Economic Report President

States and Europe fell sharply, and as other emerging marketeconomies were forced to raise interest rates to prevent a run on theircurrencies. The spread of the crisis to Korea and further deteriorationin Indonesia led to a severe and worsening crisis in the winter.Investor sentiment seemed to improve by March 1998, as the Thaiand Korean currencies stabilized and Korea successfully converted itsshort-term bank debt into longer term loans. Also, higher interestrates and tighter monetary policy in Latin America following the Octoberepisode helped stabilize investors’ confidence in that region. InApril, however, several negative developments led to a new loss ofinvestor confidence. Plunging commodity prices, resulting in part fromthe deepening recession in Asia, hurt a wide range of commodityexporters. Oil exporters such as Ecuador, Mexico, Russia, andVenezuela were hit hard by plunging oil prices. Agricultural exporterssuch as Argentina, Australia, Canada, and New Zealand were alsoaffected, as the crisis in Asia and abundant global supply led to a sharpfall in agricultural prices. Mineral producers such as Chile and Perusuffered damage as well.Violence in May surrounding the collapse of the Suharto regime devastatedconfidence in Indonesia and again shook confidence in the restof East Asia. Currency pressures on economies as far removed asSouth Africa, a sharp deterioration of business conditions in Japan,and the continued fall of the yen added to the pessimism. The yen’sweakness led to concern that China might devalue its currency inresponse and that the Hong Kong peg would collapse, causing anotherround of currency depreciations in Asia. However, China gave assurancesthat it would not devalue, and the pegs held. These adversedevelopments, however, led to another round of sharp declines inemerging market equities starting in May.Financial turmoil spread next to Russia, where the fall in the priceof oil (one of the country’s biggest exports) fed a growing currentaccount imbalance in an economy already weakened by inadequate taxcollection, a large fiscal imbalance financed by short-term ruble debt,and disappointment at the slow pace of structural reform. The manifestationsincluded a sharp fall in the Russian stock market, speculativepressure on the ruble, and a sharp increase in the interest rate onruble-denominated public debt. Despite negotiation in July of an IMFpackage aimed at reducing the fiscal deficit, the Russian governmentfailed to restore confidence. It proved unable to implement its anticrisisprogram in the face of opposition from the legislature, from powerfulbusiness interests, and from advocates of a return to communism.The deterioration in market conditions culminated in a comprehensivebreakdown in confidence in the first weeks of August.On August 17 the Russian government, faced with growing losses offoreign reserves triggered by capital outflows, decided to devalue theruble, to restructure its short-term public debt unilaterally in a form229