What caused the crisis in 1997-1998? The research paper will explore the causes of the financial crisis in Asia from 1997-1998. The crisis originated in Thailand with the financial collapse of the Thai currency (baht) after the Thai government was forced to float the baht due to lack of foreign currency. The government floated the baht to support its fixed exchange rate, after comprehensive efforts to support the currency in the face of a severe financial overextension that was to some extent real estate driven. At the time, Thailand had acquired offoreign debt that made the country effectively bankrupt even before the collapse of its currency. Since the Asian countries were all interconnected due to globalization, the crisis spread. Most of Southeast Asia including Japan saw slumping currencies, devalued stock markets and other asset prices, and a steep rise in private debt as a result of this crisis.
Indonesia, South Korea and Thailand were the countries most affected by the crisis. Hong Kong, Malaysia, Laos and the Philippines were also hurt by the slump. China, Taiwan, Singapore, Brunei and Vietnam were less affected, although all suffered from a loss of demand and confidence throughout the region.
Foreign debt-to-GDP ratios rose from 100% to 167% in the four large Association of Southeast Asian Nations (ASEAN) economies in 1993–96, then shot up beyond 180% during the worst of the crisis. In South Korea, the ratios rose from 13 to 21% and then as high as 40%, while the other northern newly industrialized countries fared much better. Thailand and South Korea saw debt service-to-exports ratios rise. The paper will look at the following aspects to assess the cause of the crisis:
Current Account Imbalances and macroeconomics