356 Ramkishen S. Rajan and Graham Bird
Post-1998 performance: the capital account
The Asia-5 economies most affected by the crisis (i.e. Indonesia, Malaysia, South
Korea, the Philippines and Thailand) experienced a sharp reversal in net private capital
flows of almost $100 billion between 1996 and 1998, largely as a consequence of short-
term bank flows which are incorporated into the ‘other net investments’ category (IMF,
2001). Quarterly BIS data on banking flows show that international bank lending to the
crisis countries was positive at almost $50 billion in the first half of 1997, but swung to
-$40 billion in the third quarter of 1997, thereafter averaging close to -$100 billion for
the three quarters that followed (BIS, 1999).2 This sudden reversal is often portrayed as
evidence of a bank panic model (Chang and Velasco, 1998; Rajan, 2001; Rajan and
Siregar, 2001). Another important aspect of the sharp contraction in private market
financing is seen to be the decline in portfolio flows in 1997-8, as investors too tried to
scale down their regional financial exposures. Net portfolio investment saw a sudden
and sharp turnaround of over $30 billion between 1996 and 1998 (from $24 billion in
1996 to -$9 billion in 1998). It was only FDI flows that remained stable during the crisis
period, averaging about $10 billion a year.
By early 1998 capital outflows appeared to be abating in all the economies except
Indonesia. However, market turbulence returned following the devaluation and debt
default in Russia and the near-collapse of the US hedge fund, LTCM. Moreover,
depreciation of the Japanese yen vis-à-vis the US dollar caused further anxiety about the
recovery prospects for other Asian economies. Combined, these factors were reflected
in a sharp rise in secondary market spreads for all major East Asian borrowers in
August and September 1998. The downturn proved to be temporary. The easing of
interest rates in the US and other industrial countries, as well perhaps as the IMF
agreement for Brazil, worked in tandem to generate a broad-based recovery in emerging
markets in general by the fourth quarter of 1998 (BIS, 1999; IMF, 1999).
While capital flows have varied significantly across the Asia-5 economies in
aggregate, net private capital outflows, which totalled slightly over $40 billion in 1997
and 1998, slowed down to $20 billion in aggregate in 1999 and 2000. Closer
examination of IMF data on capital flows for 1999 reveals some important points.
First, bank-related outflows in net terms continued, despite the renewed willingness
of lenders to maintain, if not slightly increase, exposures to the region. The repayments
that brought this about were largely concentrated in Thailand and Indonesia. Unlike the
crisis period, loan repayments had been ‘anticipated and scheduled and hence did not
lead to significant financial dislocations’ (ARIC, 2000: 6).3 According to the Institute of
International Finance (2001), net repayments by all Asian economies to banks totalled
almost $100 billion in 1998 and 1999.4
2. Interestingly, the data also reveal that while Japanese and US banks reduced their exposures in Asia-5
between June and December 1997, the European banks were still expanding their lending to the region in
this period (Rajan and Siregar, 2001).
3. The Asia Recovery Information Centre is an online project managed by the Asian Development Bank and
funded by AusAiD, the Australian government’s overseas aid programmeme. It publishes a regular Asian
4. Additional insight might be obtained from the BIS data on the nationality of creditor banks (Rajan and
Siregar, 2001). While all major creditor banks between December 1997 and June 1998 reduced their
stocks of outstanding loans to the region, this trend continued between June 1998 and June 1999 only in