According to economists, there are five principal reasons for the East Asian currency Crisis or IMF of July 1997 that caused a period of economic unrest and turmoil in Southeast Asian financial markets. The countries that were mainly affected during the crisis included Thailand, Indonesia, Malaysia, and South Korea. Inadequate foreign exchange reserves, improper handling of fund allocations and inadequately developed financial sectors in the developing Asian countries have been held as the prime reasons for the drop in the local currency exchange rates against the US dollar during the period.
The entire episode of economy crisis started due to inappropriate speculations. Speculators forecasted a decline in international market growth and started selling South East Asian currencies. With this, there was a currency depreciation and sudden drop in the value of Thai baht, Malaysian ringgit, Phillipine Peso and Indonesian rupiah. Due to this, all these markets had to sell their dollars to buy back their currencies. This caused a rapid decline in the foreign exchange reserves. In the second stage of the crisis, the lower value of the neighboring currencies affected other Southeast Asian currencies like Taiwan dollar, South Korean Won, Singaporean Dollar and Hong Kong Dollar. Governments raised the interest rates for the purpose of defending the local currency and inviting foreign capital. Due to the rapid decline in the economy, investors started removing their investments from the markets, thereby initiating a fall in the stock prices. IMF with the assistance of World Bank and Asian Development Bank arranged support packages of around $120 billion in order to rescue these markets.
Certain economists believe that the distorted macroeconomic policies and the fixed exchange rate of the currency as a major cause for the economic crisis in 1997.
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