Date: Mon, 19 Jan 98 15:16:52 CST|
From: rich@pencil (Rich Winkel)
Subject: Thailand's Road to Economic Crisis
/** headlines: 122.0 **/
** Topic: Thailand's Road to Economic Crisis **
** Written 7:58 AM Jan 16, 1998 by newsdesk in cdp:headlines **
/* Written 2:19 PM Jan 16, 1998 by email@example.com in twn.features */
/* ---------- "Thailand's road to economic crisis" ---------- */
Thailand's Road to Economic Crisis
By Kirida Bhaopichitr, in The Nation (Bangkok)
In this overview of the Thai economic crisis, the writer points out
that the key decision leading to the turmoil was the move to fully
liberalise the country's financial system and lift capital
controls. With the establishment of the Bangkok International
Banking Facilities, the door was thrown open to the massive flow of
foreign currencies and to the activities of financial speculators.
Thailand, a country once described by the World Bank as 'a
model for economic development', is now plagued by an economic
crisis characterised by massive foreign debts, unemployment,
inflation and a currency that continues to depreciate.
In one decade, how did we move from double-digit growth to
the situation we are in today?
In the mid-1980s, the local economy began to grow rapidly, and
Thailand began the process of liberalising its financial system.
Starting in 1990, as part of this process, Thailand lifted capital
controls so funds could flow freely in and out of the country.
In 1993, the Bangkok International Banking Facilities (BIBF)
were established. The BIBF permitted local and foreign commercial
banks in Thailand to take deposits or borrowings in foreign
currencies from abroad, and lend them both here and abroad. As a
result, massive amounts of currency flowed into the Kingdom.
This was to a great degree caused by the interest rate spread
and the fact that the baht's value was pegged at 25 to the dollar.
Interest rates in Thailand were much higher than in many other
countries, which caused large private firms in Thailand to begin
borrowing from abroad to finance projects.
Banks and finance companies also found it advantageous to
borrow funds from abroad and lend them to local borrowers.
Moreover, the fixed value of the baht meant that the Bank of
Thailand had essentially eliminated the exchange rate risk.
Problems arose when the loans from abroad were misallocated - in
other words, channelled to sectors of low productivity - and things
rapidly grew worse because most of the loans were unhedged against
The steel and petrochemical industries were hit hard, but the
real estate sector was devastated. The reasons were simple: Firms
were borrowing funds in foreign currencies while their revenues
were being generated in baht, and the funds were also being
borrowed short-term to finance long-term projects. This, and the
fact that most of the funds that were borrowed from abroad were
unhedged, created an extremely unfavourable economic situation, a
disaster waiting to happen.
Up until 1995, goods and wages in the real estate and
financial sectors were highly overvalued which, in hindsight, seems
to have been an economic 'bubble' waiting to burst. But this all
changed in 1996, when a scandal involving the Bangkok Bank of
Commerce prompted foreign money managers to begin carefully
re-examining the value of the loans they had made to borrowers in
At the same time there were signs of a weakening economy, the
most alarming of which was the high percentage of current-account
deficit to gross domestic product (GDP). This was primarily due to
the fact that Thailand was importing much more than it was
exporting. Exports became more sluggish, and the overvalued baht
and increasing labour costs in the country caused Thailand to lose
its competitive edge in the world market. In short, our exports had
become more expensive than that of our competitors in the eyes of
One of the main reasons for the baht being overvalued is that
it was pegged to a 'basket of currencies', of which the US dollar
made up over 80%. The baht and dollar inflation rates were roughly
parallel until 1994, when the former jumped to 6% (annual rate),
while the latter fell to 2%. As a result, the baht appreciated
against the US dollar by roughly 4%, and this began to adversely
affect our exports to the US.
As the US economy strengthened, the dollar appreciated
relative to other major world currencies, including the mark, the
franc, the pound and especially the yen. Being largely pegged to
the dollar, the baht followed this trend, which further discouraged
exports - particularly to Japan, Thailand's second largest export
To further aggravate the situation, important Thai exports
such as textiles and canned goods were losing their share in the
world market, a result of competition from countries with cheaper
labour costs like China and Vietnam. And at the same time, imports
of raw materials, capital goods and luxury goods did not decrease.
On top of the current account deficit, the real estate
sector's bubble 'burst', resulting in a plunge in property prices
and a contraction in the sector. This left many bad debts on the
balance sheets of the finance companies, which had financed those
loans primarily by borrowing from abroad.
When the foreign money managers realised what was going on,
net capital inflows into Thailand began to run dry. Once it began
to see a negative net inflow, the Thai economy slowed dramatically,
which put pressure on the baht.
In late 1997, hedge fund managers and currency traders like
George Soros began to make speculative attacks on the baht. They
realised early on that the Thai currency was overvalued and that
speculative attacks would be successful in lowering the value of
One of the ways hedge fund managers go about attacking a
currency is to enter into forward contracts to sell it. In
Thailand's case, fund managers would promise to sell another party
a certain amount of baht for dollars at 25 to the dollar after
three months, entering into these agreements in the hope that a
float of the baht would lead to a more favourable return for their
dollar, which is exactly what happened.
Before long, though, local investors started to realise what
was happening and began selling baht for dollars in an attempt to
hedge against the depreciation of the baht. Exporters with similar
motives who received payments in foreign currencies found that it
was in their best interest to wait a while before converting those
currencies into baht.
This widespread selling only hastened the depreciation of the
baht, because while there was a huge supply of baht in the money
market, there was little demand for it.
In an unsuccessful attempt to defend the baht, the Bank of
Thailand used the country's reserves of foreign currencies to buy
up the excess supply. But in the process, foreign reserves began to
dwindle, while the speculative attacks continued.
Our foreign reserves were also being used to bail out
financial institutions such as the Bangkok Bank of Commerce and 16
other finance companies which had massive 'non-performing' loans -
loans that they could not collect, most of which were made to the
real estate sector.
By August 1997, the situation in the financial sector had
become critical, and 42 more finance companies were shut down. By
that time, Thailand was in serious danger of running out of
reserves, and it was clear that the currency defence and the other
bailout attempts had failed.
By July 1997 more than US$30 billion of foreign reserves had
been used in the unsuccessful defence of the baht. On 2 July, The
Bank of Thailand, unable to defend the baht any longer, announced
that a 'managed float' system would be adopted to replace the
13-year-old pegged exchange rate system. This meant that the baht's
value would be determined by the demand and supply of the baht in
the world money market.
Since that time, the baht has fallen dramatically, reaching
record lows of nearly 44 baht to the dollar in early December. This
seems to contradict earlier research which had indicated that the
reasonable or equilibrium value of the baht was around 32 baht to
With the depreciated baht the private sector, particularly the
banking sector, found it even more difficult to repay their foreign
debts because the float had caused the debt in baht terms to rise.
And because it was impossible to obtain any more foreign funds,
more and more firms were forced to shut down.
With an economy left with virtually no foreign reserves and
a weak private sector weighed down with foreign debts, Thailand
decided to seek foreign aid to help revive its economy.
In mid-August, the International Monetary Fund (IMF) stepped
in and organised a package of $17.2 billion in loans to Thailand
from various Asian nations. The main condition of the bailout
package was a Bt60 billion budget surplus, which meant that the
government's revenues would have to exceed its expenditures by that
This led to huge cuts in government expenditures, in the
neighbourhood of 100 billion baht. But even with these cuts, unless
the government was able to raise more revenue, it would not be able
to attain a 60 billion baht surplus. Thus, the value-added tax
(VAT) was increased from 7% to 10%, and other taxes on luxury items
were imposed. However, even with the spending cuts and higher tax
revenues, the government is still 40 billion baht short of meeting
the surplus requirement.
Most analysts agree that the present economic crisis is
Thailand's worst since World War II. The consequences are being
felt by Thais from every economic background, but those who are
feeling it most are workers in the finance and real estate sectors,
as well as construction and other industries that produce goods
with high import content. The skyrocketing unemployment rate in
these sectors - it is estimated that about 600,000 workers have
been laid off already - suggests that it will be some time before
the situation improves.
Sectors that may potentially come out ahead include exporting
companies that use mainly local raw materials or labour in the
production process. These include industries such as rice
cultivation, frozen shrimp and chicken, and rubber. Because they
use raw materials, success in these industries will help boost
income in the agricultural sector, which accommodates 64% of
Thailand's labour force.
This is just an overview of the drastic economic changes which
have affected Thailand in recent months. Where are we headed? And
how should we cope with the situation? Answers to these and many
other questions will hopefully be found in coming months.
- Third World Network Features
About the writer: Kirida Bhaopichitr is currently a student in the
PhD Programme at Cornell University's Department of Economics.
The above appeared in December 1997 on the Web site of the Bangkok
daily, The Nation, and is used here with the permission of its
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