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Thammasat Economic Journal
Vol.24, No.2, June 2006
Thailand’s Macroeconomic Policies: From Crisis to Recovery
Teerana Bhongmakapat*
Abstract
This paper examines, in the case of Thailand, macro policy undertaken and experienced
during the process of crisis management and economic recovery. It was argued to go through
three distinct stages: (1) the early stabilization period (1997-1998) focusing on external
equilibrium, resulting in excessive interest rates and falling output, (2) the gradualism period
(1999-2000) with low interest rates and initial efforts at large scale debt restructuring, and (3) the
Partisan Keynesian period (2001-2004) with short-term stimulus and aggressive populist
programs aiming at a big recovery. Under the Thaksin government, easy credits and undervalued
exchange rates might quicken short-term outcome, but would lead to inefficient growth and future
slowdown. Various risks involved with such policies obviously had to be professionally
calculated.
1. Introduction
Thailand is a focus of attention both as a successful model of the 1990s and as the first
country in the region who experienced the Asian crisis. The collapse of its currency peg took
place on July 2, 1997 and was followed by a banking crisis due to its dollar-denominated external
-------------------------------------* Teerana Bhongmakapat is Associate Professor of Economics and Chairman of the Bachelor of Arts Program in
Economics (International Program) at Chulalongkorn University. The original version was completed by February 2004.
This revision has benefited greatly from anonymous referees. The author thanks Daniel Lewis and the referees for
providing valuable comments.
52
debt after a large depreciation of the baht. A few years after the collapse, the Thai economy
started to moderately recover with around 4-5 percent growth rates, and from 2002, under a much
larger stimulus package, it had a tendency to grow at around 5.5-6.5 percent per year. It is,
therefore, important to examine macro policies undertaken and experienced during the process of
crisis management and economic recovery.
The Thai crisis was caused by several factors and called for policy responses not only in
the area of stabilization, but also in terms of long-term structural reforms. Nonetheless, in this
paper, we examine experiences of Thailand’s macroeconomic policies pursued under the process
from crisis to recovery, whereas macroeconomic policies here refer mainly to fiscal and financial
policies debated in times of recessive growth and macroeconomic imbalances. Macroeconomic
policy approach undertaken under the present Thaksin government and its implications on growth
are also discussed.
2. Macroeconomic Policies: From Crisis to Recovery
In terms of economic growth, Thailand and other economies in the East Asian region
performed relatively better than other developing countries, and this was evident even during the
tough periods of the first and the second oil crises. After the second oil crisis, the Thai economy
recovered exceptionally well and became one of the fastest growing economies. The prevalence
of optimism was undoubtedly supported by a continuation of high growth figures for almost a
decade. From 1987 to 1996, the Thai economy grew impressively with an average rate of 9.52
percent annually, and peaking with double-digit growth for 3 years in a row during 1988-1990.
The Akamatsu’s Flying-Geese hypothesis was often cited in explaining the Asian miracle and the
boom in business confidence.1 Although Thailand was partly seen as lacking long-term
productivity growth (Phipatseritham and Yoshihara, 1989), and was predicted to grow only 5.9
1
The hypothesis is named after a product cycle theory argued by Akamatsu (1961). It explained the success of East
Asia as a result of changing comparative advantages and intra-regional spillovers driven by Japanese direct investment
to exporting economies in East Asia.
53
percent per year during 1996-1999 (Bhongmakapat, 1990), a slowdown, rather than a collapse,
was generally projected at the onset of the crisis.
Predicting a collapse in output is by no means an easy task in empirical research. In
1996, the Thai economy started to grow slowly at 5.9 percent compared with 9.2 percent a year
earlier. By the end of 1996, speculative attacks on the baht had signaled an unrealistic currency
peg and eventually led to the currency crash in July 1997. The baht depreciated sharply from
around 25 to an average rate of 45.20 baht per US dollar for the year1997. Heavy reliance on
dollar-denominated external debt was a very major unaware mistake in which later proved to
result in domestic bank runs, large capital outflows and stagnant output. There are of course
various factors explaining why the banking-cum-currency crisis took place. Soon after the
collapse of the exchange regime, inflation soared due to higher import costs while output also
declined dramatically.
Stability versus Growth, 1997-1998.
Data from the 1997-1998 crisis show that the output decline in Thailand was much
deeper than expected and did not receive enough attention from the Thai authorities and the IMF.
In 1998, output declined much further falling 10.5 percent. It was, thereby, a major issue how
long it would take for the economy to recover and whether there would be a sharp V-shaped
recovery or a U-shaped one.
The crisis was deeper than the Thai authorities and the IMF staff expected for at least two
major reasons. Firstly, the contagion and repercussions from crises in other countries in East Asia
was underestimated. On August 20, 1997, the IMF approved financial support for Thailand of up
to SDR 2.9 billion or about US$4 billion where all commitments under the IMF-led international
package totaled only US$17.2 billion. The package was much smaller than financial
commitments to Korea (US$58.4 billion) and Indonesia (US$42.3 billion). Secondly, the IMF set
external stability as the priority. Both fiscal and monetary policies were designed to contract
domestic absorption and improve the current account and balance of payments positions. Fiscal
measures were initially set to be contractionary to move the public sector deficit to a surplus of 1
54
percent of GDP in 1997/98.2 The VAT tax rate, among other fiscal tightening measures, was
raised from 7 percent to 10 percent. Very importantly, tight monetary policy was pursued to halt
the downward spiral of currency depreciation, but liquidity shortages and excessively high
interest rates retarded growth and the health of the corporate and financial sectors during the
crisis. Such a policy mix was a big mistake since low priority was given to internal balance
whereas tight money failed to stabilize exchange rates, but instead increased default risks
(Bhongmakapat, 2001). The authorities greatly underestimated economic slowdown while
relatively well estimating inflationary pressure.
At the onset of the currency crisis, the Thai government and the IMF staff anticipated
that the Thai economic growth could slow down at the rate of 2.5 and 3.5 percent in 1997 and
1998, respectively (Letter of Intent, August 14, 1997). It was obvious that the Thai authorities and
the IMF staff underestimated output decline during the crisis period. Economic growth was
stagnant and was revised substantially in a very short period. In the Letters of Intent of November
25, 1997, and of February 24, 1998, it was cut down to 0.6 and then -0.4 percent for 1997. For
the year 1998, its previous GDP growth figure was revised to -3 to -3.5 percent in the Letter of
Intent of February 24, 1998.
Although the Thai economy followed a kind of V-shaped recovery as its growth could
soon rebounded to a moderate increase of 4-5 percent after 1998, it did not perform as well as
Korea whose rebound was particularly strong and early. In the case of Korea, an easy credit
policy was pursued and led to a strong increase in consumer spending and thus helped stabilize
output during the early stage of the business recovery. Table 1 shows macroeconomic policy
stance under the IMF-supported program. Early in 1998, the Chuan Leekpai administration
2
At the time of the exchange collapse, it was suggested to target a fiscal surplus at 1 percent of GDP while monetary
policy being loose to avoid further recession and excessive baht depreciation (Bhongmakapat, 1997a and 1997b).
According to the Letter of Intent (August 14, 1997) signed by Minister of Finance, Thanong Bidaya, and BOT
Governor, Chaiwat Wibulswasdi, the overall public sector balance was aimed from an expected figure of -1.6 to a
surplus of 1 percent of GDP based on an estimated implicit cost of financial restructuring by 1 percent of GDP.
55
adjusted fiscal policy from the targeted public sector surplus of about 1 percent to a deficit of 2
percent of GDP, whereas monetary policy remained tight with excessively high interest rates.
Selective liquidity was, however, provided largely to some exporters who had already benefited
from the large currency depreciation. Although a deeper than expected recession was recognized,
as indicated in the Letters of Intent IV-VI (May 26, August 25 and December 1, 1998), monetary
policy continued to aim at stabilizing exchange rates and external flows. The targeted public
sector deficit then had to be adjusted upward to 3 percent of GDP for 1997/98 and 5 percent of
GDP for 1998/99.
Table 1 Stabilization Policies under IMF-supported Program
--------------------------------------------------------------------------------------------------------------------Letter of Intent
Fiscal Criterion
Monetary Policy
(Fiscal Balance)
--------------------------------------------------------------------------------------------------------------------Letter of Intent I (August 14, 1997)
+1%of GDP
Tight
Letter of Intent II (November 25, 1997)
+1%of GDP
Tight
Letter of Intent III (February 24, 1998)
-2%of GDP
Tight
Letter of Intent IV (May 26, 1998)
-3%of GDP
Tight
Letter of Intent V (August 25, 1998)
-3%of GDP
Tight
Letter of Intent VI (December 1, 1998)
-5%of GDP
Cautiously tight
Letter of Intent VII (March 23, 1999)
-6%of GDP
Cautious
Letter of Intent VIII (September 21, 1999)
-5%of GDP
Loose
-------------------------------------------------------------------------------------------------------Sources: Compiled based on the Letters of Intent by International Monetary Fund and the Royal Thai
Government
56
Financial sector restructuring was essential to fostering an economic recovery. The
program was highly affected by capital inadequacy problems and was therefore designed to
support recapitalization of financial institutions, both state-owned and privately owned. Public
funds were provided for the Ministry of Finance essentially to raise and buy banking equity
capital. The Minister of Finance disagreed with the then-proposed Nordic approach in buying bad
debts as, at that time, fiscal discipline was strictly held to forbid the use of public money to bail
out private banks. The Ministry of Finance also believed that tight money could help force
bankers to reform their ownership and thereby their management. However, tight money had an
adverse impact as it reduced fresh liquidity available to firms. It raised default risks and delayed
its initiation of debt restructuring. In June 1998, the Corporate Debt Restructuring Advisory
Committee was established as a direct measure in addition to bank recapitalization using public
funds.
This period was marked by the priority of external stability rather than growth. The IMF
did not expect a better-than-zero growth under austerity programs, whereas the Thai government
agreed with the IMF advice in pursuing the high interest rate policy to stabilize its external
account, especially during the first year after the currency crash. This brought about various
remarks that the conventional IMF approach had been unsuccessful in resolving the Thai crisis.
The wrong medicine was largely due to the over-emphasis on merely external stability rather than
internal equilibrium.
Gradualism, 1999-2000.
Late in 1998, monetary policy started to shift to provide more liquidity. The 14-day
repurchase rate decreased sequentially from 17.37% in June 1998 to 3.98% in December 1998
and to 1.48% in December 1999. In February 1999, the Bank of Thailand made a very substantial
cut in its discount rate from 12.5% to 7.0% (and then to 4 %) and has maintained its easy money
policy throughout the forthcoming recovery period until the present. The central bank took the
cold-turkey strategy in managing loose monetary policy for economic recovery. This was of
course a welcome, but long-awaited policy. Such a policy shift could be viewed as a response of
57
the Bank of Thailand and the IMF to sluggish recovery and strong criticism led by Sachs (1997),
Radelet and Sachs (1998), Stiglitz (1998a and 1998b) and Panitchpakdi (1998), among a few
others.
With easy money, external balances improved quickly and steadily without putting
pressure on the domestic currency. The baht appreciated against the US dollar from 41.3 baht per
dollar by the end of 1998 to 37.8 baht per dollar by 1999. Net international reserves moved
relatively back to the level with a parameter comparable to those before the crisis.3 Net
international reserves increased from 6.5 and 19.7 billion US dollars in 1997 and 1998 to 26.5 and
27.5 billion US dollars in 1999 and 2000, respectively. By the end of 2000, Thailand’s foreign
reserves accounted for over 2.2 times its short-term foreign debt compared to 1.0 times 2 years
earlier. Table 2 indicated that the process of economic recovery has witnessed successful
developments in the external account.
3
At end-1999, the external account accumulated net international reserves by 26.5 billion US dollars or as 135.6
percent of short-term external debts. The comparable figure for the period 1990-1996 was averaged 105.2 percent.
58
Table 2 External Position
-------------------------------------------------------------------------------------------------------------------------------------Crisis Period
1997 1998 1999 2000 2001 2002 2003 2004 2005
-------------------------------------------------------------------------------------------------------------------------------------Gross Foreign Reserve ($bn) 27.0 29.5 34.8
32.7 33.0 38.9 42.1 49.8 52.1
- As % of S-T Foreign Debt 70.4 103.9 178.0 222.3 246.8 326.6 386.5 409.3 321.6
Net Foreign Reserve ($bn)
6.5 19.7 26.5
27.5 31.0 38.4 47.3 54.4 58.9
- As % of S-T Foreign Debt 17.0 69.3 135.6 187.2 231.5 322.2 433.8 446.9 3 53.6
Foreign Debt (% of GDP)
70.1 93.2 77.5 64.9 56.1
48.8 40.3 35.7 -------------------------------------------------------------------------------------------------------------------------------------Exchange Rate (Bt/$) Period-end 45.2 41.3 37.8 40.1 44.2
43.1 39.6 39.1 41.0
Average 31.4 41.4 37.8 40.2 44.5
43.0 41.5 40.3 39.6
Nominal Exchange Rate Index 88.8 73.4 77.2 74.5 70.8
72.6 70.8 70.2 69.7
Real Exchange Rate Index
94.1 81.9 85.2 82.3 78.1
79.6 78.0 77.7 79.0
Prime Rate (%)
15.3 11.5-12.0 8.25-8.5 7.5-8.25 7.0-7.5 6.5-7.0 5.5-5.75 5.5-5.75 6.5-6.75
Repurchase Rate-14 day (%) 22.22 3.98 1.48 1.50 2.46
1.75 1.25 1.90 3.94
-------------------------------------------------------------------------------------------------------------------------------------Source: Bank of Thailand
The success of monetary expansion was by no means sufficient for a steady recovery.
Although the Thai economy moved to a point where it could grow at a moderate rate of around 45 percent per year, it could not sustain its renewed growth in the long term without successful
reform. The stimulus packages undertaken during this period were moderate and cautious, given
large budget deficits and the possible fiscal burden due to the enormous debt held by the Financial
Institution Development Fund (FIDF). The Finance Ministry was very cautious about the
provision of public funds for trimming any debt in the private sector. In terms of economic
reform, the government was not strong nor united enough to push for any shock treatment.4
4
Rangsun Thanapornpun, in a few of his essays written in March 1998, criticized conflicts within the Chuan
administration for the lack of concerted actions (Thanapornpun, 2002).
59
Although the Chuan coalition government was supportive of economic reform, it was not unified
as to the speed of reform, or the proper approach. Some reform programs, particularly
privatization and FIDF debt fiscalization, did harm to the leading party politically. Although the
program would have some beneficial effects in the long run, it was very unpopular in the short
run. After necessary election bills associated with the new 1997 constitution were passed by the
House of Representatives in 1999, Prime Minister Chuan Leekpai disagreed to take that
opportunity to call for an early election so that he could set up a more effective government based
on the new constitution. A year later, his party lost overwhelmingly in the general election.
Economic reform moved very slowly during this period and struggled under the political
environment. Gradual reforms were, of course, implemented and should have been successful
since the economy had partly moved into its recovery mode. However, reform programs did not
get significant support from interest groups who benefited from them. Although the government
made some progress in privatization plans and legal changes, privatization plans for some public
enterprises were strongly resisted by anti-IMF movements, employees and in certain cases, the
management.
There were disagreements between the Ministry of Finance and the Bank of Thailand on
how to fiscalize the FIDF debts and its increasing interest payments. Such fiscalization would
make fiscal costs of previous banking bails-out by the FIDF explicit and transparent, but it was a
political test whether the Chuan Administration was strong enough to carry out such a major
unpopular action. The Ministry of Finance was reluctant to fiscalize most of the FIDF debts,
instead proposing the use of foreign reserves to be made possible by consolidating BOT accounts.
The government failed to proceed on this and obviously overlooked political consequences as
such a quick fix for FIDF was viewed as a public provision for the rich. After the election, a
similar approach was undertaken to finance FIDF debts, but under a very strong and single-party
government, it was politically successful with, interestingly, no questions asked.
60
Given the pace of reform, the moderate recovery during 1999-2000 was reasonable in
speed and close to the medium-term projection. Thailand’s GDP growth increased from –10.5
percent in 1998 to 4.4 and 4.6 percent in 1999 and 2000, respectively. Its recovery was mainly
due to good export performance, so whether the Thai economic growth could sustain 5 percent
growth rates over a longer period of time remained an important question. Capacity utilization in
the industrial sector remained low at around 60 percent in 1999 while the private sector did not
have the confidence to reinvest for a sustainable future. Some reform measures would have been
easing if managing bad debts had occurred starting with the onset of the financial crisis. In
September 1999, the Ministry of Finance encouraged each commercial bank to set up its own
asset management company (AMC) and agreed to transfer Non-Performing Loans, NPLs, from
the state-owned Krung Thai Bank to its own newly found AMC. This measure favored only of the
state bank over private banks. Corporate debt restructuring under the Corporate Debt
Restructuring Advisory Committee (CDRAC) also made good progress and, as of January 2000,
the CDRAC could process about 40 percent of the peak level of NPLs. NPLs as a percent of total
loans reached its 47.4 percent peak in June 1999 and then decreased to 38.9 and 17.7 percent by
the year-end 1999 and 2000, respectively (Table 3).
61
Table 3 Non-performing Loans Outstanding
Unit: Million Baht
Private Banks
(% to total loans)
State-owned Banks
(% to total loans)
Foreign Banks (full
branch)
(% to total loans)
Total Commercial
Banks
(% to total loans)
Finance Companies
(% to total loans)
Total Financial
Institutions
1998
1999
1,239,944 885,441
40.48
30.59
1,036,654 1,057,276
62.45
62.84
2000
476,360
18.00
308,053
21.63
2001
370,480
14.42
71,468
5.59
2002
583,098
20.56
116,683
8.31
2003
495,268
16.91
95,760
6.64
2004
419,426
12.82
137,572
9.56
2005Q3
415,295
11.70
131,147
9.44
74,244
61,575
38,176
16,590
42,843
28,132
13,389
9,385
9.81
9.94
6.60
3.20
8.91
6.39
2.63
1.53
2,350,842
2,004,292
822,589
458,538
742,624
619,160
570,387
556,205
42.90
323,691
70.16
38.57
90,133
49.22
17.70
34,752
24.48
10.50
15,453
9.46
15.73
24,022
13.96
12.87
22,250
10.07
10.92
21,485
7.64
10.01
20,266
8.09
2,674,533
2,094,425
863,663
477,405
770,282
641,883
592,171
576,897
10.73
9.93
(% to total loans)
45.02
38.93
17.73
10.41
15.65
12.70
Remarks: 1. NPL are loans classified as substandard, doubtful, doubtful of loss, and loss.
2. Not including the NPL under the FIDF's yield maintenance and gain/loss sharing
agreement, of which the bank shares 15 % of losses if occur.
Source: Bank of Thailand
Partisan Keynesianism, 2001-20045
The Chuan government obviously lost its political momentum during its final year before
the general election in January 2001. The newly founded Thai Rak Thai Party won the election
5
“Partisan Keynesianism” named by the author here refers to a business cycle policy possibly observed under the new
party government who interested in changing stimulus measures to win huge political support from voters after, rather
than before, the election. Prime Minister Thaksin Shinawatra had signaled his strong will to establish his Thai Rak Thai
Party as a ruling party that could effectively dominate the parliament as in Singapore and Malaysia.
62
with a great majority, but the Thaksin administration carried with him various promises requiring
a huge amount of financial resources. The Thaksin government responded well to people’s
expectation and, with aggressive amount of financial resources required for its populist programs,
also surprised many observers with its attempts to undertake all promises previously thought
unrealistic by many.
After an export slowdown in 2001, the Thai economy continued to recover as during
1999-2000, but with higher consumer confidence. During 2002-2004, trade was a major
contributor to its robust growth, i.e. its export growth rates rose from –7.1 percent in 2001 to 4.8,
18.2 and 21.6 percent in 2002, 2003 and 2004, respectively. Although the export sector had risen
substantially in terms of value, its quantity indices almost throughout the year 2003 started to
indicate a possible sign of slowing down in the future. The growth rates of export quantity indices
reduced steadily from 9.6 percent in 2003 to 6.2 percent in 2004. Rising exports had raised
optimism among consumers and businesses whereas inflation remained satisfactorily very low.
In terms of macro policy, The Thaksin government aimed at big stimulus measures, in
this way differentiating itself from the Chuan government. Both fiscal and monetary policies were
set expansionary, not in a fine-tuning type, partially to activate its populist measures and to assure
a surprisingly big recovery.
During the first two years of the Thaksin’s populist government, Ammar Siamwalla
observed that fiscal stimulus measured by budget deficit per national income was not very
different from the previous Chuan government (Siamwalla, 2002). For fiscal year 2002, the
budget deficit accounted for 2.38 percent of national income whereas, under the Democrat Party
government, its average figure was 2.25 percent of national income for 1998-2001. According to
his calculations, if some off-budget items were included in government spending, the total fiscal
deficit was 4.04 percent of national income in fiscal year 2002 and 3.43 for 1998-2001. However,
there were doubts about the effectiveness of Keynesian-type government spending in raising
national income due to low supply responses and leakage effects through imports. The output
effect was found to be low or even negative in certain studies (see also Siksamat, 2001).
63
Fiscal stimulus measures were mostly aimed at promoting projects promised during the
election, and at acquiring more political support from potential voters.6 As public debt was
relatively high, though manageable, at around 50 percent of GDP, fiscal expansion took the
unconventional approach of loosing public credits. State banks were leaned on to provide
liquidity to the poor and to support certain government projects, such as low-cost housing and
village funds. “Asset capitalization scheme” was also a new vehicle for farmers and small
merchants allowing them to use public land rights and government licenses, in place of
conventional collateral, to receive more loans. Loosing public credits dictated by the government
was largely not accounted for in the government balance sheet as contingent liabilities for the
public sector. Thailand’s public debt is defined as debt outstanding made by the government and
non-financial state enterprises that the Ministry of Finance has to be responsible for. The socalled “quasi-fiscal” activities that the government decided to pursue in addition to government
spending which would be explicit in its cash balance account were calculated to account for 144.8
billion baht in 2002 and rose dramatically to 266.0 and 412.5 billion baht in 2003 and 2004,
respectively. See Table 4. This complicated type of spending could perhaps reach an unofficial
figure of over 450 billion baht, or about 8 percent of GDP. In 2003, the Ministry of Finance
established a Bt 100 billion capital conservation equity fund, namely Vayupak Fund, by
converting Bt 30 billion government equities in financial institutions to investment units and
issuing additional Bt 70 billion units to small investors. This public financial fund is neither
counted as public debt by the official definition and it is, therefore, different from the more
modern definition of fiscal liabilities used in a number of developed countries.
6
Some initial promises made by the new party before the election were (1) Bt 30-per-visit healthcare, (2) debt
suspension for farmers, and (3) Bt 1 million-per-village fund. These promises stimulated both voters to try a new party
and the government to launch more of generous programs after its election success.
64
Table 4 Populist Projects and “Quasi-Fiscal” Measures*
(Million baht)
-------------------------------------------------------------------------------------------------------------------------------------Projects
Financial Institutions
2002
2003
2004
-------------------------------------------------------------------------------------------------------------------------------------1. Credits for SMEs
44,047
171,598
294,818
BOT
4,130
53,344
134,741
SME Bank
15,410
42,783
56,292
IFCT
15,079
32,933
42,062
EXIM
7,283
16,365
24,263
GSB
2,145
6,868
12,054
2. Credit guarantee for SMEs
SIFC
4,116
8,475
10,020
3. GHB housing loans
GHB
26,784
56,147
71,770
4. People’s Bank
GSB
10,295
15,375
17,872
5. GSB Housing Project for People GSB
1,322
1,879
6. Rural Enterprise Project
BAAC
8,319
10,003
13,012
7. Investment Funds
1,209
3,052
3,144
7.1 Thailand Equity Fund
GHB/GPF/IFCT
9
159
251
7.2 Thailand Prosperity Fund
GPF
911
911
7.3 Thailand Opportunity Fund KTB/GPF
1,200
1,982
1,982
8. Low-cost Housing Project
GHA
9. Bt 1 Million Village Funds
GSB
80,000
-------------------------------------------------------------------------------------------------------------------------------------Total
174,769
265,972
412,515
-------------------------------------------------------------------------------------------------------------------------------------Note: * Excluding the estimated Bt 300 billion asset capitalization scheme, the Bt 100 billion Vayupak Fund,
the Bt 70 billion Taxi Drivers’ Loan, BOT denotes Bank of Thailand, GHB Government Housing Bank, GPF
Government Pension Fund, GSB Government Saving Bank, KTB Krung Thai Bank, BAAC Bank for
Agriculture and Agricultural Cooperatives, IFCT Industrial Finance Corporation of Thailand, EXIM ExportImport Bank of Thailand, and SIFC Small Industrial Finance Corporation of Thailand.
Source: Fiscal Risk Management Working Group, Fiscal Policy Office, Ministry of Finance
65
A low interest rate policy was key to stimulate private spending, though under excess
liquidity. Prime rates decreased steadily from 7.5-8.25 percent in 2000 to 5.5-5.75 percent in 2003
and 2004. In responding to the US dollar depreciation starting in 2002, the 14-day repurchase
rates were cut to keep the domestic currency low and to keep the export sector price competitive
relative to its trading partners. The repurchase rates, as policy interest rates, decreased to 1.75 and
1.25 percent by 2002 and 2003, respectively. As a result, net official reserves accumulated very
quickly and substantially to 38.4, 47.3 and 54.4 billion US dollars by 2002, 2003 and 2004,
respectively. See Table 2.
Buying bad debts from banks and setting up a centralized asset management agency,
called “Thai Asset Management Corporation” or TAMC, was another major promise to resolve
the debt overhang problem. Although an asset management company was set up to transfer NPLs
from the Krung Thai Bank in the second half of 1999, the Chuan government was very reluctant
to aggressively clean up the whole banking sector. The TAMC began operation in October 2001
and transferred Bt 785 billion NPLs from commercial banks. However, by September 2001, NPLs
as a percent of total loans had already been reduced to 12.9 from 17.7 in December 2000. By
2003, NPLs had remained about the same at 12.7 percent of total loans since the TAMC
transferred many non-performing assets from individual AMCs established earlier. See also Table
3. Non-performing assets are presently about 30 percent of total loans and there are NPLs still to
be resolved. However, under the TAMC, a number of bad debts could be quickly restructured and
substantially forgiven.
3. Thaksin’s Economic Policies and Inefficient Growth
Prime Minister Thaksin Shinawatra took a high risk-high return approach by mobilizing
possible resources to lift current spending onto recovery path. Although his first year in office
witnessed slow economic growth as a result of due to world economic slowdown, the rest of his
first administrative term was totally different. The Thai economy grew higher than previously
expected at the average rate of 5.9 percent per year, and consumer confidence also rose
66
spectacularly. World economic recovery during that period was one of the major contributors.
According to the IMF figures, world economic growth rates rose from 2.4 percent in 2001 to the
average rate of 3.8 percent per year during 2002-2004.
Nonetheless, such a high growth scenario is very questionable in terms of sustainability.
Populist programs require huge amounts of resources committed over long periods of time and
they are difficult to be discontinued even when the nation faces serious financial constraints.
Populism is excellent in getting attraction from voters, but frustrating in terms of long-term
economic returns. The costs of the programs were not easily calculated as they took place in
various forms. Some were not instantaneously reflected in the government balance sheet and
some subsidies, such as those for low cost housing projects and Bt 30-per-visit health care, were
not directly incurred by the government. The programs have mainly been driven by partisan
motives to gain quick beneficial results. Their positive outcome will likely be short-lived while
existing resources have been taken away from long-term structural adjustment and reform.
A lack of overall efficiency in terms of resource allocation is a very major drawback of
Thaksin’s economic policies and it will undermine competitiveness and growth dynamism in the
long term. The Thaksin government relies overly on loose credit policy, not only spending from
its budget. Lower interest rates were used to raise confidence in the equity market and consumer
durables. Autos and residential spending rose substantially and GDP growth would have been
much lower if those sectors are excluded. In 2003 alone, car sales increased by 30 percent. For
residential investment, according to data collected by the Government Housing Bank, consumer
lending for residence rose from Bt 687.5 billion by 2001 to Bt 851.3 billion by and 2003Q3, or by
23.8 percent for the past 7 quarters since the year-end 2001. State-owned banks have made credits
easier not only to consumers, but also for real estate projects. From 2002Q4 to 2003Q2, loans
outstanding for real estate projects lent by state-owned banks increased substantially by 13.8
percent whereas private banks are still concerned with NPLs-re-entries and high credit risk for the
real estate sector. See Table 5.
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Table 5 Loans Outstanding for Real Estate Projects
--------------------------------------------------------------------------------------------------------------------2002Q4
2003Q2
%Growth
-------------------------------------------------------------------------------------------------------------------------------------Private banks
286,799
277,400
-3.28
Partly state-owned banks
16,787
17,287
+2.98
State banks
75,686
86,149
+13.82
-------------------------------------------------------------------------------------------------------------------------------------Total 12 banks
379,272
380,837
+0.41
-------------------------------------------------------------------------------------------------------------------------------------Source: Data complied by Krungthep Turakij
Exchange rate policy has been critical through out the process of recovery in Thailand,
Japan and other East Asian economies. In Thailand, since the currency collapse in July 1997, the
export sector has been central in driving economic growth. Exchange rates have generally been
kept weak to make the export sector competitive relative to its trading partners. Under the
Thaksin administration, real exchange rate indices have depreciated by around 25 percent of the
level in June 1997. The baht has been particularly managed to keep close to the US dollar. Its
volatility has declined substantially since mid-2002 and has become almost nil since March 2003.
As the US dollar depreciated against other major currencies, exchange rate targeting was adopted
to keep the real exchange rate competitive relative to those of Thailand’s trading partners.
The weak exchange rate policy led to a large accumulation of international reserves and
rapid expansion of the monetary base. Net international reserves increased from 31.0 billion US
dollars by 2001 to, respectively, 38.4, 47.3 and 54.4 billion US dollars by 2002, 2003, and 2004.
(See Table 2.) The annual growth rates of the monetary base rose from 5.5 percent in 2001 to,
respectively, 13.7, 10.6 and 14.4 percent in 2002, 2003 and 2004. Although the weak currency
policy may yield short-term benefits in income, it has implications for economic recovery and
long-term growth as follows.
68
Firstly, such a rigid exchange rate targeting is by nature an exchange rate subsidy that
will jeopardize the overall efficiency of the production economy. The distortion is in favor of the
tradable sector while being against the nontradable sector which is relatively labor intensive and
accounted for 60 percent of GDP.
Secondly, Thailand has developed to the critical stage that it requires improved national
competitiveness, or more specifically, dynamic comparative advantage, based on human
resources and technological capabilities. Closing the technological gap with respect to developed
countries is indeed a national agenda for sustainable recovery in East Asia (Stiglitz, 2001).
Raising price advantages for tradables will largely take away resources for low-end products
competing in wages and prices. Exports requiring product quality, global sourcing and modern
technology will not benefit from weak exchange rates.
Thirdly, given the liquidity trap and debt overhang, the weak currency policy and
monetary expansion may help somewhat, but relying heavily on this for growth is likely to cause
higher inflation in the long run. The oversupply problem, as reflected by core inflation rates and
rates of industrial capacity utilization, still remain and underestimate the long-term implication of
the present policy on future inflation and price competitiveness.7 Core inflation rates were very
low at 0.2 and 0.4 percent in 2003 and 2004 compared with 1.8 percent in 1999, whereas capacity
utilization rates moved up slowly from 61.2 percent in 1999 to 66.2 and 70.7 percent in 2003 and
2004, respectively (see Table 6). For the banking sector, it may take a long time for excess
liquidity to be eliminated unless the long-term economic growth becomes sufficiently sustainable.
High monetary growth at present would perhaps reduce price competitiveness and crowd out
future growth when long-term inflation rises (relative to other economies with lower monetary
growth).
7
During the early 2000s, deflationary pressures were particularly strong, allowing the monetary authority a comfort
zone for its already flexible inflation targets. The deflationary pressures were also structural mainly due to low inflation
rates in China.
69
Table 6 Monetary Base, Inflation and Capacity Utilization
-------------------------------------------------------------------------------------------------------------------------------------Crisis Period
1997 1998 1999 2000 2001 2002 2003 2004 2005
-------------------------------------------------------------------------------------------------------------------------------------Monetary Base (%change) Period-end 4.68 0.23 30.83 -15.22 5.54 13.73 10.60 14.4 5.2
Headline Inflation (%change)
5.6 8.1 0.3 1.6 1.6 0.7 1.8 2.7 4.5
Core Inflation (%change)
4.7 7.2 1.8 0.7 1.3 0.4 0.2 0.4 1.6
Industrial Capacity Utilization (%)
64.8 52.9 61.2 55.9 53.5 59.3 66.2 70.7 72.6
-------------------------------------------------------------------------------------------------------------------------------------Source: Bank of Thailand
The weak currency policy is an easy solution for short-term results, but fundamentally
lacks of dynamic competitive moves. Moreover, if the risk of US trade retaliatory actions against
East Asian exports is taken into account, the persistent exchange rate subsidy is perhaps not very
far sighted from a long-term perspective.
4. Concluding Remarks
As seen in the case of Thailand, the use of macroeconomic policies to resolve crises has
both strengths and limitations. Without stabilization policies, economic problems are often
aggravated and can prevent the authorities from opportunities to correct fundamental economic
flaws. Early recovery and output stability help reduce social costs immediately after a crisis.
Stability in external balances can in some cases help protect the exchange rate and avoid capital
flight. On the other hand, short-term macroeconomic policies have to be properly managed to hit
the right targets with the right instruments. Instruments are practically lower in number than
targets, so that is generally not possible to stabilize all targets at the same time. The government
has to be cautious as to how much certain stabilization policies can do, how effective they can be,
and what costs the economy would have to pay for their short-lived benefits.
Macroeconomic policy in Thailand after the 1997-1998 crisis went through three distinct
stages. Immediately following the crisis during the Early Stabilization period, the IMF and
70
monetary authorities paid too much attention to external disequilibrium, resulting in an
inappropriate policy mix. High domestic interest rates resulted in a dramatic fall in output, and
the failure of many businesses. Resolving the debt overhang problem which required an active
debt restructuring mechanism was unfortunately slow. A variant of the Nordic asset management
approach was not initiated until the Thai economy had more or less already moved into its
recovery mode in 1999-2000.
During the Gradualism period of 1999-2000 in which the country experienced moderate
growth, the macro policy mix was right in avoiding excessive growth stimulus given the slow
pace of structural reform. The period was marked by initial efforts at large scale debt
restructuring, movements toward privatization, and reform of banking laws. However, gradual
stimulus with strong fiscal discipline was unable to match people’s expectations of a rapid
recovery. In addition, the weak nature of the coalition government made strong policies difficult
to implement. These two factors eventually brought down the government.
During the Partisan Keynesian period, Keynesian stabilization policies played an
influential role in the short run, and were usually appropriate. The Thaksin government had a
strong plan to lift business and consumer confidence towards a big recovery. The government
therefore ran a comprehensive set of stimulus programs, often with transparently partisan
motives.
Under the Thaksin administration, easy credit policy, especially for farmers, villagers and
the other poor, was intended to establish modern populism and a long-term majority in the
parliament, but it had critical implications for adjustment toward long-term unsustainable growth.
Although partisan Keynesianism may be popular as the country grew rapidly in the short run, a
possible long-term slowdown and the economy-wide inefficiency caused by persistent distorting
policies and the lack of fiscal discipline have to be carefully assessed. The high-risk-high-return
economic policy obviously requires a solid and professional calculation of various risks involved
whereas, during the period from recovery to growth, it is critical that economic reform not move
backward.
71
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