Economic Report President

fall in local currencies dramatically increased the domestic currencyvalue of the foreign-denominated debt, unleashing further financialpressures on banks and firms. The free fall of currencies was intensifiedby the sudden rush of firms, banks, and investors to cover their previouslyunhedged liabilities. Thus, accelerating depreciation aggravatedthe original foreign currency debt problem, creating a vicious circle.Concern among investors about the commitment of governments tostructural reforms heightened their uncertainty about policy, contributingto massive capital outflows. Although problems with the fundamentalslikely triggered the crisis, currency and stock markets mayalso have overreacted, with panic, herd behavior, and a generalizedincrease in risk aversion producing a sudden reversal of capital flows,exacerbating the crisis.The sharp reversal of capital flows to East Asia in the second half of1997 is clearly evident in the data. Table 6-2 shows that net privateflows to five Asian crisis countries (Indonesia, Korea, Malaysia, thePhilippines, and Thailand), which had averaged $90 billion per year in1995-96, experienced a dramatic turnabout in 1997 to a net outflow of$1 billion. This sharp reversal, amounting to about 10 percent of thecombined GDPs of these countries, took place entirely in thesecond half of the year, as foreign investors fled and internationalbanks sharply contracted their short-term loans. Commercial banksTABLE 6-2.— Five Asian Economies: External Financing[Billions of dollars]Item1995199619971998(estimated)1999(projected)CURRENT ACCOUNT BALANCE .................................. -41.0 -54.6 -26.3 58.5 43.2External financing, net ............................................. 81.5 100.6 28.8 -.5 -1.2Private flows, net ................................................ 79.0 103.2 -1.1 -28.3 -4.8Equity investment, net ................................... 15.9 19.7 3.6 8.5 18.7Direct equity, net ....................................... 4.9 5.8 6.8 6.4 14.2Portfolio equity, net ................................... 11.0 13.9 -3.2 2.1 4.5Private creditors, net ...................................... 63.1 83.5 -4.7 -36.8 -23.4Commercial banks, net .............................. 53.2 65.3 -25.6 -35.0 -18.8Nonbanks, net ............................................ 9.9 18.2 21.0 -1.7 -4.6Official flows, net ................................................ 2.5 -2.6 29.9 27.8 3.5International financial institutions ................ -.3 -2.0 22.1 21.6 -2.0Bilateral creditors .......................................... 2.9 -.6 7.9 6.1 5.5Resident lending/other, net ...................................... -26.5 -26.8 -35.0 -16.9 -14.9Reserves excluding gold 1 ......................................... -14.0 -19.3 32.5 -41.1 -27.01Minus sign indicates increase.Note.— Countries are Indonesia, Malaysia, Philippines, South Korea, and Thailand.Detail may not add to totals because of rounding.Source: Institute of International Finance.241