The Crash of the Asian Tigers
Where: Southeast Asia ( Thailand , Indonesia , Malaysia , Philippines and South Korea ,)
Percentage Lost From Peak to Bottom: The GDP of these countries lost more then 50% in US dollar terms while stocks fell harder
- A huge over hang of foreign denominated corporate debt was created because the cost of foreign debt was substantially lower then local debt.
- This corporate debt was financed by hot money from hedge funds, mutual funds and other Institutional investors. Unlike Banks the worst part about being financed through hot money is that the maturity and the tenure of the loan is not fixed and is always subject to sudden withdrawal due to any psychological and fundamental shift in thought or belief.
- Many of these hedge fund and mutual fund investors had borrowed in other low interest paying countries like the Japan and were trying to make a neat arbitrage.
- Rising trade and current account deficits, increased capacities, real estate speculation made some of the foreign funds jittery. As they withdrew money the Thai Baht was the first to give way
- The foreigners did not contribute much to withdrawing money as they did to damage sentiments. The debt structure of these companies that had borrowed was also in dis- array. They had borrowed short-term foreign money to invest into long term assets.
- Many of the South East Asian Economies like Thailand , Indonesia , and Philippines had contracted by over 50% in dollar terms. In December 1997 car sales in Thailand was down by 70%. The per capita GDP in Indonesia was down by 70%. The car sales in Indonesia were down 50%. Since automobile was an import based industry car prices were doubled just to break even. The Indonesian currency "Rupiah" was sank from 2500 to a dollar to 15,000 to a dollar all in a matter of a few months.
- One would have thought that a spiraling external currency would have worked wonderfully for the exporter. Since most of the exporters were in foreign currency debt this profit on account of increased realization was offset by the rising foreign debt in real (local currency) terms.
- The fall in dollar value of these assets made them very attractive a large number of foreign companies queued up to buy these assets. This demand for the idle capacity gave a fillip to their value.
- A good stable business always rebounds in value after a catastrophe . The market cap of HM Sampoerna fell from US $ 6 billion to US $120 million. A few months later once the dust was settled the company traded at a valuation of US $ 16 billion.