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Key Topics
Requirement
1. How did the exchange rate behave before, during, and after the crisis? (use quarterly data for two years prior and three years after the crisis –IMF)
2. Was the short-run interest rate a predictor of approaching crisis? (use IMF quarterly data for the money market rate or government bills rate).
3. Was there a build-up of short term debt? Was there sudden stop? (use IMF quarterly data (or annual if quarterly data not available) foroutstanding short-term debt from Financial data concept).
4. How large was the real reduction in GDP and how long did it take to recover to pre-crisis levels (IMF quarterly real GDP data).
5. Was there also a banking crisis? (begin with on-line search for information about the crisis – Economist Intellingence Unit Country Reports are a good source.
6. What happened to the levels of official foreign-exchange reserves before and during the crisis? IMF Foreign reserves concept.
7. Was there an international “bail out” program – again check general sources and IMF website for details of country programs.
Solution
Indonesia- 1997-1998
ANSWER 1: Before the crisis, the system of the exchange rate was described as the free foreign exchange system. But there were some restrictions on the currency’s free movement like forwarding sales to non-residents for foreign exchange to minimize the volatility of the exchange rate. During the time of crisis, the rupiah was devalued by 50 percent against the US dollar, and it further replaced it as the external anchor along with the basket of currencies which are not disclosed. After the crisis, the rupiah was devalued by 40 % then 31 % and the nominal depreciation was targeted against the US dollar ranges from 3 to 5 %.
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ANSWER 2: The short-run interest was not a predictor of approaching crisis as the country was not suffering from the great withdrawals of credit. The stock which was available was not low as compared to the burden of services of external debt ("IMF -- International Monetary Fund Home Page", 2016). Further, there was no shortfall of liquidity, and it can be clearly said that the rate of short-run interest was not a predictor in order to approach the crisis.
ANSWER 3: During the time of crisis there was a build-up of short-term debt, and there was a sudden stop at US$34.7 billion and the reserves of foreign exchange at US$19.9 billion. Further as a result there was a weakness in the corporate industry and was unable to achieve access to the liquidity in order to conduct trade internationally and nationally and further contributed to the decrease in output ("IMF -- International Monetary Fund", 2016).
ANSWER 4: The GDP of Indonesia was declined by 14.8 percent during the time of crisis. After the crisis, it also declined by 2 percent before returning to the same position as 6it was before the crisis. Further, with the good of amount of rain and the bushfires, the output was recovered and improved in the terns of trade which were being created by the decline in the rupiah. In June 1999, the situation of Indonesia was brought to the pre-crisis level ("IMF -- Indonesia", 2016).
ANSWER 5: There was a banking crisis during the crisis of Indonesia. Moreover, there was simply bankruptcy due to the base of the capital of the commercial banks which are inadequate in order to recover the huge proportion of loans that are partly innate from the financial repression. During the time of crisis, the capital base was very low. Further, the bad debt maximized after the reform.
ANSWER 6: During the time of crisis the inflation rate was low, and the huge number of corporations of Indonesia were borrowing the US dollar. And as a result, the companies which borrowed the money faced the huge cost which was imposed on them by the decline in rupiah. Before the crisis, Indonesia had a great deficit of current account and the maintenance of the rate of fixed exchange enhanced by the external borrowing and further led to great exposure to the risk of foreign exchange ("IMF -- Asian Crisis", 2016).
ANSWER 7: No, there was no program of the international bailout for Indonesia. This is a package for rescue for the most impacted economies in order to allow the impacted nations to escape default. And this package is for financial, banking and currency system reforms. Therefore, the economy of Indonesia was not affected at that level.
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IMF -- Asian Crisis. (2016). Imf.org. Retrieved 28 November 2016, from https://www.imf.org
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IMF -- Indonesia. (2016). Imf.org. Retrieved 28 November 2016, from http://www.imf.org/
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IMF -- International Monetary Fund Home Page. (2016). Imf.org. Retrieved 28 November 2016, from https://www.imf.org
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IMF -- International Monetary Fund. (2016). Imf.org. Retrieved 28 November 2016, from https://www.imf.org
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