According to economists, there are five main reasons for the East Asian currency crisis and the IMF in July 1997 that caused a period of economic unrest and turmoil in the Southeast Asian financial markets. The countries that were most affected during the crisis included Thailand, Indonesia, Malaysia and South Korea. Inadequate foreign exchange reserves, improper handling of allocations and inadequately developed financial sector in developing countries of Asia have beenas 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 led to a rapid decline in foreign exchange reserves. In the second phase of the crisis, the lower value of the neighboring currencies affected other Southeast Asian currencies like Taiwan dollar, South Korean won, Singapore dollar and Hong Kong dollar. Government raised interest rates for the purpose of defending the local currency and inviting foreign capital. Due to the rapid decline in business investment began its EliminationInvestments from the markets, thereby initiating a fall in share prices. IMF with support from the World Bank and the Asian Development Bank arranged support packages of around 120 billion U.S. dollars to rescue these markets.
Some 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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