The Asian Financial Crisis : Emerging Economies

Kvint (2008) indicates that some statistics of reports on emerging market are contradictory, and this inconsistent situation even can be seen from IMF’s reports. For instance, some emerging countries like China and India are classified as emerging markets and are included in the category of developing countries. On the other hand, many of the sub-Saharan countries as emerging markets are definitely still undeveloped. Kvint (2008) suggests that the main and most important characteristic of all emerging market countries is that they are at some stage during the processes of economic maturation and development of free markets. An attractive environment for foreign investors and global trading has been created based on this characteristic. He suggests the main characteristics in his study:

PESTLE ANALYSIS1.Wiggleworth,R.Egypt bleat outlook on debt,09/02/11,ft.com2.Stubbs,J,Investor strategy,13/04/07,ft.com3.Ho,S at all,incomplete transfer phenomena,international marketing reviw vol.5.4.Bevis,G,VAT RISE TO 20%,22/06/10.thisismoney.co.uk5.14/09/10,UK inflation rate,bbc.co.uk6.Gardiner,K,at all, Emerging market fear,09/02/11,ft.com.7.Wolf,M,a STRATEGY FOR GROWTH,10/023/11.FT.COM8.Cohen,N,Price inflation hit,15/02/11,ft.com.9.

Directly connected to changes in the U.S. interest rates are the value of U.S. Treasury Bonds. In the United States, the Treasury yield curve is the first to reflect changes in domestic interest rates. As the yield curve moves up or down, this largely dictates how global rates are set. Since Treasury bonds are considered a risk free asset, any other security must offer a higher yield to remain attractive. With interest rates expecting to increase, a great deal of pressure is put on emerging markets to remain attractive investment opportunities. Higher interest rates will likely follow with a higher dollar, and entice many global investors to park their money in the United States rather than emerging markets. This could ultimately hinder developing nation’s employment levels, currencies and exports.

In some states the financial systems, rules, and institutions did not retain pace with the swift spread of globalization. The globalization has created many wealth people all over the world.

In July of 2007, the global financial crisis was initiated from the property market in the United States.

Invesco can establish a new branch in a new market and then either inject cash or capital from their various funds. However, an investment in emerging market countries carries greater risks compared to more developed counties, for example many of the assets in these countries can be less liquid. The risks of investing in securities of foreign issuers can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues (Invesco, 2013). Therefore, there are both increased risks as well as opportunity in many of the emerging markets that Invesco is operating in.

The recent Global Financial Crisis (GFC) initially began with the collapse of credits and financial markets, which caused by the sub-prime mortgage crisis in the US in 2007. The sub-prime mortgages were given to high-risk lenders (with bad credit history) who were in danger of defaulting, which eventually caused a global credit crunch, where the banks were unwilling to lend to each other. In October 2008, the collapse of the major financial institutions and the crash of stock markets marked the peak of this global economic slowdown (Euromonitor International, 2008).

The development of the global financial crisis is a result of a number of complicated and interrelated factors. Starting with the downturn of the housing bubble in the US economy, the fall in the financial stability in the US, and the rising commodity prices, all of the factors, in one way or other, has initiated the crisis. As stated by the United Nation in its Conference on Trade and Development, and in its Trade and Development Report 2008, the major factors for the crisis are:

The U.S. Federal Reserve is expected to begin to gradually raise policy interest rates in the near term, an event widely referred to as “liftoff”. As markets over the world gear up for the first ever rate hike by Federal Reserve in a decade, the economist and policymakers still seem to be in two minds over its impact. The ongoing American recovery, supported by recent job market data has made the case for a hike even stronger. On the other hand, many experts are cautioning against the possible implications on the world economy. Weather Fed hikes rate on 17 September or not, most agree that sooner or later, a hike is imminent. This has fueled growing fear of renewed volatility in emerging economies’ currency, bond, and stock markets. The concern is understandable: When the Fed signaled in 2013 that the end of its quantitative-easing (QE) policy was forthcoming; the resulting “taper tantrum” sent shock waves through many emerging countries’ financial markets and economies.

According to our results, the policymakers in emerging market economies should closely monitor the movements of the U.S policy rates, growth rates, and government bond yield in relation to their own. Also, they can limit their exposure to capital flow volatility by developing their domestic financial markets and macro-prudential policies.

In 2013, emerging markets accounted for more than half of the world GFP based on purchasing power, per the International Monetary Fund (IMF). In 1990 they accounted for less than a third of a much smaller total. From 2003 to 2011 the share of world output provided by the emerging economies grew at more than a percentage point a year. The remarkably rapid growth the world has seen in these two decades marks the biggest economic transformation in modern history. It’s like will probably never be seen again.” (economist) “The most impressive growth was in four of the biggest emerging economies: Brazil, Russia, India and China, which Jim O’Neill of Goldman Sachs, an investment bank, acronymed into the BRICs in 2001. These economies have grown in different ways and for different reasons. But their size marked them out as special—on purchasing-power terms they were the only $1 trillion economies outside the OECD, a rich world club—and so did their growth

The global financial crisis had a profound on the financial markets leading to recession in a majority of advanced economies and massive growth declines emerging and developing economies. A financial crisis occurs when disruption increases asymmetric information in the financial system affecting efficient channeling of funds (Mishkin & Eakins, 2012).

Despite the strong argument for international diversification, there are some grounds to consider when investing. There are barriers to investing internationally. These include legal difficulties, lack of information, stringent tax regulations, and high transaction costs. These costs can reduce returns and must be considered when figuring returns. As mentioned before, these barriers are diminishing.

Commonly referred to as the “Asian Contagion” the East Asian financial crisis of 1997 marked a time in which multiple Asian countries fell into a recession as a result of financialization. Although the East Asian financial crisis affected over ten countries, Thailand’s economy is will first be primarily analyzed prior to the crash because it was the first economy to fall and essentially started the crisis. In retrospect, the complexity of the financial crisis has caused much debate on what actually started the crisis in the first place. In order to address the various positions of the East Asian financial crisis, the works of Charles Kindleberger, Krippner, and Dani Rodrik are analyzed and compared. While the crisis has many components that ultimately suggest that conjoined multiple factors are potentially to blame, these authors suggest that specific instances are the main culprit. In essence, Kindleberger states that investor and lender speculation deemed the crisis inevitable, Krippner condemns government policies, while Rodrik suggests that hyper-globalization is to blame.

In the years following the collapse of Asia’s economy in 1998, South Korea turned to alternative exports to assist in both the restructuring of the nation’s financial strength and it’s reputation in international markets. As a result, pop-cultural exports such as films, television dramas, pop music and celebrities associated with these forms of media discourses have found growing popularity in China, Hong Kong, Taiwan; as well as many other East and Southeast Asian countries. This growing popularity of pop-cultural exports has proved to be a tool in constructing a contemporary national image and encouraged the emergence of the ‘Korean Wave’. According to Huang (2009) ‘Hallyu’ or the ‘Korean Wave’ refers to the “...popularity of South Korean culture in other Asian countries” however, with the increased availability of digital media and the increase of social networking, the definition of Hallyu has grown to include Western Societies.