INDICATORS OF CURRENCY CRISIS: THE EAST ASIAN EXPERIENCE

This article analyzes the key leading indicators that could have predicted the 1997-98 East Asian currency crisis. It examines the economic and financial conditions in the affected countries, such as Thailand, Indonesia, and South Korea, in the years leading up to the crisis. The study moves beyond the immediate trigger of the Thai baht's collapse to identify the underlying vulnerabilities that made these economies susceptible to a sudden loss of investor confidence. The research focuses on a range of indicators, including large current account deficits, the rapid growth of short-term foreign debt, pegged exchange rate regimes, and weaknesses in the domestic financial and banking sectors. The paper argues that a combination of these indicators pointed to a growing risk of a "sudden stop" of capital flows. The analysis concludes by discussing the lessons learned from the crisis for the development of early warning systems to prevent future currency crises in emerging markets.

The East Asian financial crisis of 1997-98, which saw the sudden and dramatic collapse of several of the world's most successful "tiger economies," took many observers by surprise. This paper analyzes the leading economic and financial indicators from the pre-crisis period to understand the underlying vulnerabilities that were often overlooked. The study begins by outlining the dominant narrative of the "East Asian miracle," which had focused on high growth rates and sound fiscal policies. The core of the article is a detailed forensic analysis of the indicators of fragility that lay beneath this successful surface. A key indicator identified is the nature of the capital inflows that flooded into the region in the 1990s. The paper argues that the heavy reliance on short-term, debt-creating flows, as opposed to long-term foreign direct investment, created a massive vulnerability to a sudden shift in market sentiment. Another critical indicator analyzed is the health of the domestic banking sector. The paper details how weak regulation and poor lending practices had led to a credit boom and a significant asset price bubble, particularly in the real estate sector. The study also examines the role of pegged exchange rates, which, while providing stability in the short run, had encouraged unhedged foreign currency borrowing and ultimately proved unsustainable. The findings suggest that the crisis was not an inexplicable bolt from the blue but the result of a buildup of identifiable financial fragilities, offering crucial lessons for financial surveillance and crisis prevention.