Expansion of the Asian Currency Crisis and Real Economy Deterioration

1. The Asian Currency and Economic Crisis: Factors and Characteristics The Asian currency and economic crisis deepened over two stages, namely the currency crisis arising in 1997 and the ensuing contagion, which in 1998 then developed into an economic crisis. The background and causes of this crisis have provoked hot debate. A major reason is why although major currency crises of the past (Central and South America in the early 1980s, some of the EMS countries and Mexico in the 1990s) have displayed virtually the same characteristics, namely excessive consumption, fiscal deficits, current account deficits, rising inflation and other macroeconomic imbalances, the crisis- struck East Asian countries have displayed high savings ratios, sound government finances, low inflation rates and other evidence of macroeconomic soundness. Considerable credence has also been given to the argument that the real problem was massive international inflows and outflows of short-term capital.
(Emergence of the Currency Crisis)
To clarify which of the various elements generally described as fundamentals were related to the emergence of the currency crisis, a Frankel and Rose model* was used to produce a Probit analysis of approximately 100 major currency crises which have occurred to date. The results were thought-provoking, revealing that where significant factors in currency crises of the 1980s were traditional economic fundamentals such as current account deficit and currency over-valuation, new factors related to capital movement emerged in currency crises of the 1990s, such as short-term debt, foreign currency reserves and disparities between domestic and foreign interest levels. We also examined whether these various factors were observed around the time of the currency crisis in East Asia. The result was that 1990s-type factors—short-term debt ratios, foreign currency reserves and disparities between domestic and foreign interest levels—were apparent in all countries, while some countries also displayed 1980s-type factors such as direct investment ratios (the Philippines, Thailand and the Republic of Korea), currency overvaluation (the Philippines and the Republic of Korea) and current account deficit (Thailand). The Asian currency crisis therefore bears an overall resemblance to the average currency crisis of the 1990s.download