Asian financial crisis

The Asian financial crisis was a financial crisis that started in July 1997 in Thailand, and affected currencies, stock markets, and other asset prices of several Asian countries, many part of the East Asian Tigers. It is also commonly referred to as the Asian currency crisis or locally, although inaccurately, as the IMF crisis.

Indonesia

In June 1997, Indonesia seemed far from crisis. Unlike Thailand, Indonesia had low inflation, a trade surplus of more than 900 million dollars, huge foreign exchange reserves of more than 20 billion dollars, and a good banking sector.

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

But a large number of Indonesian corporations had been borrowing in U.S. dollars. During preceding years, as the rupiah had strengthened respective to the dollar, this practice had worked well for those corporations -- their effective levels of debt and financing costs had decreased as the local currency's value rose.

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

In July, when Thailand floated the baht, Indonesia's monetary authorities widened the rupiah trading band from 8 percent to 12 percent. The rupiah came under severe attack in August. On 14 August 1997, the managed floating exchange regime was replaced by a free-floating exchange rate arrangement. The rupiah dropped further. The IMF came forward with a rescue package of 23 billion dollars, but the rupiah was sinking further amid fears over corporate debts, massive selling of rupiah, strong demand for dollars. The rupiah and Jakarta Stock Exchange touched a new historic low in September. Moody's eventually downgraded Indonesia's long-term debt to junk bond.

Related Topics:
14 August - 1997

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

Although the rupiah crisis began in July and August, it intensified in November when the effects of that summer devaluation showed up on corporate balance sheets. Companies that had borrowed in dollars had to face the higher costs imposed upon them by the rupiah's decline, and many reacted by buying dollars, i.e. selling rupiah, undermining the value of the latter further.

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

The inflation of the rupiah and the resulting steep hikes in the prices of food staples led to riots throughout the country in which more than 500 people died alone in Jakarta. In February 1998, president Suharto sacked the governor of Bank Indonesia, but this proved insufficient. Suharto was forced to resign in mid-1998 and B. J. Habibie became president.

Related Topics:
Jakarta - Suharto - B. J. Habibie

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

Indonesia lost 13.5% of its GDP that year.

~ ~ ~ ~ ~ ~ ~ ~ ~ ~