Effects of the Asian Financial Crisis on 1997

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The financial crisis in many countries in Asia in 1997-1998 was an unexpected event. It was mainly because most of the Asian countries had been enjoying economic growth prior to the crisis. The crisis itself started with the devaluation of Thailand’s Baht in July 1997. The Thailand government decided to float its currency in order to defend the Baht against speculative attack, despite its fixed exchange rate system. This decision was apparently the beginning of the economic downturn of many Asian countries, such as Malaysia, Philippines, Hong Kong, South Korea, and Indonesia. Before the crisis, Indonesia’s economy was growing rapidly; having a low inflation and a well-maintained current account deficit. However, Indonesia surprisingly became the country that was affected the most by the crisis. This paper aims to examine the effects of the Asian financial crisis in 1997-1998 to Indonesian economy and how it could happen. After Thailand floated the baht in 1997, Indonesia’s monetary widened its currency-trading band. It changed the exchange rate regime from floating exchange rate to free-floating exchange rate, causing the Rupiah and the stock market to decline. Before the crisis, the exchange rate between the rupiah and the US dollar was approximately 2,600 Rupiah/USD. The rupiah started to depreciate to 4,000 Rupiah/USD, and dropped dramatically to over 11,000 Rupiah/USD on January 1998. The spot rates were over 14,000 in January 1998 and trading again over 14,000 during
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