Asian Financial Crisis

A crisis that caused by the collapse of the currency exchange rate and hot money bubble in East and Southeast Asia in 1997

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What is the Asian Financial Crisis?

The Asian Financial Crisis is a crisis caused by the collapse of the currency exchange rate and hot money bubble. It started in Thailand in July 1997 and swept over East and Southeast Asia. The financial crisis heavily damaged currency values, stock markets, and other asset prices in many East and Southeast Asian countries.

Asian Financial Crisis - Timeline from July 1997 to January 1998

On July 2, 1997, the Thai government ran out of foreign currency. No longer able to support its exchange rate, the government was forced to float the Thai baht, which was pegged to the U.S. dollar before. The currency exchange rate of the baht thus collapsed immediately.

Two weeks later, the Philippian peso and Indonesian rupiah underwent major devaluations as well. The crisis spread internationally, and Asian stock markets plunged to their multi-year lows in August. The capital market of South Korea maintained relatively stable until October. However, the Korean won dropped to its new low on October 28th, and the stock market experienced its biggest one-day drop to that date on November 8th.


  • The Asian Financial Crisis is a crisis caused by the collapse of the currency exchange rate and hot money bubble.
  • The financial crisis started in Thailand in July 1997 after the Thai baht plunged in value. It then swept over East and Southeast Asia.
  • As a result of the financial crisis, currency values, stock markets, and other asset values in many Southeast Asian countries collapsed. 

Causes of the Asian Financial Crisis

The causes of the Asian Financial Crisis are complicated and disputable. A major cause is considered to be the collapse of the hot money bubble. During the late 1980s and early 1990s, many Southeast Asian countries, including Thailand, Singapore, Malaysia, Indonesia, and South Korea, achieved massive economic growth of an 8% to 12% increase in their gross domestic product (GDP). The achievement was known as the “Asian economic miracle.” However, a significant risk was embedded in the achievement.

The economic developments in the countries mentioned above were mainly boosted by export growth and foreign investment. Therefore, high interest rates and fixed currency exchange rates (pegged to the U.S. dollar) were implemented to attract hot money. Also, the exchange rate was pegged at a rate favorable to exporters. However, both the capital market and corporates were left exposed to foreign exchange risk due to the fixed currency exchange rate policy.

In the mid-1990s, following the recovery of the U.S. from a recession, the Federal Reserve raised the interest rate against inflation. The higher interest rate attracted hot money to flow into the U.S. market, leading to an appreciation of the U.S. dollar.

The currencies pegged to the U.S. dollar also appreciated, and thus hurt export growth. With a shock in both export and foreign investment, asset prices, which were leveraged by large amounts of credits, began to collapse. The panicked foreign investors began to withdraw.

The massive capital outflow caused depreciation pressure on the currencies of the Asian countries. The Thai government first ran out of foreign currency to support its exchange rate, forcing it to float the baht. The value of the baht thus collapsed immediately afterward. The same also happened to the rest of the Asian countries soon after.

Effects of the Asian Financial Crisis

The countries that were most severely affected by the Asian Financial Crisis included Indonesia, Thailand, Malaysia, South Korea, and the Philippines. They saw their currency exchange rates, stock markets, and prices of other assets all plunge. The GDPs of the affected countries even fell by double digits.

From 1996 to 1997, the nominal GDP per capita dropped by 43.2% in Indonesia, 21.2% in Thailand, 19% in Malaysia, 18.5% in South Korea, and 12.5% in the Philippines. Hong Kong, Mainland China, Singapore, and Japan were also affected, but less significantly.

Besides its economic impact, the Asian Financial Crisis also resulted in political repercussions. The Prime Minister General of Thailand, Yongchaiyudh, and the President of Indonesia, Suharto, resigned. An anti-Western sentiment was triggered, especially against George Soros, who was blamed for triggering the crisis with large amounts of currency speculation by some individuals.

The impact of the Asian Financial Crisis was not limited to Asia. International investors became less willing to invest in and lend to developing countries, not only in Asia but in other areas of the world. Oil prices also fell due to the crisis. As a result, some major mergers and acquisitions in the oil industry took place to achieve economies of scale.

IMF’s Role in the Asian Financial Crisis

The International Monetary Fund (IMF) is an international organization that promotes global monetary cooperation and international trades, reduces poverty, and supports financial stability. The IMF generated several bailout packages for the most affected countries during the financial crisis. It provided packages of around $20 billion to Thailand, $40 billion to Indonesia, and $59 billion to South Korea to support them, so they did not default.

The bailout packages are structural-adjustment packages. The countries that received the packages were asked to reduce their government spending, allow insolvent financial institutions to fail, and raise interest rates aggressively. The purpose of the adjustments was to support the currency values and confidence over the countries’ solvency.

Lessons Learned from the Asian Financial Crisis

One lesson that many countries learned from the financial crisis was to build up their foreign exchange reserves to hedge against external shocks. Many Asian countries weakened their currencies and adjusted economic structures to create a current account surplus. The surplus can boost their foreign exchange reserves.

The Asian Financial Crisis also raised concerns about the role that a government should play in the market. Supporters of neoliberalism promote free-market capitalism. They considered the crisis a result of government intervention and crony capitalism.

The conditions that IMF set within their structural-adjustment packages also aimed to weaken the relationship between the government and capital market in the affected countries, and thus promote the neoliberal model.

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