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Financial Crisis in Southeast Asia As early as 1997 Asian currencies experienced intense market pressures, stock markets suffered heavy sell-offs and a major regional financial crisis followed. It started in Thailand and spread with alarming speed to most of its neighbors in East Asia, then to Russia and Latin America. Terms such as "infection" and "contagion" were used early on to describe the "malignant" spread of collapsing currencies and economic turmoil which followed the collapse of the Thai baht in July 1997. Millions were thrown into poverty, bankruptcies mushroomed, stock markets plummeted and in Indonesia's case, economic disaster helped topple the government, ending the 32 year reign of President Suharto.

The float and devaluation of the Thai currency, the baht saw investors abandon it and exposed the weaknesses in the debt-ridden banking system. Many businesses were unable to repay their debts and defaulted on their loans, causing more problems for the banks. The government couldn't afford to save the banks. At the same time, other currencies throughout the region were crashing. Some of the hardest hit, including those of Malaysia, Indonesia and South Korea lost nearly 40% of their value by the end of 1997.

By June 1998 Indonesia's rupiah had lost 85% of its value, hitting its record low of 16,000 to the US dollar. Thailand, Indonesia and South Korea turned to the International Monetary Fund (IMF) for help. In return for a total of US$120 billion dollars in bailout funds each government agreed to cut government spending, raise taxes, restructure the financial sectors, and clean up corrupt business practices. The $57 billion South Korean package was the largest the IMF had ever arranged, surpassing the $48 billion rescue for Mexico in 1994 during its peso crisis. In Thailand, dozens of non-bank financial firms were closed. It was the first time the government hadn't saved them.

Under intense criticism for not improving the state of the economy, Thai Premier Chavalit Yongchaiyudh resigned in November. The social consequences of the crisis were soon apparent. Unemployment exploded, doubling even in less affected countries such as Hong Kong, Singapore and China. An International Labor Organization study revealed the jobless in Indonesia rose from 4.3 million to 13.7 million between August 1997 and December 1998. In Thailand unemployment more than doubled.

With the rise in poverty, children were forced to drop out of school, people's health deteriorated. The austerity measures demanded by the IMF came in for sustained criticism, especially in Indonesia's case. The cure prescribed by the IMF was seen as worse than the disease. Social unrest and rioting followed the massive increases in the price of food and the general cost of living. The "quick-fix" measures of the IMF insisted government spending had to be cut severely and interest rates raised to try and prevent the outflow of capital. It later relaxed some of its policies, agreeing it had underestimated the severity of the crisis and should have tailored its prescriptions to each country's circumstances.

Signs of an export-led recovery were emerging in 1999, with South Korea the strongest of the three countries which had received IMF assistance. The East Asian region as a whole now has economic rates of growth approaching pre-crisis levels. With the exception of Indonesia, where political uncertainty weighs on the economy, forecasters are cautiously optimistic, adding the proviso that reform efforts do not weaken. Thailand GENERAL BACKGROUND Thailand's economy has experienced strong growth over the past year, fuelled by improved demand for Thai exports, as well as by growth in domestic demand.

The country's real gross domestic product (GDP) grew 5.3% in 2002, up from only 1.9% in 2001. Real GDP growth for 2003 is projected at 6.4%. Longer-term annual growth rates in 2004 and beyond are projected in the range of 5.8%-6.6%. Still, the risks confronting Thailand's economic recovery are serious.

The Thai economy is burdened by a relatively weak banking sector with a high proportion of non-performing loans. Delays in the restructuring of corporate debt also have been worrisome enough to prompt warnings from the International Monetary Fund (IMF) and international credit rating analysts. Any worldwide economic downturn could affect Thailand rapidly due to these structural weaknesses. Thailand's energy sector is undergoing a period of restructuring and privatization.

The Thai electric utility and petroleum industries, which historically have been state-controlled monopolies, are currently being restructured COUNTRY OVERVIEW Chief of State: King Phumiphon Adunyadet (since 6/9/46) Prime Minister: Thaksin Shinawatra (since February 2001) Independence: 1238 (traditional founding date) Population (2003 E): 64.3 million Location / Size: Southeastern Asia/514,000 square kilometers (198,455 square miles), about twice the size of Wyoming Major Cities: Bangkok (capital) Language: Thai, English, ethnic and regional dialects Ethnic Groups: Thai (75%), Chinese (14%), other (11%) Religions: Buddhism, 95%; Muslim, 4%; Other, 1% ECONOMIC OVERVIEW Currency: Baht (Bt) Exchange Rate (10/3/03): US$1 = Bt 39.7 Gross Domestic Product (2002 E): $126.5 billion (2003 E): $140.1 billion Real GDP Growth Rate (2002 E): 5.3% (2003 F): 6.4% Inflation Rate (consumer prices) (2002 E): 0.6% (2003 F): 1.8% Current Account Balance (2002 E): $7.6 billion Merchandise Exports (2002 E): $66.8 billion Merchandise Imports (2002 E): $57.0 billion Trade Balance (2003 E): $9.8 billion Major Export Products (2003): Textiles, canned food, integrated circuits, rice, tapioca, rubber, maize, precious stones Major Import Products (2003): Food and beverages, household appliances, chemicals, base metals, machinery, fuel and lubricants Major Trading Partners (2003): Japan, United States, Malaysia, Singapore, EU External Debt (2002 E): $52.3 billion Thai Financial crisis Before the crisis occurred, Thailand, a country once described by the World Bank as 'a model for economic development', plagued by an economic crisis characterized by massive foreign debts, unemployment, inflation and a currency that continues to depreciate in one decade, how did they move from 9.6% growth to this situation? Thai's financial system has been focused from worldwide attention since the summer of 1997 when devaluation of the baht sparked a currency crisis that spread rapidly throughout Southeast Asia. The crisis has unfolded after many years of outstanding economic performance. The causes of the Thai financial crisis were created by several factors such as the burst of bubble economy, the financial liberalization policy, the fixed exchange rate, the high domestic interest rate policy, the ignorance of control and investigation in financial institutions, the structural and managerial erosion of finance and securities, the economic recession, and the political limitation and decision making process.

These factor details are as follows. The highly overvalued of Goods and wages in the real estate and financial sectors which was an economic 'bubble' waiting to burst. Table 1. This cause leads to the financial instituted problems because the asset pricing is greater than its productivity. Besides, Thai's Investment rate (% of GDP) was relatively high which means high GDP wasn't came from the real sector (Table 1).

Hence, the financial institutions can lend to the asset owners more than the productivity. When the bubble economy burst, the borrowers cannot pay their borrowing back. As a result, the financial institutions faced non-performance loan (NPL) problem. In addition, the baht was pegged to a 'basket of currencies', of which the US dollar made up over 80%. The baht and dollar inflation rates were roughly parallel until 1994, when the former jumped to 6% (annual rate), while the latter fell to 2%. As a result, the baht appreciated against the US dollar by roughly 4%, and this began to adversely affect their exports.

The dollar appreciated relative to other major world currencies, including the mark, the franc, the pound and especially the yen. Being largely pegged to the dollar, the baht followed this trend, which further discouraged exports. The fixed exchange rate system and the financial liberalization policy shouldn't be carry out together, but the Bank of Thailand needed to make a certainty for international businesses and remained low inflation rate. The B IBF permitted local and foreign commercial banks in Thailand to take deposits or borrowings in foreign currencies from abroad, and lend them both here and abroad. As a result, massive amounts of currency flowed into the Kingdom. The high domestic interest rate policy has been used because the Bank of Thailand needed to accumulate the international reserve to get rid of the excess demand for dollars in the foreign exchange market by attracted international investors transfer foreign capital to Thailand.

Most of the capital mobility at that time has been invested in the security market and the real estate market. Afterwards, there is oversupply in real estate market. However, the baht's value was pegged at 25 to the dollar. Interest rates in Thailand were much higher than in many other countries, which caused large private firms in Thailand to begin borrowing from abroad to finance projects. Unhedged loans, Banks and finance companies also found it advantageous to borrow funds from abroad and lend them to local borrowers. Moreover, the fixed value of the baht meant that the Bank of Thailand had essentially eliminated the exchange rate risk.

Problems arose when the loans from abroad were channeled to sectors of low productivity - and things rapidly grew worse because most of the loans were unhedged against currency fluctuations. In late 1997, hedge fund managers and currency traders like George Soros began to make speculative attacks on the baht. They realized early on that the Thai currency was overvalued and that speculative attacks would be successful in lowering the value of the baht. Though, local investors started to realize what was happening and began selling baht for dollars in an attempt to hedge against the depreciation of the baht. Exporters with similar motives who received payments in foreign currencies found that it was in their best interest to wait a while before converting those currencies into baht. This widespread selling only hastened the depreciation of the baht, because while there was a huge supply of baht in the money market, there was little demand for it.

The Float system Bank of Thailand (BOT) attempt to defend the baht by using the country's reserves of foreign currencies to buy up the excess supply. But in the process, foreign reserves began to dwindle, while the speculative attacks continued. Thai's foreign reserves were also being used to bail out financial institutions such as the Bangkok Bank of Commerce and 16 other finance companies which had massive 'non-performing' loans - loans that they could not collect, most of which were made to the real estate sector. By August 1997, the situation in the financial sector had become critical, and 42 more finance companies were shut down.

By that time, Thailand was in serious danger of running out of reserves, and it was clear that the currency defense and the other bailout attempts had failed. More than US$30 billion ($7 billion dollars of reserves in the spot market and committing $23 billion to the forward market in an attempt to defend the baht) of foreign reserves had been used in the unsuccessful defense of the baht. On 2 July, The Bank of Thailand, unable to defend the baht any longer, announced that a 'managed float's ystem would be adopted to replace the 13-year-old pegged exchange rate system. This meant that the baht's value would be determined by the demand and supply of the baht in the world money market.

The baht has fallen dramatically, reaching record lows of nearly 44 baht to the dollar in early December. This seems to contradict earlier research which had indicated that the reasonable or equilibrium value of the baht was around 32 baht to the dollar. With the depreciated baht the private sector, particularly the banking sector, found it even more difficult to repay their foreign debts because the float had caused the debt in baht terms to rise. And because it was impossible to obtain any more foreign funds, more and more firms were forced to shut down. With an economy left with virtually no foreign reserves and a weak private sector weighed down with foreign debts, Thailand decided to seek foreign aid to help revive its economy. IMF In mid-August, the International Monetary Fund (IMF) stepped in and organised a package of $17.2 billion in loans to Thailand from various Asian nations.

The main condition of the bailout package was a Bt 60 billion budget surplus, which meant that the government's revenues would have to exceed its expenditures by that amount. Table 3 Projected Payments to Fund (SDR Million; based on existing use of resources and present holdings of S DRs): Forthcoming 2003 2004 2005 2006 2007 Principal 0 0 0 0 0 Charges / Interest 0.33 1.31 1.31 1.31 1.31 Total 0.33 1.31 1.31 1.31 1.31 Total USD 0.23 0.91 0.91 0.91 0.91 Source: web Table 4 Amount of Loan From IMF Country-of-Origin Amount of the Loan (US$ Million) IMF 4,000 Japan 4,000 Singapore 1,000 Australia 1,000 Malaysia 1,000 Hong Kong 1,000 China 1,000 South Korea 500 Brunei 500 Indonesia 500 World Bank 1,500 ADB 1,200 Total 17,200 Source: web The conditions that Thailand must follow are: 1. The government budget must be set at a surplus of 0.6-1% of the GDP. 2. The Official Reserves must be maintained at US$24.8 billion or larger.

3. Current Account Deficits must be reduced from 8% of GDP in 1996 to 5% in 1997 and to 4% in 1998.4. The Value-Added Tax must be raised for the purpose of making higher government revenues from 7% to 10%. 5. The economic growth should be 3-4% for 1997-1998.6. The inflation rate should be put under control at 10% in 1997 and 5-6% in 1998.7.

The exchange rate system must be changed from basket-pegged currency to managed float exchange rate system and it must be maintained as long as the country remains in the program. Most analysts agree that the present economic crisis is Thailand's worst since World War II. The consequences are being felt by Thais from every economic background, but those who are feeling it most are workers in the finance and real estate sectors, as well as construction and other industries that produce goods with high import content. The skyrocketing unemployment rate in these sectors - it is estimated that about 600,000 workers have been laid off already - suggests that it will be some time before the situation improves. Prior to entering the IMF Stand-by arrangement in August 1997, the Bank of Thailand recognized the necessity to segregate viable financial institutions from un viable ones in order to maintain the integrity of the overall financial system and provide the basis for the subsequent reforms and rehabilitation's. A total of 58 insolvent and liquidity strapped finance companies were suspended, 16 of them on 27th June 1997 and another 42 on 5th August 1997, leaving only 33 finance companies in operation.

To prevent further bank runs and systemic risk, as well as to quickly restore public confidence, the Financial Institutions Development Fund (F IDF) was entrusted to provide a guarantee of the deposits and liabilities of the remaining financial institutions. This blanket guarantee will later be phased into a self-financed and limited deposit insurance scheme. Resolution and Consequences FRA and AMC, In October 1997, two important institutions were created as part of the financial restructuring efforts, namely, the Financial Restructuring Authority (FRA), and the Asset Management Corporation (AMC). The FRA was established to review the rehabilitation plans of the 58 suspended finance companies and oversee their liquidation process. The FRA, on 8 December 1997, made an announcement to allow only two of the 58 suspended companies to resume business, Kiatnakin Finance and Securities Public Company and Bangkok Investment Company, while the remaining will undergo a liquidation process.

Their assets worth about 860 billion baht were transferred to the FRA to be auctioned off in an orderly and transparent manner and proceeds subsequently repaid to the creditors. The second institution, AMC, has auctioned assets with a value of about $1.57 billion, comprising $0.9 billion in core assets (which are financial loans and securities loans, e.g. hire purchase loans, mortgage and commercial loans) and $0.68 billion in non-core assets (which are foreclosed assets and companies' assets, e.g. repossessed vehicles, equity and debt paper, and art objects). The aggregate amount of the winning bids totaled 11, $16.5 million, or average 37 percent of the aggregate outstanding balance of $793.75 million. The AMC, is entrusted with the responsibility of bidding for the lowest quality assets of the 56 closed finance companies. They act, therefore, as a buyer of last resort to prevent fire sale of assets, which in turn could undermine underlying collateral values in the total financial system. The assets bought will be managed for resale later.

Financing, the ultimate costs of financial restructuring will be offset, to some extent, by asset recovery, dividend and interest payments from institutions, privatization receipts and, ultimately, by the recovery of the economy. Nevertheless, it is recognized that there could be substantial remaining costs which will be borne by the government. As a first step toward meeting these costs, the government agreed to issue $10 billion of government bonds to restructure the liabilities of the Financial Institutions Development Fund. Additional losses will be fiscal ized by the government over the next two years. Thus $10 billion worth of bonds have been issued, with a maturity ranging from 1 year to 10 years.

Intervention in Banks and Finance Companies Several financial institutions remained unable to recapitalize according to the timeframe. The Bank of Thailand was, therefore, left with no choice but to decisively intervene in a total of 6 commercial banks and 12 finance companies in 1998. The problem was mitigated by first writing down the registered capital and removing management before the injection of new capital through debt-to-equity swaps. This action was premised on the principle that existing shareholders will be the first to bear losses while depositors will be protected in full, and the integrity of the financial system shall be preserved at all times. Table: 5 Banks and Finance Companies in Thailand Year Banks Finance Companies Intervened Total Remaining Closed / Intervened Total Remaining End-1996 - 15 - 91 Dec-97 - 15 56 closed 35 Jan 1998 1 16 - 36 Feb-98 3 16 - 36 May-98 - 16 7 intervened 36 Aug-98 2 16 5 intervened 36 (13 after consolidation is completed) (24 after consolidation is completed) Source: web Corporate Debt Restructuring, The process of corporate debt restructuring is an integral part of the restructuring of the non-performing loans, hence the overall financial system. To this end, the Bank of Thailand, in cooperation with the 5 associations, namely the Board of Trade, Federation of Thai Industries (representing debtor companies) and the Thai Bankers' Association, Association of Finance Companies and the Foreign Banks' Association (representing the creditor groups) have set up a Corporate Debt Restructuring Advisory Committee (CDRAC).

On 3rd August 1998, these associations signed on to a Framework for Corporate Debt Restructuring - the so-called Bangkok Approach, modeled along the London Approach. On 13th October 1998, the CDRAC accepted 200 target cases of debt workouts proposed by the member associations. These target cases involve 353 companies with debt and overdue obligations totaling $16,858.15 million. The cases have been proposed and accepted as they involve complicated multi creditor-type of debt restructuring that requires outside mediator role. The Committee is also closely monitoring the progress on the amendments of the various tax and fee structures for the transfer of ownership of assets (underlying collateral) that would facilitate the process of debt restructuring. Subsequently, the Joint Public-Private Sector Committee established debt restructuring forum at the provincial level to be chaired by provincial governors.

Separately, financial institutions creditors and debtors are also negotiating simpler debt restructuring cases and are required to report the results to the authorities. Table 6. Corporate Debt Restructuring, As at 31 July 2003 Item Case Amount $Million 1. Successfully Restructured (Signed Restructuring Agreement) 10,341 34,770 2. In the Process of Restructuring 157 1,828 3. Creditors Taken Legal Action 4,793 29,854 3.1 Unsuccessfully Restructured 1,686 10,513 3.2 Debtors not signatory under DCA / ICA or SA 3,107 19,340 4.

Transferred to the AMC 35 601 5. Normal Loans 60 3,992 Total 15,386 71,044 Source: web Indonesia Background: Indonesia is the world's largest archipelago; it achieved independence from the Netherlands in 1949. Indonesia, a vast polyglot nation, faces severe economic development problems stemming from secessionist movements and the low level of security in the regions; the lack of reliable legal recourse in contract disputes; corruption; weaknesses in the banking system; and strained relations with the IMF. Investor confidence will remain low and few new jobs will be created under these circumstances. In November 2001, Indonesia agreed with the IMF on a series of economic reforms in 2002, thus enabling further IMF disbursements. Negotiations with the IMF and bilateral donors continued in 2002.

Keys to future growth remain internal reform, the build-up of the confidence of international donors and investors, and a strong comeback in the global economy. COUNTRY OVERVIEW Chief of State: MEGAWATI Sukarnoputri (since 23 July 2001); note - the president is both the chief of state and head of government Population: 235 million (July 2003 est. ), the fourth largest population World: 6,302 million, United States: 290 million Location: Southeastern Asia, archipelago between the Indian Ocean and the Pacific Ocean Area: 1,919,440 sq km, slightly less than three times the size of Texas Capital: Jakarta Languages: Bahasa Indonesia (official, modified form of Malay), English, Dutch, local dialects, the most widely spoken of which is Javanese Natural resources: petroleum, tin, natural gas, nickel, timber, bauxite, copper, fertile soils, coal, gold, silver Ethnic groups: Javanese 45%, Sundanese 14%, Madurese 7.5%, coastal Malays 7.5%, other 26% Religions: Muslim 88%, Protestant 5%, Roman Catholic 3%, Hindu 2%, Buddhist 1%, other 1% ECONOMIC OVERVIEW Currency: Indonesian rupiah (IDR) Exchange rates: Indonesian rupiahs per US dollar - 9,311.19 (2002), 10,260.8 (2001) GDP: $663 billion (2002 E) GDP - real growth rate: 3.5% (2003 E); ranking in the world: 83th Inflation rate: 11.9% (2003 E); while United States: 1.60% Unemployment rate: 10.6% (2003 E); ranking in the world: 97th; while United States: 5.8% Exports: $52.3 billion (2002 E); while United States: 687 billion Exports - commodities: oil and gas, electrical appliances, plywood, textiles, rubber (2003) Exports - partners: Japan 19.2%, US 14.5%, Singapore 11.6%, South Korea 6.6%, China 5.6%, Taiwan 3.7% (2003) Imports: $32.1 billion (2002 E); while United States: 1,165 billion Imports - commodities: machinery and equipment; chemicals, fuels, foodstuffs (2003) Imports - partners: Japan 18.2%, South Korea 9.6%, Singapore 8.4%, China 7.9%, US 7.6%, Australia 5.0% (2003) Debt - external: $131 billion (2003 E) Economic aid - recipient: $43 billion from IMF program and other official external financing (1997-2000) Indonesia Financial Crisis The currency and financial crises in Thailand in March-June 1997 spread rapidly to other Asian countries, including Indonesia. With an average annual real GDP growth of 8% in 1990-96, most countries in the Southeast Asia experienced a large fall in the real GDP of 5-15% in 1998. One of the countries that had the most phenomenal growth and yet was hit the most by the crisis was Indonesia. On August 14, 1997 Bank Indonesia, abandoned its exchange rate intervention band and moved to a floating exchange rate system. From June to December 1997, the rupiah depreciated by over 50 percent against the US dollar, interest rates soared to over 30 percent per annum, and the Jakarta Stock Exchange plunged by about 50 percent.

Capital outflows continued to accelerate in spite of the IMF Standby Arrangements. Over-investment in the non-traded goods industry and highly protected manufacturing industry and a weak financial system are the roots of Indonesia's financial crisis. The investment was funded by massive capital inflows that resulted in a growing current account deficit and mounting external debt. With over-investment in less efficient investment projects less resources were being devoted to enlarging Indonesia's productive capacity and hence its ability to service and reduce its external liabilities. Moreover, the over-investment caused other distortions such as asset price appreciation in the real estate sector. The changing composition of the capital inflows significantly added to the vulnerability of the system as a whole.

Short-term bank borrowings and portfolio flows invested in the stock market and in private sector instruments expanded rapidly. Surging local interest rates and depreciation of the rupiah raised the cost of renewing or rolling over short-term floating-rate dollar and yen loans in real terms. To some extent, the authorities influenced both the size and the composition of the short-term capital inflows by imposing ceilings on them and by raising their costs. Part of Indonesia's financial crisis stems from weaknesses in the banking system. Reforms ended financial market segmentation and improved competition, but the combination of relaxing restrictions on bank lending and asset portfolios, lowering reserve requirements, market opening, privatization, and greater access to offshore markets encouraged rapid credit expansion. Together with the perception of Indonesia as a stable country and one of Asia's success stories, the reform generated a massive capital inflow from the early 1990's.

Despite reform, the banking system had several critical problems including: the increasing maturity and currency mismatches of bank liabilities; the weak financial position of banks and highly concentrated problem loans; heavy government involvement in directing credit; deficiencies in financial sector governance; and Bank Indonesia's role as lender of last resort to distressed banks and politically connected institutions. The Policy Responses Indonesia's financial crisis demonstrates the inconsistency between fiscal and monetary policies in an exchange rate system with an intervention band. The massive capital inflows drove up the real exchange value of the rupiah reducing Indonesia's international competitiveness and providing further incentives to invest in the non-traded sector. Indonesia's exchange rate policy and the real appreciation of the rupiah from 1990 to 1996 were incompatible with the realities of the government's fiscal situation which contributed to the widening current account deficit and the unprecedented increase in external debt, particularly short-term borrowing from foreign banks.

When indirect policies, especially prudential rules and regulations, failed to restrain the expansion of liquidity and the current account deficit, the authorities restored direct administrative controls including eliminating the subsidy on the exchange rate swap facility and re institution of ceilings on external borrowing by the public sector. The link between the base money and broad money was weakened by raising the non-remunerated reserve requirement ratio and setting specific credit growth targets for individual banks. To support sterilization operations, the Ministry of Finance forced state-owned enterprises to shift their deposits, mainly from state-owned banks, to the central bank. This move dried up liquidity from the economy. Fiscal adjustment had been a key component of Indonesia's stabilization and adjustment programs. Tax reforms raised economic efficiency and improved external competitiveness and the authorities used oil revenue windfalls and proceeds from the privatization of state-owned enterprises to retire expensive external debt.

However, non-budget expenditures did not exhibit the same discipline and restraint as the formal budget. Investments in 'strategic industries's uch as the national car program and excessive infrastructure that required import protection and scarce foreign exchange and skilled manpower were protected from the cut in the public budget. Because it was not supported by proper fiscal and monetary policy and healthy banking system, Indonesia abandoned its moving exchange rate band system on August 14, 1997 and shifted to a floating exchange rate system. The economic costs of this change are likely to be severe because of the resulting sharp depreciation of the rupiah, surge in interest rates, plunge in share prices, and acute liquidity crunch.

All of these will cause bankruptcies both of banks and of their customers, a lower growth rate, and higher unemployment and inflation rates. Such an economic recession depresses investment and push down asset-prices. The closing of 16 financially distressed private banks in November 1997 aggravated the problems as it ignited a bank run, capital flight, panic buying, and reluctance of foreign banks to accept Indonesian letters of credit. Even domestic banks became reluctant to lend to each other. The revised IMF program announced on January 15, 1998 focuses on further reform in trade and investment policies, the financial system, and market infrastructure.

The program is a good start to strengthen the economic institutions, to improve domestic competition, to increase efficiency, and to remove distortions that restrain exploitation of Indonesia's comparative advantage in labor-intensive and natural resource-based sectors. The IMF program does not specifically address private sector short-term external debt, but it does help restore confidence of the private sector to roll over maturing loans as the reforms under the program act like an 'entrance ticket' to international financial markets. Confidence will be further restored with the progress of bank restructuring, raising productivity, and in promoting non-oil exports as they will loose the tight liquidity and restore economic growth. These will allow expansion of domestic aggregate demand and resume inflow of foreign capital.

To restore public confidence in the banking system the authorities have provided a government guarantee on claims of depositors and creditors of banks operating in Indonesia. Rebuilding the dysfunctional financial system will require strengthening both the central bank and commercial banks. State-owned banks (including state-owned non-bank enterprises) need to be de-linked from the government bureaucracy and privatized. In addition, market infrastructure needs to be improved to enforce the implementation of prudential rules and regulations, to promote competition, and to adhere to strict credit policies. In a policy statement issued on January 27, 1998 the government proposed temporarily freezing private sector external debt service. The authorities have also made clear that borrowers and lenders must solve the corporate debt problem on a voluntary basis; it will not provide financial resources, subsidies, or guarantees to bailout those companies which cannot survive the high real interest rates and rupiah devaluation.

Private sector default will be permitted, even in the financial sector. The social and political costs of the adjustment program are likely to be very high. Along with stimulating the traded goods and export sectors, devaluation will increase inflation. The contraction in domestic expenditures and economic growth and the increase in bankruptcies will raise unemployment.

The distributive effect of the adjustment program is partly influenced by the structure of the expenditure cut. Vigorous economic reform, including restructuring of the financial and corporate sectors, should raise productivity and production and promote non-oil exports to lead Indonesia to economic recovery in the medium-and long-run. Sound fundamentals for economic growth, including dynamic entrepreneurs, skilled labor, adequate economic infrastructure and a relatively high savings rate, are still in place. Overcoming the crisis, however, also depends on financial conditions.

Tight liquidity means that working capital, an important ingredient of recovery, is now scarce. Taiwan Background: In 1895, military defeat forced China to cede Taiwan to Japan. It reverted to Chinese control after World War II. Following the Communist victory on the mainland in 1949, 2 million Nationalists fled to Taiwan and established a government using the 1947 constitution drawn up for all of China. Over the next five decades, the ruling authorities gradually democratized and incorporated the native population within the governing structure. In 2000, Taiwan underwent its first peaceful transfer of power from the Nationalist to the Democratic Progressive Party.

Throughout this period, the island prospered and became one of East Asia's economic "Tigers". The dominant political issues continue to be the relationship between Taiwan and China - specifically the question of eventual unification - as well as domestic political and economic reform. Economy - overview: Taiwan has a dynamic capitalist economy with gradually decreasing guidance of investment and foreign trade by government authorities. In keeping with this trend, some large government-owned banks and industrial firms are being privatized. Exports have provided the primary impetus for industrialization. The trade surplus is substantial, and foreign reserves are the world's third largest.

Agriculture contributes 2% to GDP, down from 32% in 1952. While Taiwan is a major investor throughout Southeast Asia, China has become the largest destination for investment and has overtaken the US to become Taiwan's largest export market. Because of its conservative financial approach and its entrepreneurial strengths, Taiwan suffered little compared with many of its neighbors from the Asian financial crisis in 1998. The global economic downturn, combined with problems in policy coordination by the administration and bad debts in the banking system, pushed Taiwan into recession in 2001, the first year of negative growth ever recorded. Unemployment also reached record levels. Output recovered moderately in 2002 in the face of continued global slowdown, fragile consumer confidence, and bad bank loans.

Growing economic ties with China are a dominant long-term factor. Exports to China - mainly parts and equipment for the assembly of goods for export to developed countries - drove Taiwan's economic recovery in 2002. Taiwan Financial Crisis Since the first eruption of the Asian crisis in July 1997, the majority of Southeast Asian countries have been hit by stormy shocks from the regional crisis to their financial sectors. As a result, their economic growth has been stunted and possibly reversed. However, among Asian countries, Taiwan appears to be away from such economic chaos. Taiwan does not suffer serious structural problems that seem to have impacted the other Asian Tigers.

Most important, the small fluctuation of the exchange rate and stock market, a higher saving rate, a surplus of account balance, higher foreign reserves, and no substantial external debts also contribute to the stability of Taiwan's economy. The relationship between Taiwan and Southeast Asia countries In the past four decades, a close economic relationship between Taiwan and Southeast Asia has been well established through investment and trade. Southeast Asia has been a major destination for Taiwan's external investment (Table 7 and Graph 3). Taiwan's accumulated investment in the area up to 1997 is estimated to be exceeded US$37 billion. In most Southeast Asian countries, Taiwan has been a major foreign investor in terms of foreign direct investment (FDI); in particular, the average value of each investment in Indonesia is more than US$13 million.

Table 7. Taiwan's FDI in the ASEAN Countries (1979-1997) Countries Committed Investment Cases Taiwan's Ranking Among Foreign Investors Thailand 9.5 1278 2 Malaysian 8.3 1517 2 Philippines 0.8 802 5 Indonesia 13.3 600 6 Singapore 1.1 239 NA Vietnam 4.3 341 2 Total 37.2 4777 NA The bilateral trade between Taiwan and the ASEAN countries exceeded US$29 billion in 1997 (Table 8 and Graph 4). Of this trade, Taiwan's exports reached US$16.2 billion or 13 percent of total exports and imports reached US$13.3 billion or 12 percent of the total. During 1990's, Taiwan has been increasing its bilateral trade with Southeast Asia. Table 8 - Bilateral Trade between Taiwan and the ASEAN Countries Period Total (Billion) Exports (Billion) Imports (Billion) Value % Total Trade %Growth Rate Value % Total Exports %Growth Rate Value %Total Imports %Growth Rate 1994 20.1 11.2 23 11.4 12.3 21.8 8.6 10.1 24.8 1995 25.4 11.8 26.4 14.9 13.4 30.5 10.4 10.1 21 1996 26.5 12.2 4.3 15.4 13.3 3.2 11.1 10.9 6 1997 29.4 12.4 11.2 16.2 13.3 5.2 13.3 11.6 19.8 The Southeast Asian financial crisis, starting July 1997, has greatly undermined the economies of the region. Given its very close ties with Southeast Asian economies, Taiwan's economy inevitably became involved in the financial turmoil.

In both the financial sector and overall economy, Taiwan has been affected to some degree by fallout from the financial storm which swept Asian in the year 1997. Taiwan's economic performance Exchange rate Taiwan seems to be defending itself better against fallout from currency turmoil than Southeast Asia. The Taiwan's central bank (CBC) has had to spend more than US$5 billion from its foreign exchange reserves in defending of the New Taiwan dollar (NT$, Taiwan's currency) since early July, 1997. However, the exchange rate has depreciated 8% during this period.

From the beginning of July until October 17th 1997, the CBC has spent more than US$7 billion to keep the New Taiwan dollar at NT$28.6: US$1. Then, in the middle of last October, the CBC abandoned its defense of the New Taiwan dollar and freed the currency, which resulted in a big drop to NT$30.5: US$1. In the following weeks, the Taiwan currency slid to NT$31.4: US$1, through the end of December, the Taiwan dollar down towards NT$32.5: US$1. Between July 1st 1997 and the first week of January 1998, the New Taiwan dollar has dropped by 19% from NT$28: US$1 to NT$34.5: US$1. This was a sharp drop but a relatively modest one compared to other Southeast Asian currencies; during the same period the Indonesian rupee dropped by 70%, the Thai baht by 55%, and the Malaysian ringgit by 42%. Taiwan was effectively defending its currency, as opposed to the governments of other Southeast Asian countries.

Stock Market The Taiwan Stock Exchange (TSE) performed essentially better than other Asian stock markets in 1997; however, because of the currency fall, the foreign investors were disappointing. Foreign investors fled the market in the second half of the year. Foreign investors only put US$1.4 billion into the market in December, the lowest figure since May 1996. However, the stock market in Southeast Asia countries dropped by 30% to 55% during the year.

In 1997, stock markets among these countries started crashing. None of them can avoid the impacts of financial turmoil on their stock markets. Taiwan's stock index only fell by 25%. After December in the same year, the stock markets of these countries gradually recovered from their plummet. Gross Domestic Product (GDP) The strong performance of the Taiwan stock market in the year of 1997 contributed to the increase in GDP. From 1996 to 1998, Taiwan's economy was growing stable while the economies of the countries, like Indonesia, Malaysia, Philippines and Thailand were shrinking.

In particular, Thailand's and Indonesia growth rate in 1998 reached its lowest level, - 10.5% and -13.1%. Summary and conclusion In general, the financial markets of the most Asian countries have been severely affected by the Asian crisis in 1997. The worst countries are South Korean and ASEAN 4 - Association of South East Asia Nations - which including Thailand, Indonesia, Malaysia and Philippines. The following are the summary in different sections. This is easy to make a comparison in the year between 1996 and 1998. We can find the economic declined during 1997 and 1998.

Table 9. Exchange Rate: COUNTRY CURRENCY YEAR Change 96 97 98 Taiwan New Dollar TWD / USD 27.45 28.66 33.44 -0.28 Indonesia Rupiah IDR / USD 2342.3 2909.4 10013.6 -0.77 Thai Baht THB / USD 25.34 31.36 41.36 -0.39 Malaysian Ringgit MYR / USD 2.52 2.81 3.92 -0.36 Philippines Peso PHP / USD 26.22 29.47 40.89 -0.36 South Korean Won KRW / USD 804.5 951.3 1401.4 -0.43 Source: Source: US Economic Indicators, OECD Main Economic Indicators, Statistics Monthly of Japan, Hong Kong, Korea and Singapore Table 10. GDP Growth Rate: COUNTRY YEAR Change 96 97 98 Taiwan 6.1 6.7 4.6 -1.50% Indonesia 8 4.7 -13.1 -21.10% Thai 5.9 -1.4 -10.5 -16.40% Malaysian 8.6 7.3 -7.4 -16% Philippines 5.8 5.2 -0.6 -6.40% S. Korean 6.8 5 -6.7 -13.50% Source: Source: US Economic Indicators, OECD Main Economic Indicators, Statistics Monthly of Japan, Hong Kong, Korea and Singapore Table 11. Unemployment Rate: COUNTRY YEAR Change 96 97 98 Taiwan 2.6 2.7 2.7 0.001 Indonesia 4.9 4.7 17.1 0.122 Thai 1.5 3.5 4.8 0.033 Malaysian 2.5 2.6 3.2 0.007 Philippines 8.6 8.7 10.1 0.015 S. Korean 2 2.6 6.8 0.048 Source: Source: US Economic Indicators, OECD Main Economic Indicators, Statistics Monthly of Japan, Hong Kong, Korea and Singapore Table 12.

GDP COUNTRY YEAR Change 96 97 98 Taiwan 2796 2902 2672 -0.05 Indonesia 2204 2308 954 -0.67 Thai 1822 1530 1164 -0.37 Malaysia 1007 980 480 -0.53 Philippines 836 823 655 -0.22 S. Korean 4957 2674 3691 -0.26 Source: Source: US Economic Indicators, OECD Main Economic Indicators, Statistics Monthly of Japan, Hong Kong, Korea and Singapore For the case of Taiwan, although the stock market and exchange rate have declined due to the crisis and its contagious effect, they were affected to a lesser degree than those of other Asian countries. Although A SENA 4 have not been able to completely recovery themselves from the fallout in the currency and stock market turmoil, the economy should be slide getting strong in the region. In general, with continuing domestic investment, prudence in monetary policies, and strong economic fundamentals, will stimulate the economic. However, some of countries still struggle in the recession rather than getting better.