Asian financial crisis The Asian financial crisis erupted in July 1997, with a number of Asian countries experiencing sharp declines in the values of their currencies, stock markets, and other asset prices. The crisis threatened these countries’ financial systems, and disrupted their real economies, accompanied by large contractions in credit and economic activity that created a social and political crisis alongside a financial one in some afflicted nations.

The crisis began in Thailand as a result of intense speculation that the baht was over- valued. This led to the floating of the currency on 2 July 1997, and it immediately fell by 15 per cent. The contagion spread rapidly to other Asian countries, which were vulnerable to an erosion of competitiveness after the devaluation of the baht. In addition, unnerved by economic events in Latin America, Western investors lost confidence in securities in East Asia and began to pull money out, which compounded the crisis. In September 1998, Malaysia pegged its currency to the US dollar as part of capital controls to shield its economy from the effects of the crisis.

The countries most affected by the crisis were Indonesia, Korea and Thailand. The Thai stock market dropped 75 per cent in 1997, and Finance One, its largest finance company, collapsed. The South Korean economy demonstrated strong macroeconomic fundamentals but was burdened by non- performing loans in the banking sector. The excess debt situation led to major business failures and takeovers. By the end of November 1997, the Seoul stock exchange had fallen by more than 15 per cent. Indonesia’s rupiah crisis began in July but intensified in November 1997. Companies that had borrowed in US dollars had to face higher debt servicing costs due to the decline of the rupiah. That, coupled with steep price hikes for food staples, led to riots throughout the country. The Indonesian economy contracted by 13.5 per cent of GDP in 1997.

Despite distress in the region, Singapore emerged without serious damage. Although the stock and property markets took a beating, the economy performed well under the circumstances. Nonetheless, Singapore’s annual GDP growth rate fell from 8.3 per cent in 1997 to -1.4 per cent in 1998. The economy rebounded in 1999 with 7.2 per cent GDP growth.