Lessons acquired through the study of the 1997 asian financial crises

nations financial situation largely reflects its level of development. Finance lowers costs by assisting in the effective operation of the economy. Because of this significance, government organizations constantly give stable and healthy finances considerable attention. Governmental macroeconomic policies can be regulated by their budgetary policies. The basic law of development, however, nevertheless applies to the governments actions and has an impact on the countrys finances. However, the crisis period is among the most challenging times in the financial world. Specifically, the 1997 Asian Financial Crisis is one of the most devastating financial crises in the world. Prior to 1997, economies in East Asian countries continued to grow after a long period of spectacular growth, but the economy suddenly underwent severe changes that led to a recession. First, the Baht lost its price dramatically in Thailand, then quickly spread to South Korea, Indonesia, Hong Kong, Malaysia, and the Philippines. Not to stop, just a few months later, the crisis became global, drawing Russia and Brazil into a spiral. Fortunately, along with China, Taiwan, Singapore, and Vietnam, Vietnam is among the least affected countries in Asia. Since more than 20 years have passed, there have been thousands of pages written about this case, which encourage our team to learn more in detail about the causes, developments, and consequences of the 1997–1998 Asian economic and financial crisis. “What are the risks of such a crisis? Is Vietnam at risk or not? If so, will the Vietnamese economy fall into a crisis in the near future? These concerns have occurred to us and in order to address these questions, our team will describe the nature of a financial crisis from various perspectives. The main objective of this study is to learn from one of the biggest financial crises in history: the Asian financial crisis (19971998) by analyzing causes and consequences in order to avoid and quickly overcome similar crises in the future.

FOREIGN TRADE UNIVERSITY FACULTY OF BANKING AND FINANCE

Hanoi, June 2023

TABLE OF CONTENT

INTRODUCTION 3

LITERATURE REVIEW 5

CHAPTER 1: FINANCIAL CONDUCT THEORY 5

1.1 Definition of Financial Crisis 5

1.2 Types of Financial Crisis 5

1.2.1 Currency crisis 5

1.2.2 Banking Crisis 7

1.2.3 Debt Crisis 7

1.3 Symptoms of a Financial Crisis: A Comprehensive Analysis 8

DISCUSSION 13

CHAPTER 2: The 1997 Financial Crisis 13

2.1 The cause of the 1997 Financial Crisis 13

2.1.1 Subjective reasons 13

2.1.2 Objective reasons 14

2.2 What happened during the 1997 Asian financial crisis 15

2.2.1 Thailand 16

2.2.2 Indonesia 17

2.2.3 South Korea 18

2.2.4 Philippines 19

2.2.5 Hong Kong 20

2.2.6 Malaysia 20

2.3 Consequences of the 1997 Asian financial crisis 21

CHAPTER 3: Lessons for Vietnam 22

3.1 Some solutions the government used to limit the impact of the financial crisis on the Vietnamese economy 22

3.2 Lessons learned from the financial crisis on the Vietnamese economy 24

CONCLUSION 25

REFERENCE 26

I Rationale of the research INTRODUCTION

The national economy of a nation places a great deal of importance on the financialsector A nation's financial situation largely reflects its level of development Finance lowerscosts by assisting in the effective operation of the economy Because of this significance,government organizations constantly give stable and healthy finances considerable attention.Governmental macroeconomic policies can be regulated by their budgetary policies The basiclaw of development, however, nevertheless applies to the government's actions and has animpact on the country's finances However, the crisis period is among the most challenging times

in the financial world Specifically, the 1997 Asian Financial Crisis is one of the mostdevastating financial crises in the world

Prior to 1997, economies in East Asian countries continued to grow after a long period ofspectacular growth, but the economy suddenly underwent severe changes that led to a recession.First, the Baht lost its price dramatically in Thailand, then quickly spread to South Korea,Indonesia, Hong Kong, Malaysia, and the Philippines Not to stop, just a few months later, thecrisis became global, drawing Russia and Brazil into a spiral Fortunately, along with China,Taiwan, Singapore, and Vietnam, Vietnam is among the least affected countries in Asia Sincemore than 20 years have passed, there have been thousands of pages written about this case,which encourage our team to learn more in detail about the causes, developments, andconsequences of the 1997–1998 Asian economic and financial crisis “What are the risks of such

a crisis? Is Vietnam at risk or not? If so, will the Vietnamese economy fall into a crisis in thenear future?" These concerns have occurred to us and in order to address these questions, ourteam will describe the nature of a financial crisis from various perspectives The main objective

of this study is to learn from one of the biggest financial crises in history: the Asian financialcrisis (1997-1998) by analyzing causes and consequences in order to avoid and quicklyovercome similar crises in the future

II Objective of the research

The objective of this study is to explore the lessons learned from the analysis of the 1997Asian financial crisis Examining the causes, impacts, and responses to this crisis is crucial for policymakers and stakeholders in order to enhance financial stability and prevent similar crises

in the future By delving into the various aspects of the crisis, including its triggers, economic consequences, and policy interventions, valuable insights can be gleaned to inform decision- making and risk management strategies Understanding the key takeaways from the study of the

1997 Asian financial crisis is vital for shaping effective measures and safeguards in the global financial system

II Scope of The Research

To fulfill the aforementioned objective, our study aims to examine and analyze dataderived from the Asian region The dataset sourced from the World Bank will encompass a timeframe of 21 years, spanning from 2000 to 2020 By encompassing the entire Asian population,

we aim to achieve a comprehensive outcome that enables us to draw definitive conclusions Thisapproach will facilitate the acquisition of valuable insights and lessons derived from the study ofthe 1997 Asian financial crisis, thereby contributing to a deeper understanding of its causes,impacts, and effective response strategies

III Research Methodology

The primary methodology employed in this paper is qualitative research accompanied bytheoretical analysis To extract lessons for Vietnam from the study of the 1997 Asian financialcrisis, we adopt a case study approach This approach enables us to analyze the symptoms,effects, and responses of the crisis in a chronological order, thus facilitating a comprehensiveunderstanding of how the economy reacts to such crises Moreover, the case study approachallows for in-depth exploration of intricate issues within Vietnam's economic context, providingvaluable insights and lessons derived from real-life settings

IV Structure of the research

This research has 3 main sections as follows (not to mention the introduction andconclusion):

Chap 1: Financial conduct theory

Chap 2: The 1997 financial crisis

Chap 3: Lessons for Vietnam

is known as a financial crisis.

1.2 Types of Financial Crisis

1.2.1 Currency crisis

When monetary speculative activity causes a sharp decline in the value of the domesticcurrency or when the responsible authorities are compelled to defend their currency byincreasing interest rates or using a significant portion of their foreign exchange reserves, amonetary crisis, also known as an exchange rate crisis or a balance of payments crisis, occurs

a The First Monetary Crisis Model

P Krugman (1979) developed The First Monetary Crisis Model, which describes futuresbalance crises under fixed exchange rate circumstances that are attacked by speculative activity

This pattern appears in some nations with too weak macroeconomic foundations, large budgetdeficits, an excessive money supply (perhaps created by the government to cover the deficit), andhigher inflation, which results in a severe deficit balance The government was compelled toregularly interfere by selling foreign currencies to the market to maintain a fixed exchange ratedue to the threat of a drop in the native currency Speculative attacks start to happen whenforeign exchange reserves fall below a particular threshold, accompanied with too-weakmacroeconomic base circumstances and even an increase in political and social unrest.Speculative attacks start to happen as soon as foreign exchange reserves fall below a particularthreshold, accompanied with too weak macroeconomic base conditions and even an uptick inpolitical and social tensions At some point, the government is compelled to abandon the fixedexchange rate system and switch to floating exchange rates, which result in a continuousdepreciation of the domestic currency and a monetary crisis The crises in a few Latin Americannations in the 1980s were when this tendency was most obvious.

b The Second Monetary Crisis Model

Obstfeld (1994 and 1995) created the second model of a financial crisis This kind of crisis,also referred to as a "self-fulfilling crisis," can happen in nations with moderate financial andmacroeconomic weaknesses, but the adherence to a fixed exchange rate regime is undermined byexcessively expensive exchange protection measures (such as tightening currencies, high interestrates, and detrimental effects on economic growth and job creation) Speculators could sell theirdomestic currency and acquire foreign currency prior to the signal In response to widespreadattacks by monetary speculators, the government was compelled by these forces to abandon afixed exchange rate regime in order to enforce an extended monetary policy, which led to theonset of a crisis

The state of incomplete information and lack of symmetry gives rise to another variation ofthe second model of the monetary crisis If one or more banks have "problems," thiscircumstance causes "group" behavior, which in turn triggers financial panic and eventuallyresults in a financial and monetary crisis The European Monetary System crisis of 1992–1993provides an example of this approach in action

c The Third Monetary Crisis Model

Yoshitomi and Ohno (1999) developed the Third Monetary Crisis Model to explain capitalaccount crises in international balance of payments (Payment Balance).Financial and bankingcrises, often known as double crises, frequently follow capital account crises.Without a correctsequence, the liberalization of capital accounts has resulted in two outcomes that set up a doublecrisis: the vast inflow of capital surpasses the future balance sheet deficit, and the amount ofshort- term capital is too high Excessive capital inflows that far outpace the hybrid balance sheetdeficit (CA) have led to a rise in foreign currency reserves and an excess balance of payments(BOP) Credit, investment, and domestic consumption all increased as a result Increased fiscaldeficits, a "bubble economy," and surplus supply are the results of excessive investment (excessproduction capacity) and wasteful investment (in industries like real estate ) Investorswithdraw money from the economy when they are aware of other indicators of unpredictability,such as declining real

estate and stock prices as well as currency speculative attacks As a result, the foreign exchangereserves gradually ran out and the balance of payments suffered a significant deficit, signifying amonetary crisis Under the conditions of capital balance liberalization, a quantity of short-termcapital with an overweight proportion (larger than many foreign reserves) was poured into theeconomy As the native currency declined and significant sums of cash from foreign investorswere abruptly withheld, the balance sheet of assets for both businesses and the banking-financialsystem rapidly declined Credit became tighter as a result of the decline in bank net assets, andbank balance sheets deteriorated This cycle and resonance process speeds up the onset of crisesand drags economies into a protracted period of recession The Asian currency crisis of 1997–

1998 is seen as a representative illustration of the Third Monetary Crisis paradigm

d The Fourth Monetary Crisis Model

Because it is the longest and most severe recession since the Great Depression of the 1930s,the global economic crisis of 2008–2009 is historic The biggest bankruptcy in history occurred

on September 15, 2008, when the investment bank Lehman Brothers collapsed The U.S.government acquired up to 80% of the massive global insurance corporation AIG the followingday, making it the largest private sector bailout in history A number of fundamentalmacroeconomics issues were brought up by the crisis, including the significance of globaleconomic imbalances, the nature of financial markets, the ability of monetary policy to preventasset price bubbles, the effects of easing financial regulations, and the issue of "too big" financialinstitutions that are unable to go under

1.2.2 Banking Crisis

When customers make large bank withdrawals, this is what occurs Since banks lend themajority of the deposits, it will be challenging for banks to pay off obligations when clientswithdraw Massive withdrawals may result in bankruptcy, which could result in the loss of manyclients' accounts unless they are covered by deposit insurance A pervasive pattern of large-scalewithdrawals will result in a systemic financial collapse Another possibility is that the stock isnot widely used, but the credit rate has been increased (to raise money) because of worries aboutbudget deficits By this time, the banks will actually be the cause of the current financial disaster

1.2.3 Debt Crisis

Debt Crisis is a circumstance where a nation is unable to repay its national debt When agovernment's tax income is less than its spending for an extended period of time, a country mayexperience a debt crisis In any nation, tax revenue is the main source of funding for thegovernment's expenses The government can issue debt to cover the shortfall when tax receiptsare insufficient This is mostly accomplished by offering investors government treasury bills onthe open market Many countries have experienced debt crises Examples include the LatinAmerican debt crisis of the 1980s, which resulted in a “lost decade” for the region, and theEuropean sovereign debt crisis beginning in 2009

1.3 Symptoms of a Financial Crisis: A Comprehensive Analysis

A financial crisis represents a severe disruption in the functioning of a financial system, oftenleading to significant economic downturns Understanding the symptoms associated with afinancial crisis is crucial for policymakers, economists, and investors in identifying andaddressing potential vulnerabilities Here are some symptoms of a financial crisis, explainingtheir significance and interconnections

● Stock market volatility: During a financial crisis, stock markets exhibit high levels ofvolatility characterized by sharp declines and increased uncertainty Investors experiencepanic selling, leading to substantial market downturns This symptom reflects the loss ofconfidence in the financial system and can trigger a chain reaction of economicchallenges

● Bank failures and liquidity problems: Bank failures and liquidity shortages are commonsymptoms of a financial crisis Insolvency or inadequate liquidity can lead to a loss ofpublic trust in the banking sector It becomes challenging for banks to meet theirobligations and lend to businesses and consumers, exacerbating the economic downturn

● Credit crunch: A credit crunch occurs when there is a sudden reduction in the availability

of credit Lenders become cautious and tighten lending standards, making it difficult forindividuals and businesses to obtain loans This symptom amplifies the economic impact

as businesses struggle to secure financing for operations and investments

● Asset price bubbles: Financial crises are often preceded by the formation of asset pricebubbles, where the prices of certain assets, such as real estate or stocks, becomesignificantly inflated When these bubbles burst, it results in a rapid decline in assetvalues, leading to substantial losses for investors and financial institutions

● Currency depreciation: A significant depreciation in the value of a country's currencyrelative to others is another symptom of a financial crisis Currency devaluation can resultfrom a loss of confidence in the economy, capital flight, or excessive government debt Itleads to higher inflation, increased import costs, and reduced purchasing power forindividuals and businesses

● Rising unemployment: During a financial crisis, job losses increase, and unemploymentrates rise Businesses face difficulties in sustaining operations, leading to layoffs Risingunemployment has a detrimental effect on consumer spending and confidence, furtherdampening economic activity

● Government debt crisis: Mounting levels of government debt can contribute to a financialcrisis If a government struggles to service its debt obligations, it creates concerns aboutits financial stability Investors may lose confidence, leading to increased borrowing costsfor the government and potential sovereign defaults

● Reduced consumer and business confidence: A decline in consumer and businessconfidence is a key symptom of a financial crisis Individuals and businesses becomecautious and reduce their spending and investment activities This decrease in confidencefurther weakens the economy and exacerbates the crisis

● Declining economic growth: A significant slowdown or contraction in economic growth

is a common symptom of a financial crisis Reduced consumer spending, businessinvestments, and export activity contribute to the economic downturn GDP declines,leading to job losses and decreased income levels

● Increased financial stress: During a financial crisis, financial stress escalates acrosshouseholds, businesses, and financial institutions Debt burdens become unsustainable,leading to defaults and bankruptcies The banking system experiences heightenedinstability, further impairing the flow of credit

Recognizing and understanding the symptoms of a financial crisis is crucial for effectivecrisis management and prevention The interplay between these symptoms creates a complexweb of challenges that can have far-reaching economic consequences Policymakers andeconomists must remain vigilant, implementing appropriate measures to address vulnerabilitiesand mitigate the impact of financial crises By learning from past crises, we can develop moreresilient financial systems and foster sustainable economic growth

1.4 The Consequences of the Financial Crisis.

1.4.1 Under the impact of the financial crisis and global economic downturn, the trade, investment, and consumption activities of each country have sharply declined, leading to the risk of economic recession in each nation Furthermore, many countries have faced state-level bankruptcy.

The manifestations of the financial crisis and global economic downturn often result in severe macroeconomic impacts Macroeconomic balances are disrupted, currencies depreciate, exchange rates fluctuate dramatically in a depreciating direction, high inflation and hyperinflation emerge, public debt burdens increase rapidly, stock markets collapse, assets in various countries experience sharp devaluation, many businesses, banks, and financial institutions fail, unemployment rates soar, millions of people fall into poverty and hunger, social disorder and conflicts arise, and riots and wars occur.

It can be seen that financial crises and global economic downturns have causeddevastating consequences The global financial crisis and economic downturn of 1929-1933 gaverise to the rise of fascism in the 1930s and were the main causes of the brutal World War II Theaftermath of this crisis and the Second World War led to the collapse of many regimes and thedisintegration of several economies The Asian financial crisis of 1997-1998, starting fromThailand, resulted in the collapse of some economies and political systems The most severelyaffected countries from this financial crisis were Indonesia, South Korea, and Thailand Inaddition to the destructive impacts on the economies of these countries, the economic crisis of1997-1998 led to social conflicts and political instability in some nations, culminating in the fall

of President Suharto in Indonesia and Prime Minister Chavalit Yongchaiyudh in Thailand.Radical Islamic organizations and separatist movements gained strength in Indonesia as thecentral government weakened The global economic crisis of 2008, originating from thesubprime mortgage crisis in the United States in 2007, was caused by loose credit policies ofbanks and real estate investment institutions, through the intricate business relationships of theglobalized banking system This crisis emerged as a series of major financial institutionscollapsed, notably the bankruptcy of Lehman Brothers

This bank, just a year prior, was considered the best real estate investment bank in the UnitedStates Following Lehman Brothers, other major banks such as Bradford and Bingley (UK),Hypo Real Estate (Germany), Fortis (Belgium), Dexia (France), and Yamamoto Life (Japan) alsofaced significant difficulties In 2008, 22 commercial banks in the US went bankrupt (withWashington Mutual being the largest, with total assets of $307 billion) In the third quarter of

2008 alone, 171 banks were listed as "problematic," the highest level since 1995

The nature of financial crises has been systematized by economists For example, theStructural Crisis (1929-1933) manifested in excessive investment focused on real estate andstock markets The Commodity Crisis (1973-1975) was characterized by energy and food crises.The Institutional Crisis reflected the gradual reduction of state regulation and weak statemanagement in economic and financial matters The fundamental causes leading to these crisissituations include financial and non-bank financial institutions' activities exceeding state control,the establishment and operation of uncontrolled intermediary institutions in market economies,unregulated international speculative activities, encouragement of absolute free markets, and therelaxation of state oversight and regulation of the market

1.4.2 Financial crises and global economic downturns have complex implications for security, defense, and national protection.

Firstly, economic resources are diminished, leading to a reduction in the capabilities of national

security and defense for many countries

When a global financial crisis and economic downturn occur, countries are difficult toavoid being affected by their impact, and many countries fall into crisis and suffer severe losses

In times of crisis, nations often experience capital outflows, significant declines in investment,and their economies nearly paralyzed Economic organizations lack the ability and conditions toobtain financing for production and business development Market confidence is lost, and thevalue of assets for individuals, organizations, and even the state drastically declines Theconsequences include the collapse and bankruptcy of financial institutions and businesses,requiring the state to allocate financial resources to intervene in the economy Complex socialproblems arise that need to be addressed, while debts suddenly increase, all while the economyexperiences low or no growth, depleting the economic strength of these countries Wheneconomic resources are depleted, resources for defense and security also decrease The demandsfor military equipment cannot be met, resources for sustaining the military are cut, and defenseand security activities are constrained

In addition to the aforementioned consequences, many countries also face a suddenincrease in public debt, which redirects resources towards debt repayment and addressingemerging issues, leaving little capacity to allocate for defense and security From this point, theability to ensure security, defense, and protect the country becomes clearly difficult and willdiminish When financial resources and security capabilities are reduced, the risk of territorialintegrity being threatened by external aggression becomes evident Furthermore, a globalfinancial crisis and economic downturn will affect countries with economies dependent onforeign aid and low domestic economic strength, as they have to accept constraints imposed bystronger nations and international financial institutions

For example, to support the global financial system, the International Monetary Fund(IMF) and the World Bank have established operations and emergency lending programs worthbillions of dollars Stronger countries and international financial institutions often imposecomplex conditionalities on loans, including deep interventions not only in macroeconomicpolicy-making but also in the security, defense, and national protection issues of countries withdependent economies For instance, during the Asian financial crisis in 1997, governments ofIndonesia, Thailand, and other countries were influenced by the IMF Additionally, some largercountries may take advantage of financial crises and economic downturns in smaller countries toimpose greater economic, political, social, and diplomatic dependence on them, and in somecases, even territorial control.

Secondly, complex social transformations diminish the strength of security and national

defense

In the face of the actual impact of global financial crises and economic downturns, businesses,banks, and the livelihoods of people have gone bankrupt, leading to a significant reduction inemployment opportunities and a sharp increase in unemployment High prices, inadequatewages, and diminished incomes fail to guarantee a decent standard of living for individuals,pushing many into extreme poverty, inevitably leading to social unrest Societal turmoil fuelsprotests, strikes, theft, and various forms of disorder, threatening social stability Confrontedwith such circumstances, many political leaders have to resign, governments are overthrown, andpower structures undergo changes When the ruling authority collapses, the military and securityforces also experience upheaval, significantly diminishing their combat capabilities andundermining the ability to ensure security, national defense, and territorial protection.Simultaneously, when domestic turmoil and internal enemies emerge, external adversaries seizethe opportunity to encroach upon the integrity of the territory, causing substantial erosion ofnational sovereignty The reality demonstrates that larger nations are prone to invading theterritories of smaller nations, subjecting them to severe consequences from the financial crisisand economic downturn that occurred worldwide The threat to territorial sovereignty forsmaller nations is ever-present

Thirdly, global disorder and conflicts occurring in many places have a significant impact

on security, national defense, and homeland protection of each country.The reality of global financial crises and economic downturns has shown that there is politicalinstability in many countries and armed conflicts in various regions around the world The spread

of armed conflicts in different regions leads to a decline and collapse of the global economy.When the global economy declines, all countries are affected (due to high levels of globalization,

no economy can develop in isolation, and no economy can avoid the impact of global economicfluctuations) This has a profound impact on the security, national defense, and homelandprotection

Fourthly, terrorism and population migration pose threats to the national defense and

security of many countries

Terrorist activities are spreading, and the wave of refugees from Syria appears to be amajor disaster for Europe and has negative implications for the world as a whole When financialcrises and economic downturns escalate, criminal behavior becomes more extreme, terroristorganizations become more ruthless, and the influx of refugees intensifies, leading toincreasingly complex situations in countries affected by refugee flows and terrorist activities.Consequently, the costs for ensuring security and national defense in these countries mustsignificantly increase in order to maintain order.

Another direct cause of the crisis was the weak handling of the crisis itself.

Many economists argue that when currencies were first attacked, Asian countries should haveimmediately floated their currencies instead of trying to defend the exchange rate, whicheventually depleted their foreign exchange reserves and prolonged the speculative attacks.Inappropriate exchange rate regimes between regional currencies and the US dollar, creating aforced exchange rate system, were the primary causes of the depreciation of numerous regionalcurrencies Although the crisis originated from the Thai baht's float, leading to a contagion effect

on the peso, ringgit, and rupiah, in reality, these currencies had already been devalued against theincreasing trend of the US dollar Thailand and some Southeast Asian countries attempted toimplement what economists call an impossible trinity of policies They fixed their currencies tothe US dollar while allowing capital freedom (capital account liberalization) The rapideconomic growth of Southeast Asia in the 1980s and early 1990s created upward pressure ondomestic currencies To maintain the fixed exchange rate, Southeast Asian central banksimplemented loose monetary policies

As a result, money supply increased, leading to inflationary pressures Sterilizationpolicies were applied to counter invisible inflation, which further boosted capital flows into theeconomy In the mid-1990s, South Korea had relatively strong macroeconomic fundamentalsexcept for the continuously appreciating Korean won against the US dollar since 1987 Thisweakened South