Cause of the Asian Financial Crisis of 1997

Topics: Macroeconomics, Investment, International economics Pages: 3 (810 words) Published: June 6, 2013
Cause of the Asian Financial Crisis of 1997

During Asian Financial Crisis, the Thai baht devaluation, the Malaysian ringgit was "attacked" by speculators. The overnight rate jumped from under 8% to over 40%. The factors that triggered the 1997 crisis was negative perceptions of the Malaysian economy following the dramatic collapse of the Thai economy. Foreign investors and international rating agencies had failed to consider underlying risks in the Thai economy, and spurred by fear that the same currency devaluation would occur throughout the region, foreign portfolio investors withdrew from regional markets that were perceived to have underlying weakness. This perception influenced their assessment of Malaysia, fall of the ringgit exchange rate, sharp retraction in investment spending, weak external demand and a huge drop in household spending in Malaysia.

The Asian Financial Crisis involves four basic problems which include a shortage of foreign exchange that has caused the value of currencies and equities in Thailand, Indonesia, South Korea and other Asian countries to fall dramatically, inadequately developed financial sectors and mechanisms for allocating capital in the troubled Asian economies, effects of the crisis on both the United States and the world and the role, operations, and replenishment of funds of the International Monetary Fund. One of the causes of the crisis in Malaysia was that it had a high current-account deficits (when imports exceed exports), which made it a target for currency speculators. The deficit was partly caused by money poured into infrastructure projects. Growth was spurred by government spending and tax breaks than efficiency. Before the crisis, Malaysia had a large current account deficit of 5% of its GDP.

Besides that, Bank Negara Malaysia tried to shore up the value of the ringgit by raising short-term interest rates, but this did nothing to halt its slide, and the bank eventually gave up...
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