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1997 Thai Currency Crisis
ECON 462
Professor Castillo
Spring 2011
Team 4
Abdiqani Hassan
Louisa Pangilinan
Yang Qichen
Causes of the Crisis
Team 4
 Baht was pegged to the U.S. dollar
 U.S. dollar appreciated, Thailand became
less competitive
 Net exports declined
 Thailand depreciated its currency to
promote exports
 International financial market lost
confidence in Thailand
 Investors sold their Thai baht
Team 4
Formation of the Trade Deficit
Causes of the Crisis - continued
Team 4
 Thai baht depreciated from 25 to 55 per $1 US
dollar in the summer of 1997
 Excessive Spending - both consumer and
government
 Banks lent money to everyone for private real
estate and other spending
 Liberalization of the financial sector
encouraged domestic companies to borrow
extensively from foreign countries
Liberalization of the Financial Sector
 Again, liberalization allowed capital to flow freely
in and out of the country
 Supervision was eliminated
 Domestic banks were now open to outside the world
Team 4
 Since the foreign interest rate was lower Thai
businesses and investors bought foreign currency
and invested in domestic
 Foreign debt increased from 20 bil to 95.4 bil USD
in Nov 1997; the short-term debt accounted for
over 40% which was 2.5 times of the foreign
reserve, and accounted for over 40% of GDP
 The US dollar depreciated, so there followed the
Baht the speculation; the rest is history
Team 4
Effects of Decreased National Saving
Team 4
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Thai Baht to $1 US
Thai Baht Exchange Rate (1995-1999)
55
50
45
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35
30
25
20
More factors that contributed to the Crisis
Team 4
 Real Estate Collapse
 up to 15%
 More than 150 Financial Institutions where
shut down like the Financial One Company
 Major lay offs
 Poverty rate increased
 Stock market dropped 75%
 Fall of the world’s demand of
semiconductors which was one of the Thai
major exports
Effects to the Aggregate Economy
Team 4
 Exports declined
 Cost of raw material and wages increased
 Lost major customers such as the U.S. and
Europe
 China emerged as an intimidating
competitor in international trade
During the Crisis
Scope of the Crisis
Team 4
 Thailand experienced severe bankingfinancial sector crises that began before its
currency crisis
 Pre-crisis nonperforming loan rates were
19%, or roughly 30% of GDP; in 1998, the
delinquency rate increased by 30%.
 The cost of recapitalizing and restructuring
the banking system reached 35% of GDP.
Team 4
Scope of the Crisis (continued)
 The CPI rose about 11% between June 1997
and 1998
 Thailand’s government domestic debt
jumped to almost 10% of GDP; external
public sector rose to almost 25%
 1997 Q4 RGDP dropped 4.4% vs the previous
year; the first half of 1998 dropped another
15%
 Unemployment rate averaged 1% during
1994-1997; it increased to 3.4% in 1998.
Response of policy makers
Team 4
 Thailand followed tight monetary policies;
it did not allow its monetary base to
expand
 Monetary authorities extended enormous
credit lines to its banking systems; central
bank credit to deposit money banks rose
761%
 Thai government waited 26 days to ask the
IMF for help
Response of policy makers (continued)
Team 4
 IMF intervened - reversed the devaluation process
 Temporarily increased interest rates to halt
currency depreciation, and reduce expenditures in
all sectors of economic system
Team 4
Effects of a Decrease in Investment Demand
Post-Crisis
The IMF’s Intervention
 IMF gave a lending package of US$ 16.7 billion and
asked the Thai government to reduce financial
expenditure, increase value-added tax, and prohibit
seeking help to those problematic financial
institutions and real estates
 Official foreign reserves increased to about US $14
billion by the end of March 1999------current account
turned into substantial surplus----Thailand began to
strengthen by Feb 1998
Team 4
BUT DID THAT REALLY HELP???
Bad Impact
Team 4
 Thailand faced a huge cost that was severe
economic contraction---Real GDP growth declined
from the second quarter of 1997, and declined
another 8.4% in 1998.
 IMF had forecasted the following: a positive real
GDP growth of 3.5%, a current account deficit of
US$ 5.3 billion, and a capital account surplus of
US$ 1.8 billion in 1998. BUT EVERYTHING
HAPPENED IN THE OPPOSITE
IMF badly misjudged the severity of the
economic downturn
What the Thai Government did
Team 4
 Baht used to link to USD. Now government let
it free flow. Baht depreciated: 1USD-25 Baht
1USD-56Baht
 Used tight financial and fiscal policy
 Shut down problematic financial institutions,
and merged the good conditional banks to
enhance the power
 Increased the supervision to the financial
institutions, established special entities, and
improved the process of auction of laws
Recovery of the Economy
Team 4
 Turned production from being domestic
oriented to more export oriented
 Currently, Thailand’s banking system is one of
the strongest in the region based on capital
adequacy ratio
 Thai banks rely on domestic funding through
its deposit base. Lending against deposits is
about 88%; therefore, liquidity is no longer a
problem
 Now considering more on reducing risk in
order to stimulate lending
What the Thai crisis has taught us
Team 4
 Correctly understand financial
liberalization
 Depend on the country itself at the prime
time
 Enhance supervision’s fairness and
transparency
 Preventing is always better than solving
problems
Team 4
Thank You