The 1997 Asian financial crisis was one of the most devastating economic periods since records began, gripping Southeast Asia for most of the late 1990s.  Originating in Thailand in July 1997, this crisis rapidly spread to many other countries with a ripple effect, demonstrating the impact of financial contagion. Nicknamed the Tom Yam Kung crisis (a hot and sour shrimp soup which is seen as representative of Thai cuisine) it started with a complete financial collapse in the value of the Baht after the government was forced to float – ie, make the currency publicly tradable where the price is determined by the market. Subsequently, the Baht, due to lack of foreign currency to support its currency peg to the U.S. dollar, lost value. This sudden fall in currency value spooked investors, which led to capital flight – a rapid outflow of money or assets from an economy due to changing economic conditions.  This began a chain reaction as investors withdrew capital from not only Thailand, but many Southeast Asian economies. 

But what led up to this financial crisis? In the mid-1990s, Thailand, Indonesia and South Korea had large private current account deficits, and the maintenance of fixed exchange rates encouraged external borrowing and led to excessive exposure to foreign exchange risk in both the financial and corporate sectors. This risk was compounded by external shocks, such as the raising of US interest rates, and the depreciation of both the Japanese Yen and the Chinese Renminbi as China introduced reforms to support the switch to a so called ’socialist market economy’. The rise in US interest rates was particularly significant, as it pushed up the value of the US dollar due to attractiveness in terms of investment as a result of the high short term interest rates. As many Southeast Asian countries, including Thailand, had their currency pegged against the US dollar, real export costs rose massively, having a huge impact on export competitiveness. Some also argue that an increase in mainland China’s export competitiveness compounded this deterioration in these Asian current account positions.

In addition to this trade balance instability, one of the main causes of this crisis was unsustainable growth, as Thailand’s economy developed into an economic bubble fuelled by hot money. Surrounding countries also experienced a similar situation, called ‘crony capitalism’, which involved political corruption and market monopolies presenting the image of high growth without actually increasing output. This is demonstrated by Asia attracting almost half of the total global capital inflow into developing countries. Furthermore these nations maintained constant high interest rates to attract high level of foreign investment. This resulted in a so called ‘miracle’, where Thailand , Malaysia, Indonesia, Singapore and South Korea had exceptionally high rates of economic growth, particularly in the period from 1988 to 1994. The growth rate stayed within the range of 8 to 12% of GDP per annum. Praised by financial institutions such as World Bank and the IMF, this was affectionately named the ’Asian economic miracle’. However, the inflationary impact of this hot money bubble in part resulted in this financial crisis.

The 1997 Asian financial crisis had far-reaching consequences and impacts on the countries affected, as well as the global economy. The crisis led to severe economic contractions in several Asian countries, including Thailand, South Korea, Indonesia, and Malaysia. These economies experienced sharp declines in GDP growth, high inflation rates, and currency depreciations. In addition to this, the crisis exposed weaknesses in the financial sectors of affected countries. The aforementioned weak banking systems, excessive borrowing, and high levels of corporate and government debt which contributed to the initial instability were exposed, demonstrating the flaws in the Asian financial and fiscal sectors. Many financial institutions faced insolvency, and stock markets experienced significant declines.

Perhaps the biggest impact was how the crisis triggered massive currency depreciations in affected countries. The value of local currencies plummeted, making it difficult for businesses and individuals to service their foreign currency-denominated debts. This resulted in bankruptcies, increased unemployment, and reduced purchasing power for ordinary citizens. However, the International Monetary Fund (IMF) played a key role in providing financial assistance to affected countries. In exchange for bailout packages, countries were required to implement economic reforms, including fiscal austerity measures, financial sector restructuring, and deregulation. These reforms aimed to restore confidence in the economies and prevent further crises. Although many people in the impacted countries resented the enforcement of these reforms, they were key in increasing regulations in order to prevent similar issues from arising in the future. 

However, these problems were not limited to the countries of origin. This crisis had a contagion effect, spreading beyond the initially affected countries. It impacted other Asian economies, such as Japan, as well as emerging markets and developed countries. Investors became wary of investing in emerging markets, leading to capital outflows and financial instability in various regions. The crisis resulted in social and political upheavals in many affected countries. Widespread unemployment, bankruptcies, and social unrest led to political instability and changes in leadership. Protests and demonstrations demanding economic and political reforms became common. In the aftermath of the crisis, affected countries undertook extensive economic restructuring efforts. They focused on strengthening financial systems, promoting transparency and corporate governance, and diversifying their economies to reduce dependence on exports.

The most sizeable political and fiscal reforms came in South Korea, who focused on increasing accountability in the financial sector, Thailand, who improved bankruptcy laws and established a Financial Sector Master Plan (FSMP), and Malaysia, who implemented a set of comprehensive political and fiscal reforms known as the National Economic Recovery Plan, which aimed to address the financial vulnerabilities exposed by the crisis and promote long-term sustainable growth. 

On the whole, the 1997 Asian financial crisis highlighted the vulnerabilities of interconnected global financial systems and the importance of strong economic fundamentals. It served as a wake-up call for policymakers worldwide and led to reforms in international financial architecture to prevent and manage future financial crises.