Download Thailand’s Economic Crisis in 1997

Thailand’s Economic
Crisis in 1997
1
References
• Peter Warr (ed.) (2005), Thailand
Beyond the Crisis
– Ch.1: Boom, Bust and Beyond, by
Peter Warr
– Ch.2: Anatomy of the Thai Economic
Crisis, by Ammar Siamwalla
2
Background
• High economic growth during
1986 – 1995 in Thailand as part of
the “East Asian Miracle”
• Large influx of FDI and shortterm capital inflows
3
High economic growth in 1990s
Year
1991
1992
1993
1994
1995
1996
Economic
Growth
8.6%
8.0%
8.4%
9.0%
8.8%
5.9%
4
• High growth of exports of
manufactured products
• Trade and current account
deficits, but BOP surpluses
 accumulated reserves
5
Thailand's Current Account and GDP
Year
1990
1991
1992
1993
1994
1995
1996
Current Account
(Mill. Baht)
-186,184
-193,263
-160,074
-161,129
-203,153
-338,346
-372,159
Nominal GDP
(Bill. Baht)
2,183.5
2,506.6
2,830.9
3,165.2
3,629.3
4,186.2
4,611.0
Current Account
as % of GDP
-8.53%
-7.71%
-5.65%
-5.09%
-5.60%
-8.08%
-8.07%
6
Thailand's International Reserves
Year
1990
1991
1992
1993
1994
1995
1996
Reserves end December
(Bill. USD)
14.27
18.42
21.18
25.44
30.28
37.03
38.72
7
The Crisis
• Bank of Thailand (BOT) in early 1990s
liberalized the financial system: (to be
regional financial center)
 relaxed interest ceilings
reduced exchange control
open the Bangkok International
Banking Facility (BIBF or offshore
banking)
 Non-resident baht account
8
• Foreign money at lower interest rates and
fixed exchange rate, leading to heavy
borrowing by private sector (both banks
and non-bank), mainly short-term debts
• Investment boom, and speculation in real
estate and stock market
• BOT failed to implement strict prudential
regulation, and credit control on financial
institutions
9
• Stagnant exports in 1996
– 20% growth in previous years, down to no
growth
– slowdown of manufactured laborintensive exports
– shook confidence among investors and
creditors and “triggered” the crisis
10
• Stock prices started declining in second
half of 1996, affecting finance companies
revenue: first sign of “bubble burst”
• In November 1996, first waves of attack on
the baht by foreign speculators, hoping for
baht devaluation
• BOT defended the baht, losing some
foreign reserves
• BOT took some measures to discourage
short-term capital inflow
11
• Second wave of attacks on the baht in
February 1997
• BOT raised interest rates to make it more
costly for speculators, but this adversely
affected finance companies
• Third wave of baht attacks in May 1997
prompted BOT to control baht borrowing
by foreigners
12
• BOT “swap” by buying $ spot and selling it
forward, showing no loss in gross reserves
• Last attack on the baht in June 1997 left
BOT with almost no net reserves
• BOT was forced to float the baht on July 2;
its value sharply depreciated from 27
immediately to 30 baht/USD and to almost
60 baht/USD in January 1998 (managed
float system)
13
• The cheaper baht made foreign debts more
expensive in baht terms for both banks and
nonbanks with $ debts, badly affected their
balance sheets, and leading to lending
reduction and financial chaos
14
• Many finance companies were
“suspended”, causing panic of deposit
withdrawals
• BOT used the “Financial Institution
Development Fund” (FIDF) to solve the
problem, but failed and most finance
companies were finally closed
• Five banks were taken over by
FIDF/BOT
15
• 91 finance companies (FCs) before 1997,
lending at higher interest rates than
banks and borrow by issuing promissory
notes (IUOs)
• March 1997: BOT asked 10 FCs to
increase capital or merge
a run on them and other FCs
more loans from FIDF
• June 1997: BOT suspended 16 FCs;
deposits (promissory notes) replaced with
extended maturity
huge run on both FCs and banks
16
• August 1997: BOT suspended 42 more
FCs (2 July baht float hurt their balance
sheets  heavy borrowing from FIDF)
• December 1997: 56 FCs (out of the
suspended 58) were closed permanently;
their assets acquired by FIDF were
transferred to the Financial Sector
Restructuring, and eventually sold for
much less than their face value
17
• For commercial banks (CBs), more
serious and difficult problem due to
larger size and bigger impact: one bank
closed, 4 banks taken over by FIDF
• Banks’ balance sheets affected by collapse
in real estate + credit risks from baht
depreciation (bank clients with $ debts)
 Non-performing loans (NPLs) peaked
at > 40% of total loans
18
• Banks’ balance sheets affected by collapse
in real estate + credit risks from baht
depreciation (bank borrowers with $
debts)
Non-performing loans (NPLs) peaked
at > 40% of total loans
 banks unwilling to lend more, firms
unable to borrow
 “strategic NPLs” by firms in need of
cash
19
• NPLs created a need for banks to increase
their capital (equity): most banks had to
rely on government funding
• Solving the NPL problem:
 Very high NPLs in the crisis because:
 Thai banks lend on collateral (land,
buildings) and personal trust
(connection), hence risks could be high
20
• Solving the NPL problem:
 Very high NPLs in the crisis because:
 Thai banks lend on collateral (land,
buildings) and personal trust
(connection), hence risks could be high
Most Thai firms are highly leveraged,
relying on short-term loans from banks
 In 1990s firms owed large debts in $
Threfore, both banks and firms are
vulnerable to the crisis
21
• Solving the NPL problem:
 Problem solving was difficult and slow
 Outdated bankruptcy laws were
amended to facilitate debt settlement:
rehabilitation plan and rapid foreclosure
 Shareholders and managers are same
persons  ejecting owners = ejecting
managers
22
• Solving the NPL problem:
 Problem solving was difficult and slow
 Thai banks prefer debt restructuring
rather than debt writeoffs to avoid high
burden in recapitalization  debtors
recovered too slowly
 Many firms had a large number of
creditors (TPI had 140 creditors!)
23
• Solving the NPL problem:
 Corporate Debt Restructuring Advisory
Committee (CDRAC): public-private
agreement to facilitate voluntary debt
negotiations; more flexible than the
Bankruptcy Court, and had some
success
24
• Solving the NPL problem:
 Thai Asset Management Corporation
(TAMC), set up in 2001 to buy multicreditor NPLs from state-owned banks,
using government bonds, to facilitate
debt repayment and improve banks’
financial position
25
• Several banks ended up with more foreign
and/or government ownership; some were
merged to become bigger banks
26
• Private investment down from 33% of
GDP to 10% during 1996 - 98
• Sharp drops of production in most sectors,
particularly finance, construction,
manufacturing and some services; not
much decline in agriculture
• Big declines of GDP and employment
• Unemployment and excess capacities
27
Year
1997
1998
1999
Economic
Growth
-1.4%
-10.5%
4.4%
28
Contribution to Growth of Real GDP
1996
1997
1998
1999
2000
Private consumption
3.2
-0.7
-6.3
2.3
2.7
Government consumption
1.0
-0.2
0.3
0.3
0.2
Investment
3.0
-8.7
-15.2
-0.7
1.1
Private
0.0
-9.8
-11.8
-0.4
1.9
Public
0.0
1.1
-3.3
-0.3
-0.8
Exports
-2.6
3.0
3.8
5.0
10.1
Imports
0.3
5.6
9.6
-4.1
-11.2
-0.7
-0.7
-2.2
2.3
1.1
5.9
-1.4
-10.5
4.4
4.8
Expenditure Side:
Change in inventories
GDP
29
Contribution to Growth of Real GDP
1996
1997
1998
1999
2000
Agriculture
0.4
-0.1
-0.1
0.2
0.7
Manufacturing
2.1
0.5
-3.7
4.0
2.2
Construction
0.4
-1.6
-1.8
-0.2
-0.3
Wholesale/Retail trade
0.3
-0.5
-2.2
0.6
0.6
Transportation
1.0
0.4
-0.8
0.6
0.7
Hotels & restaurants
0.1
-0.1
-0.2
0.2
0.2
Financial service
0.3
-0.8
-1.9
-1.7
-0.3
Other
1.2
0.8
0.2
0.8
0.8
GDP
5.9
-1.4
-10.5
4.4
4.8
Production Side:
30
31
• Loans from IMF and friendly countries
($17 bill.) in late 1997
• IMF’s loan condition: strict fiscal and
monetary policies worsened the situation,
but later relaxed
• “Contagion” effect: crisis spread to
Indonesia, Malaysia, Singapore, and
South Korea
• Political repercussion: PM Chawalit gave
way to Chuan
32
33
Causes of the Crisis
Two groups:
• External factors (3)
• Domestic factors (4)
34
External factor no. 1
Increasing trend of capital flow into
emerging markets in Asia and Latin America
in the 1990s
• Financial liberalization by Thailand: no
interest rate ceilings, Bangkok International
Banking Facility (BIBF), non-resident baht
account
35
External factor no. 1
Increasing trend of capital flow into
emerging markets in Asia and Latin America
in the 1990s
• More direct borrowing from abroad by
large businesses (not through banks)
• Speculative investment in stock market and
real estate
36
External factor no. 1
Increasing trend of capital flow into
emerging markets in Asia and Latin America
in the 1990s
• Increase in international reserves, but more
rapid increase in short-term debts
• “Herd behavior” by international
investors, and big impact on small countries
37
External Factor no. 2
Continuous deficits in the current
account, exceeding 5% of GDP
before the crisis, affecting the
confidence in repayment ability
38
External factor no. 3
Stagnant exports in 1996 because:
• The baht was overvalued: “real
appreciation” of baht (higher price of
nontraded goods to traded goods)
• Slowdown in export markets for
electronics
• Competition from China
• The era of “cheap labor” is over
39
Domestic factor no. 1
Weakness in business fund raising
• Borrowing from banks using land and
buildings as collateral, heavy reliance on
bank short-term loans
• Banks gave credit without proper risk
assessment (no analysis of feasibility and
cash flow of investment projects)
• “Crony capitalism”: loans to friends and
people with good connection
40
Domestic factor no. 1
Weakness in business fund raising
• Firms borrowed too much relative to
equity (highly leveraged)
• Borrowing for speculation in stock and
real estate markets
• Later when land prices fell, causing
problems for both creditors and debtors
41
Domestic factor no. 2
Inappropriate macroeconomic policies
• Tried to do the impossible:
– fixed exchange rate
– free capital movement
– effective monetary policy
(+sterilization = neutralizing
the effect of capital inflow on
money supply)
42
Domestic factor no. 2
Inappropriate macroeconomic policies
• Why not devalue the baht before the crisis?
 high import content of exports
 high foreign debts (by private sector)
 increase import prices and inflation
43
Domestic factor no. 2
Inappropriate macroeconomic policies
• Insist on fixing the baht value, leading to
 speculative attacks on the baht
(with low risk of losing money)
 eventual floating of the baht
• Why not control capital flows, like
Malaysia?
44
Domestic Factor no. 3
Failure in bank supervision and regulation
• bank loans were main source for
businesses to raise funds
• banks gave loans without enough
care for risks
• banks were exposed to currency and
maturity mismatching
45
Domestic Factor no. 3
Failure in bank supervision and regulation
• BOT policy of “no new banks, no
bank failure” ===> the “moral
hazard” problem where banks felt
that their survival was guaranteed
by government
46
Domestic Factor no. 3
Failure in bank supervision and regulation
• Poor standards in loan classification,
loan loss provision, and data
dissemination
• Widespread problem in nonperforming loans (NPLs) and BOT’s
weak supervision
• Disunity and rivalry among BOT top
management (read Nukul Commission)
47
Domestic Factor no. 4
Weaknesses in political and social systems
•
politics in transition period of
“democracy” with instability:
within 6 years, Thailand had 4
governments, 10 finance ministers,
and 4 BOT governors
48
Domestic Factor no. 4
Weaknesses in political and social systems
•
Complacency in society: ignored risks in
short-term financial gains, with no
regard for long run sustainable
economic development
49
Situation after the crisis
• From 2000, the economy started to
slowly recover
2000: 4.8%
2001: 2.2%
2002: 5.3%
2003: 7.0%
2004: 6.2%
• NPLs declined and financial institutions
improved
50
Situation after the crisis
• Baht depreciation boosted exports,
Imports declined as investment was low,
and surpluses in trade and current
accounts since 1998 (up to 2005)
• Export-led recovery of aggregate
demand in 1999-2000
51
Situation after the crisis
• Debt repayments continued, causing
deficits in the capital account
• Balance of payments gained surpluses,
and international reserves kept rising
52
Thailand’s Balance of Payments 1997-2006, (bill. Baht)
Exports
Imports
Trade balance
Net services
Current A/C
Capital A/C
BOP
1997
1,790
-1,875
-85
45
-40
-162
-299
1998
2,181
-1,678
503
89
592
-413
58
1999
2,150
-1,800
350
120
470
-298
173
2000
2,731
-2,514
217
154
372
-405
-58
2001
2,808
-2,696
112
164
276
-213
58
2002
2,838
-2,719
118
184
302
-182
181
53
Thailand’s Balance of Payments 1997-2006, (bill. Baht)
Exports
Imports
Trade balance
Net services
Current A/C
Capital A/C
BOP
2003
3,233
-3,078
156
174
2004
3,823
-3,764
59
51
2005
4,400
-4,738
-338
27
2006
4,849
-4,769
80
38
329
110
-311
118
-334
2
149
230
507
221
302
478
54