Thisflight to quality tends to exacerbate the anticipated problems.

Competitive Currency Devaluations

One of the most notable effects of the Asian Crisis has been the rapid fall in the valueagainst the dollar of many of the regions currencies. As noted earlier, devaluations can be very contagious as matching devaluations are made, moving from country tocountry.

In the early 1930s, Professor Charles Kindleberger first described the phenomenon ofcountries, led by France and the US, pursuing beggar-thy-neighbour policies of

competitive currency devaluation, which was labeled the Kindleberger Spiral. In SouthEast Asia in 1997, there also seemed to be an element of beggar-thy-neighbourdevaluation, which added to the uncertainty,


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Interest Rates

The third symptom of the financial crisis was that interest rates increased significantly.

The market reaction to a decrease in the money supply (in this case because of capitalflight overseas) is an increase in market interest rates and the prospect of a so-calledcredit crunch, in which funds for borrowing diminish throughout the economy.

The Real Economy

These factors in combination have initiated a severe contraction in real economic activity

in South East Asia, characterized by increased corporate bankruptcies and rising levels ofunemployment. The best up-to-date statistics available (from the IMF) indicate thatnominal GDP contracted in the first half of 1998 by 12% in Indonesia, by 8% in Thailandand by 5% in Malaysia and the Philippines.

Economic theory predicts that currency devaluation should lead to an overall expansionof output, as production for export increases. However, in the worst crises, if devaluationis slow in triggering an expansion of exports, a contraction in economic activity anddeflation ensues. It is now clear that in the early aftermath of the Asian Crisis, there waslittle benefit to the export sector from the devaluation of South East Asian currencies.

The level of activity was probably depressed further by businesses and consumers reining back spending, regardless of whether or not they were directly affected in the initial phase of the crisis. The combination of high levels of debt, rising interest rates andconsumer caution reinforces weak economic sentiment. In such cases, internationaltrading conditions also become blighted, further depressing confidence. Given the pooreconomic prospects globally, currency devaluations are unlikely to provide much relief inthe medium term. This is a debt deflation.


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The IMF & Its Handling Of The

Asian Crisis

As the International Monetary Fund was able to inject liquidity into markets, it naturallytook the lead in trying to handle the crisis. The IMFs policy had a number of keyelements: financial assistance, a package of austerity measures and re-structuring of theeconomy. The following section considers these elements.

Financial Assistance

The rescue funding for the Asian Crisis economies was organized by the IMF over thecourse of the second half of 1997. The need for international assistance to strickeneconomies is usually only triggered when there is a danger of sovereign default. In tryingto defend their currencies from speculation, the Thai, Korean and Indonesiangovernments were in danger of defaulting on their repayment commitments by late 1997and thus needed aid.

Although the IMF co-ordinate the rescue, contributions were made available from avariety of sources such as the World Bank and the Asian Development Bank. Theserescue packages were notionally for the public sector in the affected countries.

The Austerity Programme

In return for the international aid, all receiving nations invariably agree to conditions

about macroeconomic policies to be followed and structural reforms to be implemented.Of course, recipients may not always fulfill these conditions. The IMFs macroeconomicproposals consisted of setting targets for the permissible size of future budget deficits andtightening monetary policy. Such contractionary policies are considered necessaryfollowing devaluation, to prevent higher import prices being translated into higher exportprices and thus causing the erosion of competitiveness gains.


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1. Fiscal Policy

Fiscal policy is tightened to limit the need for inflows of capital from overseas. InThailand, for example, the first IMF agreement called for a reduction in the budget deficit(especially by cuts in social spending), so that money could be diverted to pay some of

the costs of bank restructuring.

2.Monetary Policy

A high interest rate policy has the twin effects of reducing the need for external capitalinflows and helping to maintain export competitiveness by controlling domestic prices. Ifmonetary policy is not tightened, the benefit of the devaluation is lost.

Restructuring

Accompanying the rescue package and the macroeconomic prescriptions describedabove, the IMF also tried to correct a number of structural weaknesses in the South EastAsian economies. There is widespread agreement that in the long term the main taskfacing governments in the countrys most affected by financial turmoil is to ensure thatadjustment policies to tackle problems at their roots be implemented as rapidly andeffectively as possible.

The aim of such structural reforms is to remove features of the economy that had becomeimpediments to growth, such as monopolies, trade barriers and non-transparentcorporate practices. Immediate action was taken to correct the weaknesses in thefinancial system. While tailored to the needs of individual countries, the IMF programsarranged for

The closure of unviable financial institutions, with the associated write down ofshareholders capital;

The re-capitalization of undercapitalized institutions;

Close supervision of weak institutions;

Increased potential for foreign participation in domestic financial systems.


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Although some financial restructuring may have been welcome, the initial effect of suchmeasures was to exacerbate the shortage of liquidity in these economies, by forcing theclosure of banks.

Criticisms of the IMF

There has been severe criticism of the IMF policy prescriptions applied after the firstphase of the crisis, led by Jeffrey Sachs, especially of the imposition of large interest rateincreases, which are said to have exacerbated the effects of the credit crunch. The IMFmeasures raised real interest rates sharply in an attempt to stabilize the problemcurrencies. However, the difficulty with this policy is that at some point high interest

rates may simply become counter-productive.

While high interest rates may be ineffective in stabilizing a currency, they neverthelesscan have a damaging effect on fragile businesses on the brink of solvency. The argumentof critics of the IMFs handling of the crisis, such as Jeffrey Sachs, is that by deliberatelyincreasing interest rates the IMF exacerbated the monetary contraction that was already inplace.


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Impact Of Global Financial Crisis On

South Asia

February 17, 2009

The global financial crisis hit South Asia at a time when it had barely recovered fromsevere terms of trade shock resulting from the global food and fuel price crisis. The foodand fuel price shocks had badly affected South Asia, with cumulative income lossranging from 34 percent of 2002 GDP for Maldives to 8 percent for Bangladesh. Current

account and fiscal balances worsened sharply and inflation surged to unprecedentedlevels.

Pakistan, Sri Lanka, and Maldives

were particularly vulnerable because difficult political and social environments preventedadequate policy measures to adjust to the terms of trade shock. Additionally, theirreliance on foreign funding has been relatively large. The global financial crisisworsened their macroeconomic difficulties as sources of funding contracted. Although

India was well advanced in responding to the food and fuel price crisis and has generallymaintained prudent macroeconomic management, the magnitude of the financial crisishas hit India very hard because of the strong connectivity to global financial markets.

Bangladesh, Nepal, and Bhutan

have been mostly insulated from the first round effects of the financial crisis owing partlyto sound macroeconomic management, but also because of the underdeveloped nature of

the financial markets that are not well connected to international markets. They arehowever vulnerable to the second round effects of a global economic slowdown workingthrough export earnings, tourism receipts, remittances and external financing forinfrastructure. Issues in Afghanistan are much more complex and relate more to securityand the political environment rather than the impact of global financial crisis.


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The recent slide in food and fuel prices has provided South Asia with a welcome relief.But overall, the evidence suggests that growth, investment, exports and employment havebeen hurt. The outlook for 2009 is bleak as the global downturn deepens further. Growthin South Asia decelerated in 2008, falling from 8 percent in 2007 to 6 percent. It isprojected to decline to 5 percent in 2009, before recovering to 6 percent in 2010.

India

India, South Asias largest economy, has been facing major challenges owing to theglobal financial crisis. The immediate effects were plummeting stock prices, a netoutflow of foreign capital, a large reduction in foreign reserves and a sharp tightening ofdomestic liquidity. These caused a rapid depreciation of the exchange rate and a surge inshort-term interest rates. The second round effects emerged from a slowdown in

domestic demand and exports. Demand effects have been particularly severe in housing,construction, consumer durables and the IT sector. As a result, manufacturing productionhas taken a hit and activities in the organized services sector (housing, construction, IT)are down sharply. Exports declined for two consecutive months in October and November 2008. A recent government study estimates job losses to the tune of fivehundred thousand between October and December 2008. GDP growth rate is nowestimated at around 7 percent for 2008, down from 9 percent in 2007, and is projected todecline to around 5 percent in 2009.

Pakistan

Pakistans economy has been under strain due to excess demand pressures that have beenbuilding since 2004. The combined effects of global food, fuel and financial crisis tookquite a toll on the economy as the current account balance and fiscal deficits increased,inflation surged and growth slowed. Fortunately, strong corrective actions have beentaken over the past few months including an IMF program in November that is helpingstabilize the Pakistani economy. Macroeconomic imbalances are showing signs ofimprovement while inflation is easing. But economic growth has taken a hit, with growthslowing down from 7.3 percent during 2004-07 to 5.8 percent in 2008 and projected toslide to around 3 percent in 2009. The scope for counter cyclical fiscal policy is limitedat this time, but Pakistan is taking measures to protect social spending to help reduce theadverse effects of the crisis on the poor.


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The story in Sri Lanka and Maldives is worrisome. Like Pakistan, these countries havebeen struggling with excess demand pressures, which have been further aggravated bythe global food, fuel and financial crises.

Sri Lanka

Sri Lanka has taken actions to reduce monetary growth and contain the fiscal deficit.This, along with lower commodity prices, has helped reduce inflation, which has comedown sharply from a peak of 28 percent in June 2008 to 11 percent in January 2009. ButSri Lankas balance of payments is under stress, as current account deficit surged toabout 7.5 percent of GDP in 2008 and reserves have now fallen to less than 2 months ofimports. Access to foreign commercial credit has also been sharply curtailed by the rapidrise in the cost of borrowing. Economic growth has come down from 7 percent during

2006-2007 to 6 percent in 2008 and expected to decline to 4 percent in 2009. Furtheractions are needed to stabilize the external economy to provide the basis for recovery ofgrowth in 2010.

Maldives

Maldives is still grappling with major fiscal and current account imbalances, which hasbeen further hurt by a slowdown in foreign private capital inflows and deceleration in thetourism sector. The new government is looking at ways to bring the macro economy back

on track.

Evidence from other South Asian countries that are not well connected to global financialmarketsBangladesh, Bhutan, and Nepalshow that the direct first round effects of theglobal financial crisis have been muted.

Bangladesh

Bangladesh has held up remarkably well due to deft economic management that helpedabsorb the pressure of the global food and oil price crisis of the January 2007-May 2008period without jeopardizing macroeconomic stability. Although stock prices have fallen,domestic liquidity seems adequate. Domestic interest rates, both long-term and short-term are stable. Exports for the first 6 months of the fiscal year (July-December) havegrown at a healthy pace of 19 percent and remittance inflows show a 31 percent increase.The recent decline in global commodity prices, especially food and fuel, is helping ease


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inflationary pressure while also providing a welcome increase in the fiscal space andbalance of payments.

Bhutan

Bhutans economy is closely tied to India. Since there are no indications of reductions inaid or delays in the development of the next mega-hydropower projects, themacroeconomic underpinnings appear sound. The banking system has adequate liquidity,reserves are at a high level (exceeding 14 months of imports), and the authoritiescontinue to make good progress with implementing their reform program. Second roundeffects are expected, however, with growing non-performing loans and weaker tourismactivity later in 2009.

Nepal

Nepal is benefitting from higher inflows of remittances and healthy availability of foreignaid. Along with the decline in global commodity prices, the balance of payments andfiscal situation are comfortable and there is no evidence of a liquidity constraint ondomestic demand. On the contrary, the large foreign exchange inflows are creating somedemand pressure that has contributed to a surge in inflation that requires bettermanagement.


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The Global Impact Of The Asian

Crisis

The financial effects on countries outside South East Asia was, for obvious reasons, thechief initial concern of governments outside the region. The Asian Crisis has alreadyaffected emerging economies such as those in Eastern Europe and Latin Americaextremely severely. Now its effects on the real sector of the western industrializedcountries are being seen: reduced trade flows and lower foreign direct investment.

The Wealth Effect: Falls in Equity Markets

When equity markets in South East Asia fell, they caused a negative wealth effect oninvestors across the world, just as they had upon investors from South East Asia itself.Furthermore, these stock market falls directly initiated market declines across the globe.

To a large extent, the size of any negative wealth effect on the major nations will dependon the size of their holdings in South East Asia prior to the crisis. For a country alreadyburdened by a domestic banking crisis, the impact of a negative wealth effect will be


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doubly severe. Some investors managed, for one reason or another, to avoid some of thecollapse in South East Asian markets by repatriating funds before the crisis emerged.

Less prescient western financial institutions, having seen the value of their South East

Asian assets decline once the crisis began, tried to get their money out of these countries.However, the dilemma in such a situation is that attempts to liquidate assets inthemselves depress the markets further and prompt further sales.

The loss of wealth by western investors in South East Asia, even with such largeholdings, will have been dwarfed by the losses incurred by their holdings in their owndomestic markets. The direct financial effects of the Asian Crisis would have beenlimited, if they had not triggered falls in other equity markets, especially in Japan.

International Trade

Another obvious effect on industrialized countries of the Asian Crisis is likely to be anincome effect caused by falling international trade. Because South East Asiancurrencies have devalued, there will be a weakening of demand for western goods inthese countries, which are relatively more expensive. Western goods are likely to berelatively more expensive in third-party countries as well. There will therefore be a brakeon the growth of exports from the major economies.

As with the other consequences of the Asian Crisis, different industrialized economiesare exposed to different degrees.

On the import side, although the full impact of South East Asian currency depreciationsis yet to be passed on by producers, the fall in South East Asian product prices to globalconsumers are likely to be significant. South East Asian producers will be desperate tomaintain demand as close to pre-crisis levels as possible by cutting prices. Westernmanufacturers may be pressurized into reducing their prices in order to maintain theircompetitiveness with these South East Asian imports.


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Foreign Direct Investment

While depreciating currencies give a competitive trade advantage to South East Asiancompanies, the cost of acquiring overseas assets will increase at the same time, just as thecompanies face a shortage of available funds. As a result, foreign direct investmentprojects are likely to be cut back severely.

The UK has been a particularly large recipient of foreign direct investment from SouthEast Asia in recent years, and the announcements of delay or termination of projects byKorean companies, such as Samsung and LG Electronics, have been highly publicized.

The effect of the Asian Crisis on the advanced industrialized countries will be determinedby the sum of these separate effects. Net exports and industrial production will be hitmuch harder than overall GDP.

The vulnerability of an individual country will, in the first instance, vary depending on itsdegree of direct exposure to South East Asia. However, even a country with little directexposure to the region through trade and foreign direct investment may still experienceadverse repercussions via third-party countries. Although currency appreciation hasaffected all western nations, most analysts are agreed that the impact will slow growthmore in the US than in Continental Europe.


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Economic Growth

Given the economic turmoil, it is inevitable that there will be some downturn ineconomic growth. A constant downward revision of economic growth forecasts hastaken place since the crisis began.

Differentiating the impact on a countrys growth of the Asian Crisis from otherinfluences on a slowdown is problematic. International factors and domestic factors areusually inter-linked. The UK economy has been slowing during 1998, and part of thisslowdown has undoubtedly been the impact of the Asian Crisis. The slowdown has led toa re-evaluation of economic growth forecasts.


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References

www.wikipedia.comwww.books.google.comwww.slideshare.netwww.investopedia.comwww.twnside.org

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Exchange Rate Crises in South Asian Currency & World Impact