Handout 1
Handout 1
Handout 1
Create successful ePaper yourself
Turn your PDF publications into a flip-book with our unique Google optimized e-Paper software.
Globalization<br />
in Development Finance<br />
and Financial Crises<br />
(For MABE Lecture)<br />
Prof. Shigeru T. OTSUBO<br />
GSID, Nagoya University<br />
August 2003<br />
1<br />
Globalization<br />
in Development Finance<br />
and Financial Crises<br />
Debt Crisis of 1980s (in Latin America)<br />
Mexico’s Peso Crisis in 1994<br />
Thailand’s Financial Crisis in 1997<br />
Asian Financial Crisis (Contagion)<br />
1997-1998-<br />
“Tequila Effects to Tom Yam Effects”<br />
2
Latin America<br />
Debt Crisis of 1980s<br />
to Mexican Peso Crisis of 1994<br />
3<br />
LA Policy Achievements<br />
after the Debt Crisis<br />
Fiscal consolidation<br />
Trade reform<br />
Privatization<br />
4
Percent<br />
8<br />
Fiscal deficits fell<br />
6<br />
4<br />
2<br />
0<br />
1980s<br />
1990s<br />
5<br />
Percent<br />
60<br />
Tariffs cut<br />
50<br />
40<br />
30<br />
20<br />
10<br />
0<br />
Pre-reform<br />
Post-reform<br />
6
Revenues from privatization,<br />
1988-93<br />
Latin America<br />
E. Europe<br />
East Asia<br />
South Asia<br />
Africa<br />
0 10 20 30 40 50 60<br />
7<br />
(Billions of US dollars)<br />
LA Fault Lines Exposed<br />
Low savings<br />
Inadequate competitiveness<br />
Inappropriate resource use<br />
Over-reliance on portfolio flows<br />
8
Percent<br />
35<br />
30<br />
Savings rates, 1991-93<br />
25<br />
20<br />
Industrial countries<br />
15<br />
10<br />
5<br />
0<br />
Latin America<br />
East Asia<br />
Africa<br />
9<br />
Percent<br />
10<br />
Share of world exports<br />
8<br />
6<br />
4<br />
2<br />
0<br />
1970 1986 1993 1970 1986 1993<br />
Latin America East Asia<br />
10
Percent of GDP<br />
LA Current Account Deficit<br />
3<br />
2<br />
1<br />
0<br />
1985-90 1991 1992 1993 1994 1995 1996 11<br />
Consumption and Investment:<br />
Change between 1985-87 and 1991-93<br />
(% of GNP)<br />
Consumption<br />
Investment<br />
15<br />
10<br />
5<br />
0<br />
-5<br />
-10<br />
Argentina<br />
Brazil<br />
Chile<br />
Mexico<br />
China<br />
Indonesia<br />
Korea<br />
Malaysia<br />
Thailand<br />
Note: The years 1985–87 represent pre-inflow and 1991-93 post-inflow periods in this comparison.<br />
For Korea, the average for the second period includes only 1991–1992.<br />
Source: World Bank staff estimates.<br />
12
Composition of private capital flows<br />
Billions<br />
$80<br />
60<br />
Bonds /<br />
loans<br />
(1988-93)<br />
40<br />
20<br />
0<br />
FDI<br />
Portfolio<br />
China<br />
Mexico<br />
13<br />
Mexico’s Peso Crisis<br />
In 1994, real GDP was growing at 3.5 percent, buoyed in part by NAFTA. Low inflation<br />
(7%) with Exchange Rate Rationalization in 1992 with an adoption of a Crawling Peg.<br />
(President Carlos Salinas de Gortari)<br />
Privatization of Banks since 1991- (after nationalization in 1982). Banks were<br />
overvalued in auctions due to a lack of information among investors. Banks lent<br />
aggressively.<br />
System-wide deposit insurance by FOBAPROA created Moral Hazard.<br />
$-peg widened trade deficit. Mexico’s CA deficit widened to 7.6% of GDP (almost 8% in<br />
1992-93), (fiscal deficit was) largely financed by S-T $-denominated Tesobonos issues.<br />
Foreign reserves were actually increasing up to 1994.<br />
The Chiapas uprising in January 1994 plus the assassination in March of the PRI<br />
presidential candidate led to capital flight (mainly domestic investors).<br />
Delayed release (non-release for 10 months) of data on the CB’s Foreign Exchange<br />
Reserves. Investors realized that FER was not enough to honor Tesobonos obligations.<br />
Full-fledged capital flight (incl. intn’l investors).<br />
Newly-installed President Zedillo’s government announced a “one-time only” 15 percent<br />
devaluation on December 20, but failed to stop the attack, floated peso on December 22<br />
(60% depreciation in total by December 1995).<br />
US came to rescue quickly with an expanded swap line in the Exchange Stabilization<br />
Fund (totalled US$20 billion). IMF rescue with a $17.7 billion Standby Letter of Credit.<br />
Mexico, in turn, pledged revenues from Pemex as collateral.<br />
14
Mexico: Into an Crisis, Again<br />
Liberalizing<br />
Institution building<br />
15<br />
East Asia<br />
Asian Financial Crisis of 1990s<br />
Is the East Asian Growth (Model)<br />
Invincible?<br />
16
Asian Financial Crisis<br />
-Thailand – Malaysia, Indonesia, Philippines<br />
– HKSAR – Taiwan, Korea – Brazil, Argentina …. Contagion!!<br />
Bangkok International Banking Facility (BIBF) opened in 1993 was not an Offshore<br />
Financial Market.<br />
The Asian Carry Trade. (<strong>Handout</strong>)<br />
Capital Flow Reversals during the Mexican and Asian Crises. (<strong>Handout</strong>)<br />
Real Estate and Stock Prices, a financial bubble. Started to decline in the second half of<br />
1996. (<strong>Handout</strong>)<br />
In addition, China’s Exchange Rate Rationalization in January 1994 (33%<br />
devaluation). Poorer performance of Thai exports from the second half of 1996.<br />
(<strong>Handout</strong>)<br />
Doubt on the sustainability of the $-peg. Capital Flight. Hedge funds’ forward sales of<br />
Thai Baht. (<strong>Handout</strong>)<br />
Reserve Impact of BOT’s Forward Foreign Exchange Market Intervention. (<strong>Handout</strong>)<br />
BOT’s announcement of a managed float on July 2, followed by the CB of Philippines<br />
(July 11), Bank Negara Malaysia (July 14), and the CB of Indonesia (August 14).<br />
(<strong>Handout</strong>)<br />
New Taiwan Dollar’s depreciation (October 20) triggered turmoil in HKSAR (October<br />
20-23). Downgrading of Korean and Thai sovereign ratings. DJIA down. Equity<br />
markets in Brazil, Argentina, Mexico down. (<strong>Handout</strong> continued)<br />
Comparison of BOP and External Debt among ASEAN4 and Mexico. (Next Slide) 17<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
18
EA Current Account Balance<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
Source: World Bank, World Development Indicators, 2000.<br />
19<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
EA Fiscal Balance<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
Source: World Bank, World Development Indicators, 2000.<br />
20
Asian Financial Crisis<br />
Changes in Exchange Rates<br />
(vs. US$, Benchmark: end June 1997)<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
Source: IMF, International Financial Statistics CD-ROM (March 2001).<br />
21<br />
<br />
Asian Financial Crisis<br />
Changes in Output<br />
(GDP Volume Index, 1995=100)<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
Source: IMF, International Financial Statistics CD-ROM (March 2001).<br />
22
East Asia, too, is vulnerable to<br />
violent forces of globalization…..<br />
East Asian Growth Model<br />
has been robust to trade integration.<br />
has been robust to investment integration through<br />
FDIs.<br />
is not yet robust to financial integration through<br />
portfolio equity and other S-T flows.<br />
21 st Century-type Currency Crisis<br />
* Banking Sector’s Balance Sheet with<br />
- $-denominated S-T liabilities<br />
- Weak (non-performing) domestic L-T credits<br />
* Doubts on repayment capacity of that<br />
$-denominated liabilities creates Capital Flight<br />
23<br />
East Asian Financial Crisis was…..<br />
Not a Current Account Crisis.<br />
But a Capital Account Crisis.<br />
That requires different kind of medicine<br />
(rescue package), different from the<br />
standard IMF package.<br />
And that requires deeper and more<br />
sophisticated institutional reform.<br />
24
Asian Financial Crisis<br />
-A Fight Back ! -<br />
Key Financial Sector Policy Responses to the Asian<br />
Financial Crisis<br />
- Thailand, Indonesia, Korea (<strong>Handout</strong>)<br />
Malaysia’s Capital Controls (<strong>Handout</strong>)<br />
IMF Rescue Package and Structural Adjustments in<br />
Korea (<strong>Handout</strong>)<br />
- Quick recovery due to expansionary policies that Korea<br />
took.<br />
- At the end, 5 out of 9 surviving major banks fell into<br />
foreign ownership.<br />
Problems are still embedded.<br />
25