Title Page
Evaluation Report
The IMF and Recent Capital Account Crises
Indonesia, Korea, Brazil
International Monetary Fund • 2003
Copyright
© 2003 International Monetary Fund
Production: IMF Multimedia Services Division
Cover: Martina Vortmeyer
Figures: Theodore F. Peters, Jr.
Typesetting: Alicia Etchebarne-Bourdin
Cataloging-in-Publication Data
The IMF and recent capital account crises: Indonesia, Korea, Brazil—[Washington, D.C.]: International Monetary Fund, 2003
p. cm.
“Evaluation Report.”
Includes bibliographical references.
ISBN 9781589061880
1. Capital movements—Indonesia. 2. Capital movements—Korea. 3. Capital movements—Brazil. 4. International Monetary Fund—Evaluation. I. International Monetary Fund. Independent Evaluation Office.
HG3891.I45 2003
Price: US$25.00
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Contents
Foreword
Abbreviations and Acronyms
The IMF and Recent Capital Account Crises: Indonesia, Korea, Brazil
Executive Summary
Main Report
1 Introduction
2 The Three Crisis Cases
Indonesia
Korea
Brazil
3 Precrisis Surveillance
The Diagnosis Role of Surveillance
The Impact of Surveillance
The Role of Transparency
Recent Initiatives and Further Steps to Strengthen Surveillance
4 Program Design and Implementation
Macroeconomic Framework and Projections
Fiscal Policy
Monetary Policy
Official Financing and Private Sector Involvement
Bank Closure and Restructuring
Structural Conditionality
Communications Strategy to Enhance Ownership and Credibility
5 Internal Governance
Human Resource Management
The Role of Major Shareholders and the Executive Board
The Relations with Other International Financial Institutions
6 Conclusions and Recommendations
Conclusions
Recommendations
Appendix 1. The IMF’s Financial Arrangements with Three Crisis Countries, 1997–2002
Appendix 2. List of Interviewees
Box
4.1. Conditionality for Structural Reforms in an IMF-Supported Program
Figures
2.1. Indonesia, Korea, and Brazil: Exchange Rate Movements Against the U.S. Dollar Under IMF-Supported Programs
2.2. Indonesia: Key Economic Variables
2.3. Korea: Key Economic Variables
2.4. Brazil: Key Economic Variables
Tables
2.1. Indonesia: Key Economic Indicators
2.2. Korea: Key Economic Indicators
2.3. Brazil: Key Economic Indicators
4.1. Real GDP and Investment Projections and Outturn in Crisis Countries
4.2. Real Interest Rates in Selected Countries
4.3. Official Financing Assumed in Initial IMF-Supported Programs
Annexes
1 Indonesia
Introduction
Precrisis Surveillance
Program Design
The Mode of Operations
Conclusions
Appendix A1.1. Indonesia: Selected Conditionality Under IMF-Supported Programs: Evolution and Implementation, 1997–98
Appendix A1.2. Indonesia: Timeline of Major Events
2 Korea
Introduction
Precrisis Surveillance
Program Design
Program Financing and the Debt Rollover
Conclusions
Appendix. Korea: Timeline of Major Events
3 Brazil
Introduction
Precrisis Surveillance
Program Design
Conclusions
Appendix A3.1. Brazil: Selected Conditionality Under IMF-Supported Programs, 1998–2000
Appendix A3.2. Brazil: Timeline of Major Events
Annex Boxes
A1.1. Indonesia: Was Monetary Policy Tight?
A2.1. Merchant Banks in Korea
A2.2. The IMF-Supported Program in Korea
A2.3. Recent Studies on the Impact of High Interest Rate Policy in Korea
A3.1. Brazil: The Real Plan
A3.2. Brazil: The Evolution of Exchange Rate Policy
Annex Figures
A1.1. Indonesia: Selected Macroeconomic Indicators
A1.2. Indonesia: Monthly Nominal Interest Rates
A1.3. Indonesia: Monthly Real Interest Rates
A1.4. Indonesia: Daily Movements of the Rupiah–U.S. Dollar Exchange Rate
A1.5. Indonesia: Base Money Outcomes and Targets Under IMF-Supported Programs
A2.1. Won–U.S. Dollar Exchange Rate and Korean Equity Prices
A2.2. Korean and Emerging Market Borrowing Spreads
A2.3. Won–U.S. Dollar Spot and Forward Rates
A2.4. Korea: Overnight Call Money Rate and Inflation
A2.5. Daily Volatility of U.S. Dollar Exchange Rates Against Korean Won, Japanese Yen, and Deutsche Mark
A3.1. Brazil: Real Effective Exchange Rate
A3.2. Brazil: Foreign Exchange Reserves
A3.3. Brazil and Emerging Markets Bond Index Spreads
A3.4. Brazil: Debt Sustainability Projections
A3.5. Brazil: Composition of Federal Domestic Securities
A3.6. Short-Term Interest Rate and Real–U.S. Dollar Exchange Rate
Annex Tables
A1.1. Indonesia: Fiscal Outcomes and Targets
A1.2. Indonesia: Balance of Payments Projections and Outcomes
A2.1. Korea Balance of Payments and Financing Requirements
A3.1. Brazil: Fiscal Developments
A3.2. Brazil: Factors Affecting Net Public Debt
A3.3. Brazil: Financing Assumptions and Outturns
A3.4. Brazil: Macroeconomic Projections
Bibliography
Memorandum from First Deputy Managing Director, Statement by Managing Director, IMF Staff Response, and Summing Up of IMF Executive Board Discussion by Acting Chair
Memorandum from First Deputy Managing Director
Statement by Managing Director
IMF Staff Response
Summing Up of IMF Executive Board Discussion by Acting Chair
The following symbols have been used throughout this report:
– between years or months (e.g. 2000–01 or January–June) to indicate the years or months covered, including the beginning and ending years or months;
/ between years (e.g. 2000/01) to indicate a fiscal (financial year).
“Billion” means a thousand million.
Minor discrepancies between constituent figures and totals are due to rounding.
Some of the documents cited and referenced in this report were not available to the public at the time of publication of this report. Thus, they have not been listed in the bibliography. However, under the current policy on public access to the IMF’s archives, some of these documents will become available five years after their issuance. They may be referenced as EBS/YY/NN and SM/YY/NN, where EBS and SM indicate the series and YY indicates the year of issue. Certain other documents are to become available ten or twenty years after their issuance depending on the series.
Foreword
This report, The IMF and Recent Capital Account Crises, is the second evaluation report produced by the Independent Evaluation Office (IEO). The report focuses on the role of the IMF in three recent currency crises in Indonesia (1997–98), Korea (1997–98), and Brazil (1998–99).
The three cases exemplify the new type of balance of payments crisis, characterized by a sudden reversal of capital flows, which are increasingly seen as posing special risks for emerging market countries. All three cases have been the subject of considerable debate both within and outside the IMF and, in revisiting these episodes, this report covers ground that will be familiar to many readers. However, it also brings a fresh perspective because of the IEO’s access to internal IMF documents which cast new light on various aspects of each crisis, both in the buildup to the crisis and in the crisis management phase.
The primary purpose of the evaluation, in keeping with the IEO’s mandate, is to draw lessons for the future. The report therefore recommends a number of steps aimed at making the IMF’s surveillance and program design more effective in the prevention and management of future capital account crises. The report recognizes that many important lessons have already been learned from the cases studied and a number of changes have been made in IMF procedures and policies. The recommendations in the IEO report seek to build on the many steps already taken.
The preparation of the report followed the IEO’s established procedures. A draft issues paper was posted for comments on the IEO’s website (www.imf.org/ieo) and was later revised, on the basis of inputs from a range of groups and individuals, to form the final terms of reference for the evaluation. This was posted on the website and interested parties were invited to submit material relevant to items included in the terms of reference. Several seminars were held to interact with outside experts and stakeholders and comments on early drafts were obtained from staff. The final IEO report, as approved by the Director, was submitted to management for comments and also circulated simultaneously to Executive Directors. The report was discussed in the Executive Board on May 30, 2003, along with comments from management and staff.
In line with IEO procedures, the report, as discussed in the Board, is being published along with the Summing Up of the Executive Board discussion by the Acting Chair and the statements by management and staff to the Board. The staff statement draws attention to positive developments in Indonesia and Brazil in the period following the end of the programs covered by this report. The IEO was precluded from evaluating these developments because our mandate does not allow us to review ongoing programs.
Montek S. Ahluwalia
Director
Independent Evaluation Office
The IMF and Capital Account Crises: Indonesia, Korea, Brazil
The report was prepared by a team headed by Shinji Takagi and including Ali Mansoor, Kevin Barnes, and Benjamin Cohen. The team was assisted by Afonso Bevilaqua, Stephen Grenville, Mohamad Ikhsan, Jai-won Ryou, and Takashi Shiraishi; sections of the report have also benefited from comments and other inputs from Jeffrey Frankel, Takatoshi Ito, Yung Chul Park, and David Peretz. However, the final judgments are the responsibility of the IEO alone. Research assistance from Misa Takebe, Shauqie Azar, Minkyung Kim, and Leandro Rothmuller; administrative support by Annette Canizares, Arun Bhatnagar, and Florence Conteh; and editorial work by Ian McDonald and Esha Ray are gratefully acknowledged.
The Independent Evaluation Office (IEO) was established by the International Monetary Fund’s Executive Board in July 2001. The office operates independently of IMF management and at arm’s length from the IMF’s Executive Board. Its mission is to provide objective and independent evaluation of issues related to the IMF’s mandate and thereby support the Executive Board in its governance and oversight responsibilities, to contribute to enhancing the learning culture of the IMF, and to promote understanding of the IMF’s work.Abbreviations and Acronyms
| ADB | Asian Development Bank |
| APD | Asia and Pacific Department (IMF) |
| APEC | Asia-Pacific Economic Cooperation |
| ASEAN | Association of South East Asian Nations |
| BCBS | Basel Committee on Banking Supervision |
| BI | Bank Indonesia |
| BIS | Bank for International Settlements |
| BLBI | Bank Liquidity from Bank Indonesia |
| BOK | Bank of Korea |
| BPK | Supreme Audit Agency (Indonesia) |
| CBA | Currency board arrangement |
| CCL | Contingent Credit Line (IMF) |
| CD | Certificate of deposit |
| CPMF | Financial transactions tax (Brazil) |
| EFF | Extended Fund Facility (IMF) |
| EMEAP | Executives’ Meeting of East Asia–Pacific Central Banks |
| ERM | Exchange rate mechanism |
| FDI | Foreign direct investment |
| FSAP | Financial Sector Assessment Program (IMF) |
| FSC | Financial Supervisory Commission (Korea) |
| FSS | Financial Supervisory Service (Korea) |
| G-7 | Group of Seven countries |
| GDP | Gross domestic product |
| IBRA | Indonesian Bank Restructuring Agency |
| ICM | International Capital Markets Department (IMF) |
| IDB | Inter-American Development Bank |
| IEO | Independent Evaluation Office (IMF) |
| IFI | International financial institution |
| IIF | Institute of International Finance |
| IMF | International Monetary Fund |
| INDRA | Indonesia Debt Restructuring Agency |
| ITC | Investment trust company (Korea) |
| JIBOR | Jakarta interbank offered rate |
| KAMCO | Korea Asset Management Corporation |
| KDB | Korea Development Bank |
| KDIC | Korea Deposit Insurance Corporation |
| LIBOR | London interbank offered rate |
| LOI | Letter of intent (IMF) |
| LOLR | Lender of last resort |
| MAE | Monetary and Exchange Affairs Department (IMF)1 |
| MEFP | Memorandum on economic and financial policies (IMF) |
| MOF | Ministry of finance |
| MOFE | Ministry of Finance and Economy (Korea) |
| NDA | Net domestic assets |
| NIR | Net international reserves |
| NPL | Nonperforming loan |
| OECD | Organization for Economic Cooperation and Development |
| PC | Performance criteria (IMF) |
| PDR | Policy Development and Review Department (IMF) |
| PEDT | Private External Debt Team (Indonesia) |
| PIN | Public Information Notice (IMF) |
| PSBR | Public sector borrowing requirement |
| PSI | Private sector involvement |
| RES | Research Department (IMF) |
| ROSC | Report on the Observance of Standards and Codes (IMF) |
| SBA | Stand-By Arrangement (IMF) |
| SBI | Bank Indonesia certificate |
| SDDS | Special Data Dissemination Standard (IMF) |
| SDR | Special drawing right (IMF) |
| SME | Small and medium-sized enterprise |
| SRF | Supplemental Reserve Facility (IMF) |
| URV | Unit of real value (Brazil) |
| VAT | Value-added tax |
| WHD | Western Hemisphere Department (IMF) |
| WTO | World Trade Organization |
Effective May 1, 2003, name was changed to Monetary and Financial Systems Department.