1Identify the following characteristics of the debt issuance:
I) Principal amount offered to the public SGD100 million II) Interest rate .!" per annum III) Payment arrears Semi#annual I$) %umber of years the debt will be acti&e 10 years 1.'(alculate the following financial ratios: I) (urrent ratio (urrent )sset * (urrent +iabilities 1!1,-. * ,-/-! 0 1../ ii) 2uic3 ratio (urrent assets 4 In&entory 50) * current liabilities
1!1,-. 4 0 * ,-/-! 0 1../ iii) Interest co&erage ratio 67I8 * Interest (harges 1'/-'! * '-,0 0 1..! i&) 9eturn on e:uity 59;6) %et profit after 8a< * Shareholder=s 6:uity -1!.! * -!!!'0 0 0.0. 1.7ased on the ratios you ha&e calculated in 1.'> discuss whether you would lend money to the issuer. ) healthy current and :uic3 ratio indicate that the company5s) is financially sound and we should assume going concern and that its funds are &ery li:uid. ) 1..! interest co&erage ratio suggests that the company5s) should ha&e no problem paying interest payments and fulfilling the loan. )lthough the 9;6 is wea3> as a lender> we are not concerned with the profits of the shareholders> but simply if the company5s) can repay the loan and interest charges. '. Pro&ide a concise summary of the causes of the 1../ )sian financial crisis and the resulting damages. Students are ad&ised to lin3 concepts taught in class to their answer. Strong growth was typical of economies in the South 6ast )sian region in the years leading up to the currency crisis 5?c3innon 1../). Significant increases in stoc3 and land prices in the region fueled foreign in&estments and lending> creating an economic boom. 8his lasted until the mid#1..0s when growing competition and a wea3ening @apanese yen slowed economic growth and reduced asset prices 5?oreno 1..!). 8hese e&ents triggered collapsing currencies starting with the 8hai baht. In retrospect> the growth witnessed in 8hailand was most li3ely caused by a large influ< of foreign capital facilitated by a pegged e<change rate. ?oreno suggests that poor credit allocation was also a factor> in which borrowers who were well connected were also granted credit. In addition> financial intermediaries were protected by go&ernment guarantees> creating se&ere moral haAard. 8his resulted in poor ris3 management and transformation and ga&e little incenti&e to ban3s to choose clients wisely. 8his became apparent in South Borea where companies with unhealthy debt ratios were granted credit and had to rely on special go&ernment loans to ser&ice their debts. Since it is common for financial intermediaries to practice siAe and maturity transformation 5(asu '00,)> a sudden withdrawal of deposits would ma3e the system &ulnerable to collapse and be unable to fulfill its obligations. 8his is because as li:uid deposits> in the form of foreign in&estors> start to panic and withdraw> financial intermediaries are left with collateral> often in the form of illi:uid and highly ris3y assets. In addition> the ris3y lending practices that were present at that time suggests that a significant number of borrowers would ha&e defaulted on their loans. ) wea3ening currency and slowed economic growth would then cause these illi:uid assets to fall in &alue and be difficult to con&ert into li:uid funds.
In )pril 1../> 8hai authorities suspended trading in finance company shares on the 7ang3o3 stoc3 e<change. 8his brought attention to the wea3ness in the economy that had been disguised by large growth and in&estments. Cearing that if financial institutions losing their credibility would do more harm to their currency> the 8hai authorities chose to de&alue the 8hai baht instead. 7y %o&ember the same year> South 6ast )sian currencies dropped by o&er fifty percent below their pegged le&els. Dowe&er> it was unli3ely that a financial crisis could ha&e been a&oided either way as the re&aluation depreciated the currency on ban3 balance sheets. 8he e&ents in 8hailand triggered panic and speculation in the region> affecting the ?alaysian ringgit and the Philippine peso shortly after. 8he ringgit depreciated against the dollar by nearly fifty percent in the middle of ?ay 1../. Eee3s later> the composite inde< of the Buala +umpur Stoc3 6<change fell by 11.. percent 5)riff 1...). In the Philippines> the peso fell twel&e percent to the dollar when news spread that the country will loosen controls on the peso 5Dolley 1../). 8he Singapore dollar also suffered a decline of 1!. percent against the FS dollar o&er a si< month period and the Straits 8imes Inde< dropped appro<imately ,0 percent o&er a year. Dowe&er> because of a gradual de&aluation and measures to reduce labour costs> the impact in Singapore was relati&ely mild 5@in '000). In )ugust the same year> Indonesia decides to float the currency freely and resulted in an immediate depreciation. %asa=a 51...) suggests that this is due to a lac3 of in&estor confidence in the currency. )dditionally> go&ernment inter&entions distorted the mar3et and frightened in&estors> pre&enting a natural rebound. Indonesia=s economy was also fundamentally flawed> in a similar fashion to 8hailand> in which lenders were pro&iding credit to either well connected clients or ris3y firms. 8here was also little super&ision and accountability which fueled panic in Indonesia. Dowe&er> unli3e in 8hailand> Indonesian authorities refused to implement the International ?onetary Cund=s 5I?C) policy recommendations> delaying the receipt of much needed funds in face of a plummeting rupiah. Indonesia=s president would e&entually agree to eliminate monopolies and insol&ent financial institutions as per I?C macroeconomic policies but only after the rupiah reached 10>000 to the F.S dollar. In ;ctober the same year> Dong Bong=s e<change> the Dang Seng inde< fell by ' percent o&er four days 58he Fni&ersity of Dong Bong '001). Similar to Singapore> Dong Bong=s economy was robust and well#regulated> but was still subGect to speculati&e attac3s on its currency. Dowe&er> with support from the People=s 9epublic of (hina and their reser&es> in addition to Dong Bong=s own e<change reser&es of FSH.0billion> it was able to defend its currency from de&aluating. 8his outcome was not without conse:uence> as interest rates rose to nearly '!0" and the interban3 rate reached '0" 5and subse:uently 1-" and 10"). )t its lowest point> the stoc3 mar3et inde< was ,0" below its pea3. Soon after the decline of the Dang Seng e<change> the South Borean won began to decline. )t the beginning of the year> Borea was plagued by failing corporate entities. Domestic financial intermediaries funded these local corporations using the influ< of foreign capital> often ignoring usual business criteria. Dowe&er> as contagion spread from 8hailand> Indonesia and Dong Bong> financial intermediaries no longer had the li:uidity to fulfill their obligations. 8his prompted go&ernment inter&ention to guarantee the debt of local institutions> essentially bailing them out. 7y the end of the year> the Eon had dropped by -0" against the F.S dollar and the stoc3 mar3et had dropped by o&er 10". 8his was the result of Borean financial intermediaries abandoning its efforts to defend the &alue of the won. Soon after> South Borea re:uested for I?C aid. 8he crisis in )sia has effects that were felt in the rest of the world as the Dow @ones Industrial )&erage declined /.1!" in the day of ;ctober '/> 1../. In addition> the %)SD)2 (omposite fell /" and the SIP -00 fell ,.!, percent on the same day. It is estimated that H,, billion in mar3et capitalisation was wiped out 5F.S S6( 1..!). 8he panic caused F.S authorities to suspend stoc3 mar3et trading temporarily. In @apan> se&eral top ran3ing firms started to fail> including 8a3usho3u 7an3 and Jamaichi Securities> two of the largest financial institutions in @apan. 8hese companies failed in spite of the go&ernment pledging to support them caused consumer confidence to drop and caused widespread panic in the country 5Ito 1...). Ito states that the @apanese economy was fundamentally flawed as it was still reco&ering from stagnation since 1..'. Eea3 e<portation from @apan was also a factor as trade and in&estments in )sia are closely tied between countries. Sharp declines in land and asset prices also resulted in many defaulted loans which wea3ened the ban3ing system in addition to currency depreciation. 8he author auggests that @apan> among other countries> did not ha&e the legal framewor3 to close insol&ent ban3s before the crisis hit in 1../. 7y @uly 1../> the @apanese Jen had depreciated by o&er 0" from pre#crisis le&els> although it should be noted that the Jen had already been plagued by depreciation since 1..-. )t the pea3 of the crisis> the I?C had gi&en funds to countries in the region to 3eep affected financial intermediaries lending and increasing real output. 8hese countries most notably included 8hailand> Borea and Indonesia. In addition to funds> the I?C also re:uired the authorities of these countries to adopt policy changes according to I?C recommendations. Such measures included structural reforms> in particular> the financial and corporate sectors> in order to facilitate lending and growth. Strict monetary policies were also adopted> such as the increasing of interest rates to stabilise e<change rates and fiscal polisies to gi&e go&ernments ade:uate resources to finance the structural reforms. In certain countries> the I?C had also demanded that certain conditions were met> such as in Indonesia when the president was re:uired to close down insol&ent financial institutions or in Borea where the I?C demanded mass lay offs to restore its financial credibility. Despite the inGection of o&er FSH110 billion to 8hailand> Borea and Indonesia> foreign in&estments continued to pull out from these countries and continued on into 1.... 8he e<change rate also continued to decline in spite of I?C funds> with currencies in the region reco&ering to only ,0" of what they were in pre#crisis le&els. 8he Indonesian rupiah was the worst hit as it only managed to reco&er to appro<imately '0" of its pre#crises &alue after the implementation of these programs. In Indonesia> the crisis had se&ere ramifications politically and socially. 8he free#fall of the rupiah triggered panic buying and soon store shel&es were empty. Prices for basic food staples increased by as much as !0" which lead to the 1..! food riots of Indonesia. In addition> the failing economy resulted in mass unemployment which only fueled resentment with the ruling party. 8he &iolence was target particularly at ethnic (hinese> who were seen as being the cause of the financial crisis. )t that point in time> /" of publicly listed companies were owned by ethnic (hinese> despite ma3ing up only " of Indonesia=s population. 9eligious differences> historical resentment and ignorance and fear about the (hinese ser&ed to fuel the spar3 that was the financial crisis. It is estimated that the riots caused appro<imately trillion rupiah in damage and o&er a thousand deaths 5Purdey '00-). In the wa3e of the riots> President Suharto resigned following the se&ere economic and political crises in the past year. It could be suggested that the resentment of Suharto by the Indonesian people came from the fact that Suharto was unwilling to fulfill his end of the agreement with the I?C early in 1..!> which lead to delays in loan pac3ages. In South Borea> as part of I?C reforms> South Borean firms ha&e been conducted mass layoffs> a&eraging 10>000 wor3ers laid off per day. 8his led to a two#day nationwide stri3e in protest of the unemployment in the country. In addition> high interest rates and restricted credit caused sales to decline> pushing Borea=s largest firms to the &erge of ban3ruptcy 5Eolfe 1..!) )lthough a H-/ billion pac3age was appro&ed for South Borea> foreign in&estors continued to sell Borean assets and e:uities into late 1..!> causing further damage to the won and the Borean stoc3 mar3et. 8he outcome in 9ussia was similar to South 6ast )sia> although it should be noted that 9ussia still had substantial so&ereign debt inherited from the former So&iet Fnion. Prior to the e&ents in 1../> 9ussia=s economy was undergoing reforms and had begun to stabilise and grow despite wages and unemployment still being a problem 5(hiodo '00'). )lthough not directly affected by the crisis> the outcome is still significant. 7y the middle of 1..!> the ruble had de&alued from - to the F.S dollar to almost 0 to the F.S dollar. In addition> 9ussia=s main e<ports> oil and nonferrous metals> began to drop in price. )t this point in time> in&estor confidence was not good> despite tal3 of I?C funds to alle&iate the situation. Internal strife within the ruling party pro&ed to harm in&estor further> when President Jeltsin fired his entire go&ernment. In )ugust 1..!> the 9ussian stoc3 mar3et had dropped ,-" o&er / months amidst fears that the 9ussian go&ernment would de&alue the ruble 5which it later did) and default on its domestic debt. )t the end of 1..!> real output for the year decreased 1.." and the current ruling party seemed unable to successfully reform its economy. Similar to the countries in South 6ast )sia> 9ussia also faced increased interest rates which increased its debt rapidly as interest payments mounted. 8he panic in 9ussia spreads to +atin )merica which causes stoc3 and bond mar3ets to plunge. Soon after> the Dow Industrial a&erage starts to decline> dropping a total of -1' points> or ,.1" on )ugust 1 1..! 5Kang 1..!). Conclusion )lthough the crisis lasted for less than two years> it is li3ely that the debts created by accepting I?C bailout pac3ages will ta3e a long time to repay. 8he crisis had a worldwide impact starting with the decline of one currency. 8here are some traits that are shared amongst many of the countries in&ol&ed in the crisis. Cirstly> financial intermediaries spurred on by the large influ< of foreign depositors were eager to lend as much as possible to generate income. 8his resulted in poor> almost non e<istent credit ris3 management often influenced by connections or indi&iduals in positions of power. 8his was most pre&elant in Indonesia where President Suharto would 3eep insol&ent financial institutions with family ties running. Second> go&ernment guarantees to assume defaulted liabilities create se&ere moral haAard on the part of financial intermediaries. +oans were often granted to companies with unhealthy financial ratios. 8his was most pre&alent in South Borea. 8hird> e<cessi&e inflow of capital often disguised wea3nesses in the mar3et or financial systems in these countries> which distorted true mar3et and operational ris3. 6<amples of this can be found in 8hailand> Indonesia and 9ussia. (ontagion and panic played a large role in the crisis. )lthough the crisis affected the entire region> it could be argued that certain countries with sound macroeconomic policies> growth and ban3ing regulations would ha&e been strong had it not been for fear and speculati&e attac3s. (ountries such as ?alaysia> Philippines> Singapore and Dong Bong only came under attac3 because of the e&ents that occurred in 8hailand. 8his is natural as the region is closely lin3ed by trade and in&estments. )dditionally> 9ussia> which is a country that is relati&ely more remote to the South 6ast )sian region> should ha&e been able to fend off the crisis. Dowe&er> it was fear and speculation that triggered a mass withdrawal of in&estments which subse:uently re&ealed wea3nesses in a country that has Gust started to reco&er from a recession. It is li3ely that if the contagion was isolated in 8hailand> many of the other economies> which were robust to begin with> would not ha&e suffered such a se&ere outcome. 8he end result of the abo&e factors was a chain reaction in &arious countries where financial intermediaries were in a position where their assets 5de&alued by currency> decline in prices> defaulted loans) could not co&er their liabilities and mass withdrawals. )s financial intermediaries are the primary source of financing for the economy> a failure of these systems caused a halt in producti&ity and growth> resulting in lower real output. ',0 words for :uestion ' 9eferences: )riff> ?ohamed. )buba3ar> Syarisa Janti. 1.... The Malaysian Financial Crisis: Economic Impact and Recovery Prospects. 11/#! 8he De&eloping 6conomies. LLL$II#1 (asu> 7arbara. Girardone> (laudia. ?olyneu<> Philip. '00,. Introduction to Banking. P.!"#$ %#!&%$ &'!"('$ )'*!"%. Pearson 6ducation +imited. (hiodo> )bbigail @. ;wyang> ?ichael 8. '00'. ) (ase Study of a (urrency (risis: 8he 9ussian Default of 1..!. 8he Cederal 9eser&e 7an3 of St. +ouis. Dolley> Da&id. 1../. Philippine Peso +uccum,s to -eight o. Thai /evaluation. (urrency 6<changes. +os )ngeles 8imes. Ito> 8a3atoshi. 1.... 0apan and the 1sian Financial Crisis: The role o. Financial +upervision in Restoring 2ro3th. Eor3ing Paper Series $ol...#10. @in> %giam Bee. '000. Coping 3ith the 1sian Financial Crisis: The +ingapore E4perience. Institute of Southeast )sian Studies. ISS% 0'1.#-!' ?c3innon> 9onald. Pill> Duw. 1../. International 5ver,orro3ing: 1 /ecomposition o. Credit and Currency Risks. Fnpublished manuscript. Dar&ard 7usiness School. %o&ember ?oreno> 9. 1..!. Responding to 1sia6s crises$ Economic 7etter$ 8o. #*!> San Crancisco: Cederal 9eser&e 7an3 of San Crancisco. ?oreno> 9. 1..!. -hat Caused East 1sia6s Financial Crisis9$ Economic 7etter$ 8o. #*!)%> San Crancisco: Cederal 9eser&e 7an3 of San Crancisco. %asa=a> ?arwa )l. (han> @essica. +ewis#7ec3> (olin. 1.... Indonesia. Fni&ersity of ?ichigan Purdey> @emma. '00-. 1nti!Chinese :iolence in Indonesia "##;!"###. Bonin3liG3 Instituut&oor 8aal#> +and# en $ol3en3unde 8he Fni&ersity of Dong Bong. '001. 1sian Financial Crisis: Causes and /evelopment. Dong Bong Institute of 6conomics and 7usiness Strategy. IS7% .,'#!,0-,#1#- F.S Securities and 6<change (ommission. 1..!. Trading 1nalysis o. 5cto,er )& and )*$ "##&. %ews I Statements> Special Studies. Eolfe> Bathy. 1..! +trikes erupt against ne4t phase o. crisis. %ews article. 6I9 $olume '-> %umber '> @une - 1..!. Kang> ?alina Poshto&a. 1..!. /o3 plunges '") points: <istoric losses 3ipe out market6s gains .or "##* as glo,al turmoil mounts. (%% ?oney> %ews article. ?ar3ets and Stoc3s.
@BUKU - PELEDAK - Jamie S. Davidson - Indonesia's Changing Political Economy - Governing The Roads-Cambridge University Press (2015) - @BUKU - PELEDAK PDF