Thai Financial Crisis Essay Online for Free

Before financial crisis South East Asian countries had undergone some of the most magnificient economic growth rates worldwide. However, between 1997 and 1998 the "tiger economies" of South East Asian are badly impacted by a financial crisis. Thailand was the first country influenced by the financial crisis when Thai baht dramatically fall down in value in July 1997 which affected the other countries and resulted in economic downturns in several countries. Due to the time limitation, This paper can only try to focus on a specific country which is Thailand by explaining the causes of Thai financial crisis. Then the possible consequences of financial crisis on Thai economy are analysed. Finally, this paper come up with recovery strategies and some implications for this implementations.

3. Causes of Thai financial crisis

This section seeks to identify some of the underlying factors that made Thailand susceptible to financial crisis.

3.1. Large current account deficits

Thailand had a large current account deficit ranging from -2.0 to to -14.4% of GDP. These deficits caused country to rely heavily on external borrowing( Thammavit, 1998) 1995 1996 1997 % of GDP

(%)

US dollars ($ billions) % of GDP

(%)

US dollars ($ billions) % of GDP

(%)

US dollars ($ billions) -7.9 -13.2 -7.9 -14.4 -2.0 -3.0 Sources: IMF, "World Economic Outlook", May 1998 table 10 & October 1998 table 2.11

3.2 Overdependence on external debts

Secondly, excessive external debt, in 1997 the International Monetary Fund (IMF) estimated that Thailand's external debt was about $U.S.99 billion about 55% of GDP. The majority of this debt was privately incurred and this large external debt sharply lifted the country's debt service ratio from 11.4 percent in 1994 to 15.5 percent in 1997 ( Thammavit, 1998). Domestic borrowers were eager to go off-shore to borrow because this money was cheaper and the fixed exchange rate regime made people think that there was no currency risk.Thai corporate borrowers discovered they could borrow at an interest rate of 5-8% instead of paying more than 13% when borrowing domestically. They could even earn money simply by borrowing abroad and depositing the bath in Thailand. Even borrowers with sound business businesses would raise capital abroad to finance industrial development, excessive leverage in financial market is most often the cause of extreme booms and crashes.

3.3. Liberalisation of international capital flows

The collaspe of the property sector that began to boom in the late 1980's. With the liberalisation of international capital flows in 1993 this capital grew rapidly. By 1995, an oversupply of housing emerged, expanding int a major problem.With loans increasingly becoming more expensive and hard to get under the Bank of Thailand's squeeze on lending, the property sector began to collaspe in 1996. The property sector's debts totalled around 1,000 billion baht in 1996. The slump in the property sales market and lending squeeze worsened developers'cash flow troubles and defaults on interest payments. As a consequence many finance companies and small banks faced liquidity problems, with 16 finance companies suspended in June 1997, and another 42 in August 1997. By December 1997, 56 finance companies were closed permanently.

3.4. Exchange rate mismanagement

With a fixed exchange rate and the liberalisation of internatioanl capital flows, foreign money poured into Thailand between 1993 and 1996. As a result the Thai baht became overvalued against other currencies, partly slowing down growth in exports in 1996, however, the Bank of Thailand continued to peg the baht to a basket of currencies in which the U.S. dollar had a significant influence. Speculators attatcked the baht in February and May 1997 and in order to defend the currency the Bank of Thailand used official foreign reserves. The net result being that official foreign reserves fell from $U.S.39 billion in January 1997 to $U.S.32.4 billion in June 1997. In July 1997, the Bank of Thailand had to replace the fixed exchange rate with a "managed float", as it could no longer tap the reserves. The exchange rate for the bath had fallen steadily since 25.8 baht to the $U.S. to around 40 Baht to the $U.S. currently, with the Baht reaching 50 Baht to the $U.S before settling at its current level. The mismanagement of the exchange rate system has been cited as evidence of central bank incompetence(Thammavit, 1998).

3.5. Overinflated asset prices

In Thailand the property market was the main weakness of the financial sector. Thai banks had loaned funds to non-bank financial institutions, which in turn advanced loans to property market investors. It is estimated that a quarter of bank loans in Thailand was ultimately made, sometimes through intermediaries, for property-related investments. Speculators purchased property because they expected the price of the property to rise in the near future. Their increased purchasing of the property caused the price of the property rise, which caused even more speculative buying. When it became obvious that the current price greatly exceeded the real value of the property, speculators quickly sold, causing the price to collaspe- the bubble burst (Leightner 1999)

4. Consequences

Secondly, The stock markets experience a sharp fall because the level of any stock market is ultimately dependent upon the prospects for continued earnings/profits of the companies listed on the market. In periods when economic problems are taking place, stock markets would tend to fall to reflect the lower expected profits. The third effect of financial crisis was that interest rats increased significantly. Because of loss of confidence in Thai economy, most investors move their investment overseas which results on a decrease in the money supply, thus, raising market interest rates and diminishing te funds for borrowing throughtout the economy. In addition to market response, the monetary authorities may raise rates further in an effort to prevent further, continuous depreciation of the currency. Although they may be necessary to prevent stricken currencies going into free-fall, one effect of higher interest rates is to reinforce the deflationary pressures squeezing the domestic economy.

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