Ex-post analysis shows that the slowdown in world demand can explain a large part of the slowdown in the region's export growth (Bhattacharya, Gihosh and Janisen, 1998). The slowdown in the growth of export markets was greatest for Indonesia at over 6 percent. The growth of Malaysia's export markets slowed by around 5 percentage points, while that of Thailand slowed by just over 4 percentage points. In case of Malaysia and to an even larger extent Thailand, the exchange rate appreciation was also a significant factor. Nonetheless, it is true that the slowdown in these countries' export performance was greater than what could be expected based on the slowdown in export market growth and real exchange rate appreciation alone.

Two additional factors could have accounted for this difference: the global downturn in demand for some specific products in 1996 such as semiconductors; and, growing competition from low cost producers. A detailed analysis of the top ten exports of Indonesia, Malaysia and Thailand (Bhattacharya, Ghosh and Jansen, 1998) suggests that in the more recent period, increases in China's market shares were accompanied by declines in market shares in their top ten products, especially in the case of Thailand. By contrast, during 1989-92, increases in China's world market shares were not associated with declines in world market shares in these products for the three countries. All three countries, however, have increased their share of more skill intensive products as China's share in their traditional exports increased during the 1990s. And although there has been a deceleration in the pace at which their world market share of manufactured exports has grown, these countries have continued to increase world market share in total exports of manufactures.

This analysis suggests that the deterioration in the region's export performance and the implications for future competitiveness were not as severe as the market may have assessed them to be. However, the real exchange rate appreciation and export slowdown were likely very important in affecting investor perceptions. Increasingly, investors began to focus on the misalignment of exchange rate in Thailand. Following prolonged poor policy reaction in Thailand, the crisis was then triggered.

# IV. **Evolution, the Role of Contagion and the Depth of the Crisis**

# **Onset and Evolution of the Crisis**

- **Thailand.** There was a lag of almost a year between the onset of confidence weakening and vigorous policy reaction. Equity investors were the first to withdraw. The stock market, which had peaked in February 1996, had already fallen by 40% by early 1997, with equity prices of financial institutions falling by even more, a cumulative 60 percent. Capital flows in 1996 were increasingly in the form of short-term debt as financial institutions and some corporates had difficulty obtaining longer maturity funding. Several large investments ran into difficulty obtaining financing as early as 1996, notably Alphatec, a large iabout $1 billion) semi-conductor investment with weak economic prospects. In early 1997, total private capital flows started to slow down, with bond issues and syndicated loans falling in thte first half of 1997 to $4 billion, compared to $6.5 billion in the first half of 1996. Confidence in Thailand was further reduced by the default on a Eurobond issue of Somprasong Land.

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