How did the vulnerabilities in Asian economies lead to the Asian financial crisis of 1997-1998

Question

What will be an ideal response?

Answer 1

First, a number of Asian countries had large trade and current account deficits. This implied large financial account borrowing and large capital inflows, particularly because rates of growth in these economies were relatively high, making them attractive places to invest. Secondly, many economies had currencies that were pegged to the dollar, and as the dollar appreciated, these currencies appreciated as well, causing overvaluation and misalignment of currency values, as well as reducing the competitiveness of exports. Third, the financial sectors of these countries were weak, with mismatches between the maturities of assets and liabilities and inadequate regulation due to corporate structures that relied heavily on personal and family relationships. The crisis was triggered by reductions in export earnings in Thailand, which then reduced confidence in the ability of the country to maintain its overvalued exchange rate. The expectation of devaluation of the baht caused speculation against it, and at the same time, monetary authorities were reluctant to devalue because it would increase the cost of dollar-denominated international loans. Eventually, the baht had to be devalued, and in turn, this may have caused investors to lose confidence in related economies with similar vulnerabilities, spreading the crisis to other Asian economies.