6.2 It should be noted that the Southeast Asian crisis differs from many previous crises in that the affected countries had high saving rates and government surpluses. However, their excessive investment, rigid exchange rates, too early a domestic financial liberalization, lack of transparency, and ineffective law enforcement created doubts among traders and speculators about sustainability of stable exchange rates. The resulting vulnerability to capital outflows was reinforced by heavy reliance upon short-term external debts.
6.3 Korea serves as another good example of excessive investment, lax discipline, government intervention, and high vulnerability. Large corporate conglomerates (chaeblos) opted for heavy dependence on debt instead of equity finance. Corporate entities that encountered financial difficulties were kept alive by debt rollovers, often demanded by government authorities. The vulnerability of the banking system was increased by large exposures to chaeblos, compulsory lending to small-and medium-sized enterprises, politically influenced lending, and credit channeling from abroad. Therefore, a large number of Korean firms received increasing amounts of short-term foreign currency debts, little of which were hedged.
6.4 The management of, and the supervision plus regulations of, Korean financial institutions paid too little attention of prudent analysis and containment of risks. According to unofficial estimates, at the end of 1996 banks’ nonperforming loans, net of reserves, already reached 70% of their equity, indicating very poor asset quality. During 1997, an unprecedented number of chaebols moved into bankruptcy as a result of several factors, including excessive investment (in such sectors as steel and autos) and cyclical downturn.
6.5 Strong government intervention (via directed credits, regulations, and subsidies) heavily influenced Korean industrial structure. Worse yet, true fiscal positions were not as tight as they appeared to be, because of extra budgetary and quasi-fiscal operations. The resulting lack of market discipline contributed to the problem of unproductive or excessive investment that played an important role in the buildup to the crisis. Fortunately, those substantial short-term external debts of Korea were clustered among few conglomerates, so debt renegotiations were much easier and more successful than the similar attempts in Indonesia, where not only were debts widely scattered but political instability debilitated investor confidence.
6.6 Singapore, in contrast, was least affected by the recent capital account crisis because it had prudent banking regulations and rigorous supervisions. Neither cronyism nor nepotism nor corruption distorted the allocation of resources. Public officers acted as referees, not participants in the market, and good transparency functioned to check abuses of power and privilege.
6.7 Even though Singapore faced considerable net outflows of portfolio investment in 1996-97, such event represented temporary market reactions to export downturn (especially electronics) and Asian financial crisis. Given that Singapore has a firm command on economic and institutional fundamentals, those disturbances turned out to be only transitory.
6.8 In the countries most affected by the crisis, the key factors that led to the difficulties are the following: (a) failure to dampen overheating pressures manifested itself in large external deficits and property plus stock market bubbles; (b) too long a peg of exchange rates encouraged excessive foreign borrowing without hedging; (c) formats of foreign borrowing mattered very much in that short-term debts generated extreme vulnerability while foreign direct investment was at the opposite end; (d) lax rules and financial oversight precipitated deterioration of banks’ asset quality; (e) poor transparency induced speculation; (f) political disarray and uncertainties weakened investor confidence
