Surge in capital inflows
One of the biggest reasons for Asia’s financial crisis was the surge in capital inflows. It was the primary aspect that created panic within the entire Asia. This panic further led many investors to pull out their money, which resulted in a financial crisis.
The devaluation of currencies
The two of the robust currencies of Asia, including the Japanese ‘yen’ and the Chinese ‘renminbi’, was devalued to a large extent. This affected the export revenues immensely and brought crisis into Asia. (See Why do countries devalue their currency?)
Weakness of the Asian financial systems
Asia’s financial system was not much organized or systematic as they were prone to the financial crisis. The biggest weakness of their economic systems was that they did not include any incentives for effective risk management.
The collapse of the Thai baht
Many investors started assessing the financial systems in Thailand just after they realized and witnessed the collapse of the Thailand currency ‘baht’.
An acute decline in semiconductor prices
Semiconductors’ prices slump adversely affected export revenues. It was because Asia was extensively dependent on the export of semiconductors.
Inefficient use of capital inflows
The inefficient utilization of capital inflows was one of the predominant reasons that caused the financial crisis in Asia. This inefficient usage led to an increase in the number of current account defects. It impacted on the well-being of Asia’s economy adversely. Thus, it resulted in a crisis.
Interruption in credit flows
The whole of Asia experienced an abrupt economic slowdown when several Asian banks have to deal with bankruptcies of borrowers, due to which the whole of Asia undergone the disruption in cash flows.
Underestimating economic weakness
Some countries predicted the possibility of experiencing economic weakness, but many countries ignored and underestimated the warning signs that were showing up the occurrence of this situation. (See Summary of the Syrian Crisis)
The fixation of exchange rates
Some borrowers were immensely affected as they were misguided about the exchange rates and were given a false sense of security. Subsequently, those borrowers lost plentiful money when devaluation in Asian currencies happened.
Asset price inflation
The price of the assets was inflated to the levels that were not sustainable as the capital was effortlessly available at much lower rates than before.
Lack of transparency
Many Asian countries were not able to see the warning signs and hence, lacked knowledge about the actual state of their economy. Being unable to comprehend the current situation led to the financial crisis.
What caused the Asian Financial Crisis of 1997?
Asian Financial Crisis 1997 Causes, Effects, & Facts | What caused the Asian Financial Crisis of 1997?