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The Monetary Crisis of
the Thai Baht
Macroeconomics II
SoSe 2004
Prof. Dr. Paul Bernd Spahn
Dipl. – Volkswirt Jan Werner
Saskia Scarbrough, Candace Toussaint,
Stefan Khanna, Sha He
Contents
1. Introduction
2. The Crisis : Overview
3. Background
4. Stabilization Strategy
5. Aftermath : On the road to recovery
6. Summary
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Introduction
The Bahtulism epidemic
• 20% loss of value by the Baht to US dollar in less than 1 week
• Asian contagion spread rapidly across Asia
- Stock prices fell
- Real estate prices plummeted
- Non-repayment of loans in Yen, Marks and Dollar by banks
and corporations
- Local currencies across Asia went into free fall, for example
 Malaysian Ringgit
 Indonesian Rupiah
 Phillipine Peso
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98
Thai dies : Bangkok SET index
Stock Exchange of Thailand SET Index
1600
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0
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Background (1)
1.The economic boom
• Point of origin: beginning of the 80´s, stock-market crash and
economic crisis
• Japan‘s capital inflows prevent an IMF rescue
• Thailand becomes an important exporter of manufactured goods
• Over 2 decades economic growth averaging 6.7%
2. Endangered cyclical downturn
• Huge demand for capital
• Alternative countries for production (e.g. Vietnam, China) due to
inland wage increases
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Background (2)
3. Regulation vs. Liberalization
• Agreement with GATT and WTO  Thailand opens markets
-
Milestone decisions : Lifting of controls on all foreign exchange
transactions on the current account
Opening of the Bangkok International Banking Facility (BIBF)
• 3-year-plan (1990-1992) introduced to improve financial system
• Tight coupling of the Baht with the USD
• Opening of the bond and stock market for foreign investors
• Development strategy emphasizes role of private sector
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Background (3)
4. Effects
of Liberalization
• „Virtuous circle“ = high growth rates attract new capital inflows thereby
creating higher growth in economy and export
• Thai banks lend foreign borrowed money to domestic banks
• Oversupply in construction sector – 50% of loans are non-performing;
banks having trouble to service their foreign debt
• 1994: Depreciation of Chinese Yuan by one third – reduction in Thai
competitiveness
• 1995: US$ rises against most currencies – and so does the Baht
• Growth sinks from 26% in 1995 to 1% in 1996
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The Crisis : Overview (1)
Macroeconomic landscape
•
•
•
•
Financial liberalization and deregulation since early 1990s
Strong capital inflows
Unhedged foreign currency borrowing
Excessive reliance on short-term external debt
Overvalued currency
• The Baht‘s peg to strengthening US dollar arose suspicion of
being overvalued
• Link between currencies looked unreasonable due to high current
account shortfalls, inflation & asset bubbles
- Speculative runs triggered against the Baht by currency
traders hoping to profit from a devaluation
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The Crisis : Overview (2)
Political instabilities:
• Over investment in unproductive sectors, especially in property
- Misallocation of funds in uneconomic factories (e.g. By
cronyism, corruption)
• rotten pseudo-democracy (vote-buying)
Waning investor confidence
• Attack on Baht by hedge fund operators such as George Soros
and Julian Robertson intensified (early 1997)
• Increasing number of non-performing loans
• Many investors exchanged Baht for dollars (fearing instability)
• Massive sell-off of Baht by companies operating in the region
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The Crisis : Overview (3)
Government intervention
• Interest rate increases. For offshore borrowers more than 1,300%
to deter speculators (May 1997)
• Suspension of 16 finance companies
• Billions of dollars invested (mostly on forward contracts) trying to
defend currency
- Central bank finally depletes resources in the process
The bursting of the bubble
• Devaluation and floating of the Baht on July 2nd 1997
- Foreign investors fled
- Flurry of loan defaults by many businesses
- Many banks on the brink of bankruptcy
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Tumbling : Baht against the dollar
Thai Baht vs. US$
20
25
5th August 97
Entry price into the IMF programm,
suspension of 42 more financial companies, totalling 58
30
May 97
Attack on Baht by
international speculators
35
40
2nd July 97
"official" start of the crisis
28th June
suspension of 16
financial institutions
45
50
low in Baht vs. US$, approx. 6 month later
55
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Sink or swim : Currencies against the dollar
Currencies vs. US$
20
2
25
2,5
30
3
35
3,5
40
4
Thai Baht
Phillippine Peso
45
4,5
Malaysian Ringgit (rhs)
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Stabilization Strategy (1)
(under IMF consultation)
• Short-term goals:
- restoring of market confidence & stability
- stopping massive capital flight due to the Baht devaluation
• Long-term goals:
- macroeconomic stability
- implementation of key structural reforms
- Recapitalization of the banking system
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Stabilization Strategy (2)
• 1st Letter of Intent : (14th August 1997)
• Fiscal side: Fiscal austerity (tax increases and expenditure
cut to offset the costs of financial restructuring)
• Monetary side:
- Stringent monetary policy to stabilize the exchange rate
(money growth declined)
BUT
Slowdown of the economy led to a large revenue shortfall
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Stabilization Strategy (3)
• 2nd Letter of Intent : (November 1997 - most difficult time, baht
reached 54 to a dollar)
- Further cuts in government expenditures
- Minor tax increases
- More stringent monetary policy, with M2 growth to be kept at 1 per
cent
• 3rd Letter of Intent : (24th February 1998)
- to achieve a comfortable current surplus, whose attainment was
now mentioned as allowing fiscal relaxation.
• 4th Letter of Intent : (26th May 1998)
• Change in IMF policy
- Deficit spending as a stabilization strategy
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Aftermath : On the road to recovery (1)
• Closure of 10 finance companies at the start of the crisis, aimed at
creating confidence towards the still existing finance companies
- The opposite was the case, the closure was interpreted as proof for a
desolate finance sector
• Impossible Trinity:
- capital mobility, fixed exchange rates, self-contained monetary policy
can‘t be realized simultaneously
• In the early stages:
- Call for budget surplus and a restrictive money policy
- Government intervention in the weakest banks
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Aftermath : On the road to recovery (2)
• Change in Policy since beginning 1998
• Fiscal policy shifts targeting budget deficits
• Focus: privatization in the intervened banks, sale of assets from
finance companies, restructuring corporate debt & strengthening the
institutional framework
• Foreclosure procedures introduced and foreign investment restrictions
are reduced
• High interest rates are reduced by mid-1998.
• Non-performing loans remain on a high level.
• Positive growth in late 1998 (GDP growth>4% in 1999)
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Aftermath : On the road to recovery (3)
• Foreign-exchange reserves remain $32-34 billion
• Strenghtening of both the Central Bank & the financial and corporate
sectors
• The established „Chiang Mai-Initiative“ among the ASEAN
members, China, Korea and Japan is an important example for the
new membership in that region. Swap-retail deals offered
• IMF criticized: Greater interest in safeguarding foreign creditors, than
avoiding collapse in Asia
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Impact
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Summary
• Until the crash of 1997, the Thai economy had performed
exceptionally well. The consequent crisis therefore raised many
questions as to the root of the problems. Was it purely speculation,
economic factors or a combination of both, that led to the dismay ?
• Besides all criticism towards the IMF policy one can conclude that the
reason for the crisis has not been financial liberalization, but the
inadequacy of regulation.
• In the end, transparency leads to increased confidence in the
financial system and reassures future foreign investments and
decreases the probability of a new crisis.
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