Asian Financial Crisis investment & finance definition

A chain of events that led to turmoil in the financial markets during the latter half of 1997 and continued into 1998. The crisis began when traders decided that Thailand’s currency, the baht, was too highly valued given that country’s financial situation. Thailand had a very large current account deficit, a growing foreign debt, and a governmental budget shortfall. To stop the baht from falling, the Thai government used its currency reserves to buy baht. The effort was short lived and the Thai government had to let the baht trade freely, instead of being linked to the U.S. dollar.

As the baht weakened, so, too, did other currencies in the region, particularly the Philippines’ peso, Malaysia’s ringgit, and Indonesia’s rupiah. Stock markets, such as Hong Kong’s market, posted sharp declines. South Korea was drawn into the turmoil when it spent much of its foreign currency reserves to protect the value of the won.

In January, attention turned to Indonesia, which agreed to implement economic reforms in order to continue receiving IMF assistance. In particular, the IMF wanted to reduce the country’s use of crony capitalism, whereby many large businesses were controlled by members of the then-President Suharto’s family.

In March, the Thai baht and South Korean won begin to firm as investors confidence began to return to the markets. However, by May riots in Indonesia left Jakarta in ruins, and President Suharto resigned after 32 years in office. Currencies in emerging markets also begin to weaken. Although the situation has stabilized, the emerging Asian countries still haven’t regained their former status as attractive places to invest.