1997 Thai Currency Crisis

1. 1997 Thai Currency Crisis ECON 462 Professor Castillo Spring 2011 Team 4 Abdiqani Hassan Louisa Pangilinan Yang Qichen

2. Causes of the Crisis • 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

3. Formation of the Trade Deficit

4. Causes of the Crisis - continued • 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

5. 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 • 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

6. Effects of Decreased National Saving

7. Thai Baht Exchange Rate (1995-1999)

8. More factors that contributed to the Crisis • 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

9. Effects to the Aggregate Economy • 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

10. During the Crisis

11. Scope of the Crisis • Thailand experienced severe banking-financial 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.

12. 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.

13. Response of policy makers • 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

14. Response of policy makers (continued) • IMF intervened - reversed the devaluation process • Temporarily increased interest rates to halt currency depreciation, and reduce expenditures in all sectors of economic system

15. Effects of a Decrease in Investment Demand

16. Post-Crisis

17. 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 BUT DID THAT REALLY HELP???

18. Bad Impact • 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

19. What the Thai Government did • 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

20. Recovery of the Economy • 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

21. What the Thai crisis has taught us • 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

22. Thank You