I:Behind the Collapse: Decoding the Roots of the 1997 Asian Financial Crisis

                                                     Source: Investopedia

The 1997 Asian Financial crisis was a macroeconomic shock and erupted in Thailand in July 1997 and then spread to several other countries like Malaysia, Indonesia, and South Korea, with knock-on effects.

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Source: Wikipedia

From 1985 to 1996, Thailand experienced rapid economic growth at over 9% annually, with low inflation within a range of 3.4-5.7% and a fixed baht-to-dollar peg. However, in May 1997, speculative attacks led to a baht crisis, forcing Thailand to float its currency. This triggered a regional economic downturn, causing massive layoffs and a 75% drop in the stock market. Realizing the seriousness of the crisis, The IMF provided a $17 billion rescue package with conditions. 

There are many reasons of this crisis:

• Economic factors: Rapid growth led to economic overheating (Asian countries generally adopted overdraft economic development models and high-growth strategies, which led to the rapid accumulation of domestic funds and the rapid expansion of foreign debts), formed a bubble economy, and the economy became vulnerable. These countries generally implement the fixed exchange rate system, but the implementation of this system intensifies the exchange rate risk. At the same time, these countries' export-oriented economic models have led to excessive dependence on external markets.
• Financial factors: Some asian countries have weak financial market supervision, a large number of non-performing loans appeared, the excess growth in debt-to-GDP is most likely fuelling an asset price and the bank asset quality began to deteriorate. At the same time, the financial systems of these countries lack the ability to prevent international financial risks.
  
• International financial market volatility: At that time, there was a large amount of speculative capital in the international financial market, which hyped up the financial market of Asian countries, exacerbating the volatility and risk of the financial market. 

 

Share prices in East Asia

                                                       Source: redbook

To sum up, the causes and background of the 1997 Asian financial crisis were the result of many factors, including economic overheating, weak financial market supervision, monetary policy mistakes, fluctuations in the international financial market and external economic shocks. The crisis has brought huge economic losses and social unrest to Asian countries, thus, it also prompted these countries to strengthen financial supervision, adjust economic structure and improve risk prevention capabilities.

                                                    Source: Bloomberg 2022