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Asian Crisis

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The Asian financial crisis (sometimes referred to as the "Tom Yum Gung crisis" after the Thai hot-and-sour soup) started with the devaluation of Thailand’s Bath, which took place on July 2, 1997. This first devaluation of the Thai Baht was soon followed by that of the Philippine Peso, the Malaysian Ringgit, the Indonesian Rupiah and, to a lesser extent, the Singaporean Dollar. What began as a currency crisis soon affected the wider economy and led to economic downturns in other countries in the region. The Asian-Pacific economies known as Asian “tigers” were the most affected. Three of the countries: Thailand, South Korea, and Indonesia, had to seek bailout assistance from the International Monetary Fund because of the desperate balance of payments associated with the crisis. This paper was aimed to focus on the financial crisis in THAILAND and provide an insight thought on some of the related issues. Pre-Crisis (1980s-1996) Prior to 1997, Thailand had been one of the Southeast Asia’s outstanding performers. Prudent macroeconomic management, including cautious fiscal policies, a non-inflationary monetary policy and a closely monitored fixed exchange rate system, was key to Thailand‘s economic success in the 1980s and early 1990s. Thailand’s real economic growth increased from about 6 percent per year in 1976-1985 to above 8 percent in 1986-1995. At its peak in 1988-1990, growth averaged 12 percent per year (Coxhead and Plangpraphan, n.d.). World trade expansion and industry relocation to Thailand were believed to be the first push for economic expansion. Important trading partners of Thailand included the USA, the ASEAN (Association of Southeast Asian Nations), EU, and Japan. Over the ten years between 1987 and 1996; the average growth rate of real exports was 14.5 percent, while inflation was contained at 4.7 percent. In the mid-1980s, Thailand began the process of liberalizing its financial system. Starting in 1990, Thailand liberalized all current account foreign exchange transactions, followed by a relaxing of capital account restrictions. In 1993, the Bangkok International Banking Facilities (BIBF) was officially established in attempt to open up the domestic capital market. Commercial banks were permitted to hold net foreign assets up to 25 percent of their capital funds while the maximum percentage of net liabilities was raised to 20 percent (Thiengtham, 2000). Among other activities, the facilities were to provide a channel for cheaper borrowing of foreign funds. Interest rates in Thailand were much higher than many other countries, therefore bank and finance companies found it advantageous to borrow funds from abroad and lend them to local borrowers. Moreover, the fixed value of Thai Baht to a basket of currencies in which the US dollar dominated meant that the Bank of Thailand had essentially eliminated the exchange rate risk. During that period, the bath-dollar exchange rate was stable within the narrow band between 20:1 and 25:1. The high level of investment and the economic rapid growth had been supported by large flows of foreign capital: in the period of 1987-1996, an average annual capital inflow was equal to 8.7 percent of GDP. Cheap labor, progressive reductions in trade barriers, and years of conservative macroeconomic management resulting in moderate inflation have helped Thailand as a destination for FDI. Thailand was able to attract enormous inflows of foreign investment, especially form Japan and East Asia (Petprasert, 2000). The following table (Figure 1) shows direct investment from abroad.
Figure 1
Countries 1988 1989 1990 1991 1992
Japan 14,607.60 18,761.60 27,931.00 15,593.40 8,571.80
USA 3,184.70 5,220.30 6,154.00 5,918.60 11,788.3
EU 2,248.40 3,818.80 4,212,1 3.964.1 6,886.90
Hong Kong 2,794.50 5,715.70 7,027.40 11,565.40 14,549.00
ASEAN 1,646.90 2,811.50 6,665.50 6,575.40 7,170.00
Taiwan 3,163.30 5,062.30 7,159.90 2,753.50 2,220.80
Others 345.1 1,901.60 15,563.10 15,018.10 2,571.50
Unit: million baht
Source: Bank of Thailand

From the table, it can be seen that Japan is the largest external direct investor in Thai businesses from 1998-1991. In 1987, Japanese investment was only 4,711.5 million baht, but it went up to 14,607.6 million baht in 1988 and reached a peak of 27,931 million baht in 1990. Also apparent in the table is the later influx of Hong Kong capital, as a result of the fear of the consequences of the return of Hong Kong to Chinese rule in 1997.…...

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