Jump to content
IGNORED

Why the Baht crashed.......


Jumbo

Recommended Posts

2. An Anatomy of the Thai Financial Crisis

 

Since early 1990s, Thai economy had attracted massive volumes of capital inflow from aboard due to its accommodating economic policies, goal, healthy-looking conditions, and some other outside factors such as the stagflation of Japanese economy and the recession in European countries during 1990s. After a long period of strict financial regulations that limited credit expansion of commercial banks, starting from the beginning of 1990s, the Thai government had decided to accommodate a policy of financial market deregulation and capital account liberalization. Moreover, with an exchange rate fixed to a basket of world dominant currencies especially US dollars, the Thais had enjoyed a long period of nominal exchange rate stability as the baht had fluctuated very narrowly between 24.91-25.59 baht per dollar (Table 1), stable price level of 3.3-5.9%, and high interest rate at around 13.25% before the crisis.

 

The Thai government also had done a good job in keeping inflation rate low between 3.36% and 5.7% (Table 2) as well as fiscal balances surpluses (Table 3). Plus the economy had possessed a characteristic of high saving rates situated at around 33.5% of GDP while its GDP growth had stayed at an impressive level of 8.08-8.94 during 1991-95. As a result, the Thai economy had become very attractive to international speculators, many of whom had channeled their large sum of capital out of Japan which had undergone a lengthy period of stagflation and low interest rate. And by 1995, Thailand had a net capital inflow of US$ 14.239 billion, more than one hundred percent increase from its net capital inflow three years ago.

 

As a consequence of the huge overflow of capital, domestic investment had its prime years and the banking sector had expanded very rapidly. Thailand’s investment rate between 1990-96 as shown in Table 4 came in the first place compared to the other nations of the same region. Stock market prices rose by 175% in aggregate and by 395% in property sector. There emerged more than 50 banks and non-banks financial institutions which had been controlled and monitored much leniently by the Thai central bank—the Bank of Thailand. These financial institutions had made a large sum of money out of the economy as they had had small constraints and difficulties in borrowing quite excessively from abroad and lending with a dear interest at home. By early 1990s, Thailand’s banks were ranked among the world’s most profitable as the banks could charge up to 4 percentage points more interest for loans than they paid on deposits, a discrepancy which was 4 times bigger than the spreads of less than 1 percentage point in the banking system of many developed economies. And Thailand’s lending boom measure calculated from the growth of bank lending as a percentage of GDP ratio was 58%, the highest in the East Asian group (Table 5).

 

However, the growth of the capital inflow and the lending practice of the Thai financial institutions were not very healthy nor wise. A large part of the capital had been put into non-productive sectors especially real estate. Those sectors were non-productive because they produced non-tradable goods which were sold only domestically, resulting in less national volume of exports and thus weaken the economy’s balance of trade as well as the capital account. A statistic showed that 10-35% of bank loans were committed to bricks and mortar. In addition, only a small portion of the capital inflow could be categorized as foreign direct investment (FDI)—a non-speculative, thus real, type of investment that went to the build-ups of capital goods, factories, inventories and land. In table 6, the percentage of contribution of inward FDI to current account financing was calculated. The proportion of FDI to the Thai economy was low and had decreased over time from 33.57% in 1990 to 15.90% in 1996, compared to that of Malaysia who had a proportion of FDI above 90% throughout the time period. In addition, the financial institutions tended to lend recklessly without a prudent procedure of lending contraction and monitoring. This was an adverse selection problem resulted from moral hazard on the side of the financial institutions as the institutions had expected a safety net provided by the Thai government or the Bank of Thailand if a bank run occurred. The same problem was also with the foreign creditors and depositors sides as they credited money to the financial institutions with little care, having in mind the government’s bailout policy. As Jeffrey Sachs had presented an early analysis of the role of excessive lending driven by ‘moral hazard’ incentives:

Furthermore, it was worth noting that the lending boom was significantly larger for finance and securities companies than for banks (133% of the former as opposed to 51% of the latter). And the non-bank share of lending to the private sector was quite significant (about 33% of bank lending). As a result, Thailand was the only country, among the countries affected by the Asian crisis, where lending to private sector was very different if we added the ‘other banking’ and ‘non-bank financial institutions’ figures. Unfortunately, these non-bank institutions tended to have a very bad lending practice. As later on, they were severely affected by the incident of non-performing loans crisis, and 56 of them were forced to close their business in a government’s attempt to remedy the crisis which had gone much worse after the devaluation of the baht. Another imprudent lending practice of the financial institutions was that they lent from foreigners mostly in dollar denomination and thus needed to pay back in the foreign-nominated currency, but they relent that foreign-denominated currency in baht at home. A ratio of foreign liabilities to assets is shown in table 8. Strikingly, the ratio is far higher in the case of Thailand than that of the other countries: the ratio of Thailand before the crisis had been increasing from 6.93 in 1993 to 11.03 in 1996 whereas that of the other countries never exceeded 4.3 in the same time period. This suggested a serious mismatch between the stock of foreign liabilities and assets. The Thais would get into a really big trouble if they needed to repay those liabilities in all of a sudden. This later on would be shown to be a crucial cause of the deterioration of the nation’s balance of payment and the collapse of the economy.

 

Unfortunately, the golden years did not last long. Starting from the year 1995, Thailand’s economic growth became much slow down due to a number of factors such as the contraction in the real estate sector, the emergence of China as an intimidating competitor in international trade, the fall of world demand of semiconductor which was one of the Thai major exports in 1996, and an appreciation of the dollars after Spring 1995. As previously discussed, real estates were non-tradable; thus, there was a constraint in market demand of them. Too many houses and business buildings were built; by 1997, the commercial vacancy rate had gone up to 15% (Table7). The real estate business had become unprofitable., and the business owners, thus, had no capacity to pay back their debts to financial institutions when the maturity came. The percentage of non-performing loans had risen up to 13% in 1996. This soar of the non-performing loans began the era of banking crisis as banks’ balance sheet had been deteriorated. Besides, in international trade, Thailand had become less competitive in the existence of an emerging trader like China together with a constantly increasing trend of dollar currency (i.e. an appreciation of dollar) which had worsened Thailand’s terms of trade since the Spring of 1995. (The exchange rate of yen for dollar went from 80 in Spring 1995 to over 125 yen per dollar in Summer 1997). Thailand’s terms of trade had been worsened because the Thai baht needed to appreciate along with the dollar which was the major currency in the currencies basket Thailand had fixed its exchange rate to. And as the world demand of semiconductor had fallen in 1996, Thailand’s volume of exports decreased, contributing to a balance of trade deficit.

 

Thai people had had an expectation of a long run economic growth of their country; thus, their consumption had become quite excessive especially in imported commodities and luxuries.

 

There came speculators who had seen Thailand’s slow growth rate, bank run, and deteriorating balance of payments as signs of unprofitability for their investment. They started selling domestic assets and claimed back their foreign assets. As a result, bank balance sheets became increasingly deteriorated, and the economy had faced a severe credit crunch problem. Even investors with productive investment opportunities could not get loans to run their business. The country’s economic growth, thus, had been even more deterred. On February 5, 1997, “Somprasong” was the first Thai company to miss the repayment of its foreign debt. The situation had gone so severe that a large number of Thai financial institutions were not any more to pay back their debts; the government’s bailout operation was expected. On March 10, 1997, the Thai government announced that it would buy $3.9 billion in bad property debt from a number of; however, it reneged the promise at the end. On May 23 the government made an attempt to save “Finance One,” Thailand’s largest finance company, via a merger with another financial institution. But again it could not fulfill its mission. As only one month later, the new finance minister ‘discovered’ that the Bank of Thailand had already used US$ 28 billion out of US$ 30 billion of its international reserves in the course of forward market interventions to defend the value of the baht.

 

Under a fixed exchange rate system, it was the responsibility of the government or the central bank to conduct policies i.e. exchange-rate changing, exchange-rate switching, and direct control, to keep its exchange rate fixed as well as to maintain a fine level of the overall condition of the economy. An exchange-rate changing policy was the first approach, constituted of a fiscal and monetary policy. As more and more capital flew out of the country or as the country had faced a balance of payments deficit the central bank needed to forfeit its foreign reserves, injecting the foreign currency into the economy to satisfy the currency’s excess demand and bring the economy back to its exchange rate equilibrium. So as speculators had kept taking dollars out of the system (i.e. Thai economy) , the Bank of Thailand had a necessity to inject dollars into the system using its stock of foreign reserves. Not for a long time, however, did the central bank could do that. Its stock of foreign reserves was almost used up, and it realized that it could not, in any way, be able to supply the foreign currency to the economy given the enormous size of foreign liabilities. An exchange-rate switching policy, thus, soon would need to be committed. The speculators knew the situation as well and had realized a mammoth gain from a devalued baht as their foreign assets would worth much more. So there occurred the first massive speculative attack in the Thai history on May 14-15, 1997. Only in Spring of 1997, more than 90% of the country’s foreign reserve had been used to defend the value of the baht, and the country was forced to finally switch its exchange rate regime. On July 2, 1997, Thailand had become under a flexible exchange rate system; the Thai baht was devalued by about 15-20 percent (28.80 baht per dollar) after the announcement. The value of the baht had continuously gone down since then and reached the bottom at 48.80 baht per dollar in December of the same year, the highest rate (lowest value of the Thai baht) ever since Thailand started keeping record in 1969.

 

In this world, open economies were interrelated basically through trade and capital flow, and the health of an economy essentially depended upon how well the economy had managed itself to be in a healthy balance of trade and capital flow. The Thai economy had not well managed its balances. It was too reckless in capital flow management which resulted in an imbalance of bank balance sheets of the nation’s financial institutions. In trade, however, an imbalance was largely caused by outside factors which were likely to be exogenous to the Thai economy, for instance, the emergence of China in international trade, the appreciation of the dollars, and the fall of world demand of semiconductor. The Thais might be able to do things such as the abandonment of an exchange rate regime that caused the Thai baht to move in the same direction as that of the dollars, and investment in research and development to find other types of exports that Thailand could profitably produce and export.

 

So do the Thais forget the painful lessons of Mexico? I would say “yes, but without many choices.” By the time that Mexico had entered into the financial crisis (1994-95), the Thai economy had begun to get used to a new style of economic liberalization. Thai people had earned more income and had become more and more proud of the growth of their economy. A set of government who came in and suddenly made the economy less appreciable would become unpopular. Thus, the governments in power during that period had preferred not to change the picture of the economy much. So, political concerns did have impacts on the direction of the economic policies. Besides, the Thai economy had had one characteristic much contributing to the rationale of the economy along its path. It believed in a miracle, and that it could make things different. As commented by Paul Krugman:

 

“Well, maybe the revelation that Asian nations do, in fact, live in the same economic universe as the rest of us will provoke some much-needed reflection on the realities of the Asian economic “miracle.””[2]

. The Asian countries had observed the success of Japanese economy and believed that they, as well, could do the same thing. . Miraculously successful as it had seen itself to be, it believed that it would not fall.

 

4. An Evaluation of the Thai Government Performance along Thailand’s Economic Path and in Response to the Crisis.

 

The Thai governments had not done a very good job. They had not dared to be far-sighted as they were still concerned much about politics. They had stuck to the goal held since the first time of capital account liberalization, a goal which had aimed at the expansion of the economy. The economy did expand, however, not quite healthily. It was like a bubble, continuously inflated, but the bigger it became, the more easily it would explode even with a soft touch of a rough surface.

 

The liberalization of the financial sector had been proved to be too reckless. Statistics such as ratio of foreign liabilities to foreign assets, non-performing loans, contribution of inward FDI to current account financing, had been evidences of the recklessness. However, even a good statistics like high GDP growth could not have made the economy joyful. Thailand’s GDP growth had been high at around 8.5% during the first half of 1990s. Nevertheless, a large contribution of the growth had come from production of non-tradable good and from pure speculative capital inflow.

 

Politics seemed to be much influential in policy making of the government. The majority of Thai people who walked on the street had been made to see only a prosper side of the economy. It had only been shown to them the growing of the cities and business sectors, and statistics such as high GDP growth, high saving rate, government fiscal balance surpluses, high volume of exports, a claim that Thailand had become one of the Asian Tigers. But it had not been shown to them how serious the country had become indebted, and how recklessly capital had been transferred and used in the economy. Thai people should be better informed and made sophisticated. The Thai government had tried to maintain its popularity even in the last minute when it decided not to ask IMF for a rescue package immediately after the devaluation of the baht was announced, but waited until 26 days later to eventually called in the IMF. This delay had a serious consequence as it exacerbated the situation of bank run.

 

Another government conduct worth to be discussed was its loose monetary policy during the period right after the first devaluation of the baht. Committing to that policy, the government showed its steadfast attempt to promote the production and thus the growth of the economy, an objective which had never been set aside. It had kept interest rate low so that the amount of money supply in the economy would be high which would encourage domestic consumption and investment. This conformed to the ‘Laffer curve’ condition saying that a fall not a rise of interest rate would have strengthen the economy and restored confidence. Unfortunately, the problem of bank panic was so serious that no matter how much money supply the economy had, the creditors would attempt their best to take money out of the system and did not invest. This resulted in a continuous spiral of currency depreciation that dramatically increased the real burden of the foreign-currency liabilities. Seeing that a loose monetary did not work, the government later on had switched to tighten its monetary policy. It raised domestic interest rate, hoping to retain money in the system. However, the policy turned out to be propelling a more serious contraction of the Thai economy and credit crunch.

 

5. Final Remarks on the Future of the Thai Economy.

 

The Thai financial crisis was built upon macroeconomic imbalances of the country, and those imbalances were essentially attributable to the faulty structure of the nation’s financial sector. A financial restructuring thus became the first episode of its road to discovery. Beside that it would be ensured that a similar type of financial crisis would not happen again in the future, the financial restructuring would have an immediate or short term benefit to the economy as it would beef up the investors’ confidence to bring in credits or capital into the Thai economy in order to make the economy move again.

 

The next step was that Thailand needed to try to have a reliable and capable institution which could give it a safety net when such a crisis occurred. Unlike the Fed, the Bank of Thailand had a constraint on its foreign-currency reserves which were to be used to pay the nation’s debt. So the Bank of Thailand, at least in this ten or fifteen years, would not be able to function as a lender-of-last-resort. This job, therefore, needed to be given to a powerful international institution like IMF. The Bank of Thailand, however, should be reconstructed so that it became independent to the government in its policy making since politics was proved to be a crucial source of the unhealthiness of the economy.

 

Beside a strong financial structure and a good supporting institution in case of a future financial crisis, from this point on, Thailand needed to be careful in keeping things in a well order. For instance, current account deficit should not be much in excess of 5% of GDP especially if the deficit was financed in a way that could lead to rapid reversals according to the US Deputy Treasury Secretary Lawrence Summers[4]; Banks should be restricted in how fast their borrowing could grow (Mishkin)[5].

 

6. Conclusion

 

To achieve Macroeconomic balances, great care and prudent policy management are needed. To be prudent was to be far-sighted and realistic. In the Thai financial crisis case, policies had not been prudently thought out. The collapse of the economy was a very tough lesson for the Thais. It would take long for the economy to recover. (It was predicted to be longer than that of Mexico concisely because the other countries of the region were also hit. Thus, Thailand could not gain much terms of trade after the devaluation of the baht to help improving its economy. Plus, the slow down of Japanese economy had made it unable to give much aid to Thailand unlike Mexico who had a huge support from the US for the road to its recovery.) But hopefully, during that long road, the Thais would maximally utilize the time to thought out wise policies and beef up a real strength so that when the next storm came, it would not turn over again.........etc

 

 

What are they going to do NOW?

  • Like 2

"If you think you can do it, or you think you can't.....You are right!"

Henry Ford.

Link to comment
Share on other sites

this is what happens when you abstain for too long :(

O you who turn the wheel and look to windward, Consider Phlebas, who was once handsome and tall as you.
Link to comment
Share on other sites

  • 2 weeks later...

Not for gits who can only read about three lines........for educated peeps only.

"If you think you can do it, or you think you can't.....You are right!"

Henry Ford.

Link to comment
Share on other sites

2. An Anatomy of the Thai Financial Crisis

 

Since early 1990s, Thai economy had attracted massive volumes of capital inflow from aboard due to its accommodating economic policies, goal, healthy-looking conditions, and some other outside factors such as the stagflation of Japanese economy and the recession in European countries during 1990s. After a long period of strict financial regulations that limited credit expansion of commercial banks, starting from the beginning of 1990s, the Thai government had decided to accommodate a policy of financial market deregulation and capital account liberalization. Moreover, with an exchange rate fixed to a basket of world dominant currencies especially US dollars, the Thais had enjoyed a long period of nominal exchange rate stability as the baht had fluctuated very narrowly between 24.91-25.59 baht per dollar (Table 1), stable price level of 3.3-5.9%, and high interest rate at around 13.25% before the crisis.

 

The Thai government also had done a good job in keeping inflation rate low between 3.36% and 5.7% (Table 2) as well as fiscal balances surpluses (Table 3). Plus the economy had possessed a characteristic of high saving rates situated at around 33.5% of GDP while its GDP growth had stayed at an impressive level of 8.08-8.94 during 1991-95. As a result, the Thai economy had become very attractive to international speculators, many of whom had channeled their large sum of capital out of Japan which had undergone a lengthy period of stagflation and low interest rate. And by 1995, Thailand had a net capital inflow of US$ 14.239 billion, more than one hundred percent increase from its net capital inflow three years ago.

 

As a consequence of the huge overflow of capital, domestic investment had its prime years and the banking sector had expanded very rapidly. Thailand’s investment rate between 1990-96 as shown in Table 4 came in the first place compared to the other nations of the same region. Stock market prices rose by 175% in aggregate and by 395% in property sector. There emerged more than 50 banks and non-banks financial institutions which had been controlled and monitored much leniently by the Thai central bank—the Bank of Thailand. These financial institutions had made a large sum of money out of the economy as they had had small constraints and difficulties in borrowing quite excessively from abroad and lending with a dear interest at home. By early 1990s, Thailand’s banks were ranked among the world’s most profitable as the banks could charge up to 4 percentage points more interest for loans than they paid on deposits, a discrepancy which was 4 times bigger than the spreads of less than 1 percentage point in the banking system of many developed economies. And Thailand’s lending boom measure calculated from the growth of bank lending as a percentage of GDP ratio was 58%, the highest in the East Asian group (Table 5).

 

However, the growth of the capital inflow and the lending practice of the Thai financial institutions were not very healthy nor wise. A large part of the capital had been put into non-productive sectors especially real estate. Those sectors were non-productive because they produced non-tradable goods which were sold only domestically, resulting in less national volume of exports and thus weaken the economy’s balance of trade as well as the capital account. A statistic showed that 10-35% of bank loans were committed to bricks and mortar. In addition, only a small portion of the capital inflow could be categorized as foreign direct investment (FDI)—a non-speculative, thus real, type of investment that went to the build-ups of capital goods, factories, inventories and land. In table 6, the percentage of contribution of inward FDI to current account financing was calculated. The proportion of FDI to the Thai economy was low and had decreased over time from 33.57% in 1990 to 15.90% in 1996, compared to that of Malaysia who had a proportion of FDI above 90% throughout the time period. In addition, the financial institutions tended to lend recklessly without a prudent procedure of lending contraction and monitoring. This was an adverse selection problem resulted from moral hazard on the side of the financial institutions as the institutions had expected a safety net provided by the Thai government or the Bank of Thailand if a bank run occurred. The same problem was also with the foreign creditors and depositors sides as they credited money to the financial institutions with little care, having in mind the government’s bailout policy. As Jeffrey Sachs had presented an early analysis of the role of excessive lending driven by ‘moral hazard’ incentives:

Furthermore, it was worth noting that the lending boom was significantly larger for finance and securities companies than for banks (133% of the former as opposed to 51% of the latter). And the non-bank share of lending to the private sector was quite significant (about 33% of bank lending). As a result, Thailand was the only country, among the countries affected by the Asian crisis, where lending to private sector was very different if we added the ‘other banking’ and ‘non-bank financial institutions’ figures. Unfortunately, these non-bank institutions tended to have a very bad lending practice. As later on, they were severely affected by the incident of non-performing loans crisis, and 56 of them were forced to close their business in a government’s attempt to remedy the crisis which had gone much worse after the devaluation of the baht. Another imprudent lending practice of the financial institutions was that they lent from foreigners mostly in dollar denomination and thus needed to pay back in the foreign-nominated currency, but they relent that foreign-denominated currency in baht at home. A ratio of foreign liabilities to assets is shown in table 8. Strikingly, the ratio is far higher in the case of Thailand than that of the other countries: the ratio of Thailand before the crisis had been increasing from 6.93 in 1993 to 11.03 in 1996 whereas that of the other countries never exceeded 4.3 in the same time period. This suggested a serious mismatch between the stock of foreign liabilities and assets. The Thais would get into a really big trouble if they needed to repay those liabilities in all of a sudden. This later on would be shown to be a crucial cause of the deterioration of the nation’s balance of payment and the collapse of the economy.

 

Unfortunately, the golden years did not last long. Starting from the year 1995, Thailand’s economic growth became much slow down due to a number of factors such as the contraction in the real estate sector, the emergence of China as an intimidating competitor in international trade, the fall of world demand of semiconductor which was one of the Thai major exports in 1996, and an appreciation of the dollars after Spring 1995. As previously discussed, real estates were non-tradable; thus, there was a constraint in market demand of them. Too many houses and business buildings were built; by 1997, the commercial vacancy rate had gone up to 15% (Table7). The real estate business had become unprofitable., and the business owners, thus, had no capacity to pay back their debts to financial institutions when the maturity came. The percentage of non-performing loans had risen up to 13% in 1996. This soar of the non-performing loans began the era of banking crisis as banks’ balance sheet had been deteriorated. Besides, in international trade, Thailand had become less competitive in the existence of an emerging trader like China together with a constantly increasing trend of dollar currency (i.e. an appreciation of dollar) which had worsened Thailand’s terms of trade since the Spring of 1995. (The exchange rate of yen for dollar went from 80 in Spring 1995 to over 125 yen per dollar in Summer 1997). Thailand’s terms of trade had been worsened because the Thai baht needed to appreciate along with the dollar which was the major currency in the currencies basket Thailand had fixed its exchange rate to. And as the world demand of semiconductor had fallen in 1996, Thailand’s volume of exports decreased, contributing to a balance of trade deficit.

 

Thai people had had an expectation of a long run economic growth of their country; thus, their consumption had become quite excessive especially in imported commodities and luxuries.

 

There came speculators who had seen Thailand’s slow growth rate, bank run, and deteriorating balance of payments as signs of unprofitability for their investment. They started selling domestic assets and claimed back their foreign assets. As a result, bank balance sheets became increasingly deteriorated, and the economy had faced a severe credit crunch problem. Even investors with productive investment opportunities could not get loans to run their business. The country’s economic growth, thus, had been even more deterred. On February 5, 1997, “Somprasong” was the first Thai company to miss the repayment of its foreign debt. The situation had gone so severe that a large number of Thai financial institutions were not any more to pay back their debts; the government’s bailout operation was expected. On March 10, 1997, the Thai government announced that it would buy $3.9 billion in bad property debt from a number of; however, it reneged the promise at the end. On May 23 the government made an attempt to save “Finance One,” Thailand’s largest finance company, via a merger with another financial institution. But again it could not fulfill its mission. As only one month later, the new finance minister ‘discovered’ that the Bank of Thailand had already used US$ 28 billion out of US$ 30 billion of its international reserves in the course of forward market interventions to defend the value of the baht.

 

Under a fixed exchange rate system, it was the responsibility of the government or the central bank to conduct policies i.e. exchange-rate changing, exchange-rate switching, and direct control, to keep its exchange rate fixed as well as to maintain a fine level of the overall condition of the economy. An exchange-rate changing policy was the first approach, constituted of a fiscal and monetary policy. As more and more capital flew out of the country or as the country had faced a balance of payments deficit the central bank needed to forfeit its foreign reserves, injecting the foreign currency into the economy to satisfy the currency’s excess demand and bring the economy back to its exchange rate equilibrium. So as speculators had kept taking dollars out of the system (i.e. Thai economy) , the Bank of Thailand had a necessity to inject dollars into the system using its stock of foreign reserves. Not for a long time, however, did the central bank could do that. Its stock of foreign reserves was almost used up, and it realized that it could not, in any way, be able to supply the foreign currency to the economy given the enormous size of foreign liabilities. An exchange-rate switching policy, thus, soon would need to be committed. The speculators knew the situation as well and had realized a mammoth gain from a devalued baht as their foreign assets would worth much more. So there occurred the first massive speculative attack in the Thai history on May 14-15, 1997. Only in Spring of 1997, more than 90% of the country’s foreign reserve had been used to defend the value of the baht, and the country was forced to finally switch its exchange rate regime. On July 2, 1997, Thailand had become under a flexible exchange rate system; the Thai baht was devalued by about 15-20 percent (28.80 baht per dollar) after the announcement. The value of the baht had continuously gone down since then and reached the bottom at 48.80 baht per dollar in December of the same year, the highest rate (lowest value of the Thai baht) ever since Thailand started keeping record in 1969.

 

In this world, open economies were interrelated basically through trade and capital flow, and the health of an economy essentially depended upon how well the economy had managed itself to be in a healthy balance of trade and capital flow. The Thai economy had not well managed its balances. It was too reckless in capital flow management which resulted in an imbalance of bank balance sheets of the nation’s financial institutions. In trade, however, an imbalance was largely caused by outside factors which were likely to be exogenous to the Thai economy, for instance, the emergence of China in international trade, the appreciation of the dollars, and the fall of world demand of semiconductor. The Thais might be able to do things such as the abandonment of an exchange rate regime that caused the Thai baht to move in the same direction as that of the dollars, and investment in research and development to find other types of exports that Thailand could profitably produce and export.

 

So do the Thais forget the painful lessons of Mexico? I would say “yes, but without many choices.” By the time that Mexico had entered into the financial crisis (1994-95), the Thai economy had begun to get used to a new style of economic liberalization. Thai people had earned more income and had become more and more proud of the growth of their economy. A set of government who came in and suddenly made the economy less appreciable would become unpopular. Thus, the governments in power during that period had preferred not to change the picture of the economy much. So, political concerns did have impacts on the direction of the economic policies. Besides, the Thai economy had had one characteristic much contributing to the rationale of the economy along its path. It believed in a miracle, and that it could make things different. As commented by Paul Krugman:

 

“Well, maybe the revelation that Asian nations do, in fact, live in the same economic universe as the rest of us will provoke some much-needed reflection on the realities of the Asian economic “miracle.””[2]

. The Asian countries had observed the success of Japanese economy and believed that they, as well, could do the same thing. . Miraculously successful as it had seen itself to be, it believed that it would not fall.

 

4. An Evaluation of the Thai Government Performance along Thailand’s Economic Path and in Response to the Crisis.

 

The Thai governments had not done a very good job. They had not dared to be far-sighted as they were still concerned much about politics. They had stuck to the goal held since the first time of capital account liberalization, a goal which had aimed at the expansion of the economy. The economy did expand, however, not quite healthily. It was like a bubble, continuously inflated, but the bigger it became, the more easily it would explode even with a soft touch of a rough surface.

 

The liberalization of the financial sector had been proved to be too reckless. Statistics such as ratio of foreign liabilities to foreign assets, non-performing loans, contribution of inward FDI to current account financing, had been evidences of the recklessness. However, even a good statistics like high GDP growth could not have made the economy joyful. Thailand’s GDP growth had been high at around 8.5% during the first half of 1990s. Nevertheless, a large contribution of the growth had come from production of non-tradable good and from pure speculative capital inflow.

 

Politics seemed to be much influential in policy making of the government. The majority of Thai people who walked on the street had been made to see only a prosper side of the economy. It had only been shown to them the growing of the cities and business sectors, and statistics such as high GDP growth, high saving rate, government fiscal balance surpluses, high volume of exports, a claim that Thailand had become one of the Asian Tigers. But it had not been shown to them how serious the country had become indebted, and how recklessly capital had been transferred and used in the economy. Thai people should be better informed and made sophisticated. The Thai government had tried to maintain its popularity even in the last minute when it decided not to ask IMF for a rescue package immediately after the devaluation of the baht was announced, but waited until 26 days later to eventually called in the IMF. This delay had a serious consequence as it exacerbated the situation of bank run.

 

Another government conduct worth to be discussed was its loose monetary policy during the period right after the first devaluation of the baht. Committing to that policy, the government showed its steadfast attempt to promote the production and thus the growth of the economy, an objective which had never been set aside. It had kept interest rate low so that the amount of money supply in the economy would be high which would encourage domestic consumption and investment. This conformed to the ‘Laffer curve’ condition saying that a fall not a rise of interest rate would have strengthen the economy and restored confidence. Unfortunately, the problem of bank panic was so serious that no matter how much money supply the economy had, the creditors would attempt their best to take money out of the system and did not invest. This resulted in a continuous spiral of currency depreciation that dramatically increased the real burden of the foreign-currency liabilities. Seeing that a loose monetary did not work, the government later on had switched to tighten its monetary policy. It raised domestic interest rate, hoping to retain money in the system. However, the policy turned out to be propelling a more serious contraction of the Thai economy and credit crunch.

 

5. Final Remarks on the Future of the Thai Economy.

 

The Thai financial crisis was built upon macroeconomic imbalances of the country, and those imbalances were essentially attributable to the faulty structure of the nation’s financial sector. A financial restructuring thus became the first episode of its road to discovery. Beside that it would be ensured that a similar type of financial crisis would not happen again in the future, the financial restructuring would have an immediate or short term benefit to the economy as it would beef up the investors’ confidence to bring in credits or capital into the Thai economy in order to make the economy move again.

 

The next step was that Thailand needed to try to have a reliable and capable institution which could give it a safety net when such a crisis occurred. Unlike the Fed, the Bank of Thailand had a constraint on its foreign-currency reserves which were to be used to pay the nation’s debt. So the Bank of Thailand, at least in this ten or fifteen years, would not be able to function as a lender-of-last-resort. This job, therefore, needed to be given to a powerful international institution like IMF. The Bank of Thailand, however, should be reconstructed so that it became independent to the government in its policy making since politics was proved to be a crucial source of the unhealthiness of the economy.

 

Beside a strong financial structure and a good supporting institution in case of a future financial crisis, from this point on, Thailand needed to be careful in keeping things in a well order. For instance, current account deficit should not be much in excess of 5% of GDP especially if the deficit was financed in a way that could lead to rapid reversals according to the US Deputy Treasury Secretary Lawrence Summers[4]; Banks should be restricted in how fast their borrowing could grow (Mishkin)[5].

 

6. Conclusion

 

To achieve Macroeconomic balances, great care and prudent policy management are needed. To be prudent was to be far-sighted and realistic. In the Thai financial crisis case, policies had not been prudently thought out. The collapse of the economy was a very tough lesson for the Thais. It would take long for the economy to recover. (It was predicted to be longer than that of Mexico concisely because the other countries of the region were also hit. Thus, Thailand could not gain much terms of trade after the devaluation of the baht to help improving its economy. Plus, the slow down of Japanese economy had made it unable to give much aid to Thailand unlike Mexico who had a huge support from the US for the road to its recovery.) But hopefully, during that long road, the Thais would maximally utilize the time to thought out wise policies and beef up a real strength so that when the next storm came, it would not turn over again.........etc

 

 

What are they going to do NOW?

 

 

I don't know what Thailand will do now, i only know that the economy of Thailand is growing fast, and that much foreing money is entering the country.

Maybe there will be less tourists from Europe and the US but Thailand has more income from export and this is growing.

I live in Europe where many non-European people are coming to get money, food , living , healthcare for free. The working-class people are forced to pay as much taxes they can and they will have to work till they die because in 25 years there will be no more money to give a pension to the working people. Our new friends will return to there countries in new homes wherein they invested money they got for free from Europe.

I think that a new crisis will likely occur in Europe and not in Thailand.

I can not talk for the US, but i think there are problems there too.....

Just a thought but maybe it is the time to invest in the Asian countries because they are the future?

Sorry for my Englisch.

Link to comment
Share on other sites

Is this a history lesson? '94 '96 '06 that's in the past we're now nearing 2011 and the Thai economy has survived all that, the baht has remained strong against the USD and Pound, maybe you should try to advise the American market where the financial bubble burst in the first place, sending most of the world into freefall with it. Maybe the Thai's could teach the American money Boys a thing or two.

Link to comment
Share on other sites

Well, I'm impressed to see all the facts laid out like that. I can remember the crash and the years that proceeded it. My simplistic view of it based upon my memory was that the Thai's got too big for their boots.

 

The economy was growing and hotels were being built everywhere...but only 5 star hotels, apparently on the logic that they would get 5 star prices. They borrowed heavily to build and after the crash many of them were left uncompleted for years. There was also a surplus of high quality accommodation that could be had at bargain prices because there weren't as many people willing to pay 5 star prices as they'd banked on.

 

In the mid 90's Thailands new affluent kids would pay thousands of Baht for genuine Levi jeans from the US. Some friends of mine made good money importing them. it was crazy, you could buy a SE Asian pair for 200 Baht at Jatujak market and a pair of 'red label' ones for 5000 Baht at MBK! Imagine people buying Levi's in America and then selling them at a decent profit in Thailand. I helped a friend sell his jeans at MBK one day. one of the buyers told me that we had the wrong type and what he wanted to buy were pairs like the ones I had on....they were 200 Baht Levi's from Jatujak lol.

 

I also remember that the fact that they were going to devalue the Baht was announced in a UK newspaper 3 weeks before it happened. Of course everybody in a position to do so then had time to change their assets into US Dollars. Ex Prime Minister Chatchai maid untold millions this way.

 

My impression was that the Thais in the mid 90's who were doing well got very over confident and they really seemed to believe that the good times could never end.

         ความจริงเป็นสิ่งที่ไม่ตายแต่คนพูดความจริงอาจจะตาย                 

The truth is immortal but people who speak it aren't - Thai proverb

Karl's Thailand - My YouTube Channel

 

 

Link to comment
Share on other sites

Is this a history lesson? '94 '96 '06 that's in the past we're now nearing 2011 and the Thai economy has survived all that, the baht has remained strong against the USD and Pound, maybe you should try to advise the American market where the financial bubble burst in the first place, sending most of the world into freefall with it. Maybe the Thai's could teach the American money Boys a thing or two.

what happens in the east is influrence by what china do,es next,and with inflation running at 10% it will be probable early next year that we might see a bit of leeway in the exchange rate.speaking from a uk point of view.

Link to comment
Share on other sites

Jumbo - a lot of effort went into your post if it was just a history lesson - or are you trying to suggest history may be repeating itself in some way?

Link to comment
Share on other sites

Near 29 to the USD and 47 to the GBP and we call call this a crash of the Thai Bhat :WTF1:

I think that the title refers to the South East Asian currency crash that started with the Thai Baht in 1997 rather than being a reference to the current state of the Baht.

         ความจริงเป็นสิ่งที่ไม่ตายแต่คนพูดความจริงอาจจะตาย                 

The truth is immortal but people who speak it aren't - Thai proverb

Karl's Thailand - My YouTube Channel

 

 

Link to comment
Share on other sites

Last news i caught on this forum was that the Thai government had plans to devaluate the Thai bath against euro and pound to get some more tourist again as the numbers of tourist were decreasing due to the strong baht! But didn't read it again or had any news on this for a month, so not true i think!

A good girl gives you happiness and a bad girl gives you experience both are essential in life so enjoy every girlfriend!

Link to comment
Share on other sites

Last news i caught on this forum was that the Thai government had plans to devaluate the Thai bath against euro and pound to get some more tourist again as the numbers of tourist were decreasing due to the strong baht! But didn't read it again or had any news on this for a month, so not true i think!

 

They should also realize that raiding bars and go gos won't help either. Whether they accept it or not, a lot of money comes into the country because of these venues...

 

Instead imagine providing tax concessions to businessmen wanting to start go-gos, massage parlours and ST places!

 

Also imagine providing Government subsidized accomodation to employees working in such places..

 

I will dream on...

Edited by ifriendyou
Link to comment
Share on other sites

Jumbo - a lot of effort went into your post if it was just a history lesson - or are you trying to suggest history may be repeating itself in some way?

I don't think there is much effort in a cut and paste. I think people should at least acknowledge where the information has come from and not try to pass it on as their own work.

 

A Good Look at the Thai Financial Crisis in 1997-98 by Narisa Laplamwanit

Pattaya Photos Free newbie guide to Pattaya How to get a TG a tourist visa for Australia Pattaya Weather


My moto for 2017: Don't argue with an idiot. Don't argue with.....

Link to comment
Share on other sites

I do think in this case those in control of Thai finances learned their lesson and we won't see the Baht crash like that again anytime soon. I would not mind being proven wrong though as it seems 25:1 THB:USD is a given.

Link to comment
Share on other sites

  • 1 month later...
  • 2 weeks later...

I think people completely overestimate the amount of money Thailand makes from tourists, and completely underestimate the amount of money Thailand makes from export and manufacturing.

 

BKK is surrounded by huge industrial factories. I bet that just _one_ of those oil/resources factories makes more money than all of Walking Street combined. And there are hundredths of these huge industrial complexes.

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now


  • COVID-19

    Any posts or topics which the moderation team deems to be rumours/speculatiom, conspiracy theory, scaremongering, deliberately misleading or has been posted to deliberately distort information will be removed - as will BMs repeatedly doing so. Existing rules also apply.

  • Advertise on Pattaya Addicts
  • Recently Browsing

    • No registered users viewing this page.
×
×
  • Create New...

Important Information

By using this site, you agree to our Terms of Use.