Group Action Learning Project

Team-5

ABSTRACT

In July 1997, The Asian crisis started in Thailand and swept over east and southeast Asian countries, which
heavily damaged currency values, stock markets, and other asset prices in these countries. The project report
explores the economic performance of Thailand in the pre and post period of 1997 and 1998, the Asian
Economic crisis, looking into the causes of the crisis, with emphasis on current account imbalance, quantity
and quality of financial lending, banking problems, composition, maturity and size of capital inflows. The
project report also provides an overview of the crisis's effect on Thailand's economy and the remedies
proposed and implemented to curb the crisis.

Team members

Satyajit Baruah

Sanjay Sahoo

Sanjeeb Kumar Mishra

Sanjeev Agarwal

Venkatesh Chilke

Santosh Hirikude
Describe the economic performance of the country of your choice, say 10 years before the crisis. What were
the strengths of the economy?

According to the world bank, Thailand was the fastest growing economy in 1985-94. The average increase
rate of real domestic product per capita was 8.2 percent a year.

From 1987 to 1990, the GDP recorded real annual growth of more than 9.5 percent and the highest value of
13.2 percent. Since then, the figures level out at a rate of 8 to 9 percent range, but the growth momentum
remained strong with an average of 10.4% during the period 1988-95, and the inflation was averaging 5.3%,
which was considered low.

Two attributable factors contributed to the dramatic growth of Thailand in this period, growth of export,
especially labor-intensive manufacturing good and a high flow of foreign capital including foreign direct
investment. Between 1980 and 1994 the , the share of manufacturing goods in total export raised from 36%
to 81% and the share of agricultural good in GDP dropped from 21% to 11%.The manufacturing exports of
Thailand were labor intensive with availability of local resources .In a very short expand of time , Thailand had
developed an export oriented manufacturing facility which involved a large number of different companies.
The production and management of the medium-tech industries required a skilled workforce with
sophisticated support industries. In the 1990 the level and scope of skill training increased, and the industrial
structure also deepened. In both medium-tech and labor intensive phase, the FDI increased as the businesses
from japan, Hong Kong and Taiwan had begun relocating their operations to Thailand and invested
aggressively in Thailand after 1985 to escape the rising cost at home and to benefit from GSP (generalized
system of preferences) privileges. A number of labor intensive farms from Japan and the “four tigers”
(Taiwan, Korea, Hong Kong and Singapore) relocated in the late 1980’s.The average annual net inflow of FDI
rose from 6.6 billion baht in 1980-87 rose to 47.1 billion baht in 1988-93.In Early 1990 Japan was in a
Stagflation and there was a recession in the European countries. The depreciated US dollar thus help
depreciating Thai baht, which was pegged against US dollar, to become competitive in export.

The growth of export led to boom in domestic market in which local capital played a major role. After 1988,
the gross domestic investment rose from about 25 percent to 40 percent of GDP. By the early 1990 the
upward trend of domestic investment began to break beyond the boundaries of home market. In 1988
Thailand equity in abroad was totaled US dollar 24.1 million and by 1993 it increased by 12-fold to US dollar
281 million. This is due to exhaust of Thailand local opportunity; newly developed expertise made the Thai
firms competitive in abroad and the opening of Chinese market.

Restructuring (Liberalization) Capital Market: From 1987 onwards Thailand government and central bank
introduced measures to expand the capital market. The stock market has been restarted (kickstarted). In
1991-92 the stock market improved the regulation and make it attractive for foreign funds. The monopoly
power of the major banks was diminished. Several new firms invested in stock market to gain rapid growth.
In 1992-93 the government widened the capital market by legalizing offshore banking and issuing license to
fifteen Thai and thirty-two foreign banks. In 1989 the commercial banks net borrowing was only 15 billion
baht, which jumped to 545 billion baht in 1994.There emerged 50 bank and non-banking financial
institutions, these financial institution had made a large sum of money as they had small constrains and
difficulties in excessively borrowing money from abroad and lending with a dear interest in home.
Towards the mid-1990s, what were the main challenges that the economy faced?

From 1991 the manufacturing industry faced the difficulties of raising wages, the neighboring countries, such
as china and Vietnam emerged as competitors. Even so, the medium and high-tech products, such as
computer components, electronics, automobile parts and electrical goods export raised and by 1994 these
technical categories accounted for one third of Thailand’s export. With the rapid shift of the medium tech
industry, the demand of skilled workforce increased but only a small proportion of labor force had the
secondary education, which provided the basic support to the manufacturing industries. In 1993 the only
10.3 % of labor force were with secondary education. To combat the shortfall in skill, the government took
variety of measures and channeled more money into the education budget and encouraged private investors
to build more schools than the government can. By 1994 there were twenty-six private universities and
technical colleges in Thailand.

Macroeconomic stability: In the year 1995 the current account deficit and the inflation rate increased
consistently. At the end of the year the deficit stood at -7.1 % of GDP and inflation annual rate was
5.6%.Although these figures are far from crisis level, but the consistent upward trend has led to concern
about the authorities ability to maintain Thailand’s macroeconomic stability.

Trend on Current Account Deficit

In the mid 90’s the recovery of USA from a recession, has raised the interest rate against inflation. The higher
interest rate attracted money back to the USA, leading to an appreciation of the US dollar. The currencies
paged to the US dollar also appreciated and rising export cost. This was a duel shock as both export and
foreign investment reduced for Thailand. The central banks usual deflationary correction has not been
effective, the higher interest rate set to reduce demand has resulted in the inflow of short-term funds which
had negated the policies intended effect

Trend of
Interest rates between 1993 to 1998

A real appreciation of the Thai Baht is caused because it remained pegged to US dollar and at the same time
the Japanese yen has depreciated. The wages in Thai also increased to raise cost of export, resulted in
slowing down the Thai export.
Though Thailand’s real exchange rate in 1995 to 1996 relative to US dollar barely changed, but Japan’s rate
of inflation was only 0.2%.So the Yen depreciated to real term as compared to US dollar by striking 17.6%.The
Thai Baht appreciated in real terms relative to Yen by more than 18%.In 1996 Thailand’s overall exchange
rate with respect to all trading partners increased by about 5% as compared to 1995.

The liberalization program intended to challenge to Singapore and Hong Kong as regional financial center has
led to dismantle of several form capital market control by Bank of Thailand, that were imposed till early 1990.
The Bangkok International banking facility was established in 1993 to promote this objective and the
unintended effect left Bank of Thailand with very little control over domestic money supply and the fixed
exchange policy remained in place.

3. To what extent did the crisis affect the economy?

In 1996 the GDP growth of Thailand fall to only 6.8%, for the first time since 1993.The inflation rate was just
below 6%. The government budget ended in deficit, and the new government promised to cut on public
spending, especially in military expenditure. The current account deficit got public attention and raised
concern at 8.3% of GDP. Export growth slowed down and during 1996 the Thai Baht remain under speculative
pressure and rumors of impending devaluation were in common.

Inflation trend of Thailand from 1995 to 2000

Contractionary Effect of devaluation: Devaluation can reduce the trade deficit if taken in the economic
boom period, but tight monetary and fiscal policy should be employed simultaneously to reduce the pressure
of its impact on the price level. Otherwise the gain from devaluation is wiped out my wage and price
increases followed by the devaluation. In Thailand both laborer and capital income earner suffered income
loss due to the float of Thai Baht after the crisis. The contradictory effect of devaluation caused by reduction
in both consumption and investment. Export had not responded sufficiently to the large depreciation of Thai
baht. Devaluation of Thailand competitors had made Thai imports less attractive than they would have been.
The contagion effect also slowed down the economic activity in major trading partner.

Thailand Economy entered a Debt-Deflation mechanism .it is defined as a propagative mechanism, which
multiplies small shocks into a substantial reduction in aggregate demand and output. Bankruptcy and
liquidation caused distress in asset sales and caused a price deflation, which in turn raised the real value of
debt. The rising interest by the economic policy implementation and decline in net worth lead to less
expenditure by the public and the firms. Firms that relied on foreign borrowing to finance their investment
faced huge balance sheet problem and credit difficulties. Most of these firms could not service their debt and
these debts became non-performing loan.
When profit and output fall, the resulting layoff lead to loss of confidence and pessimism. Such pessimism
reflected by hoarding of money and in decline in velocity of money, which further depressed the economy.
The growth rate of M1 money in Thailand drop to 1.2 % in 1997 from 9.1% in 1997.

Thailand unemployment rate from 1995 to 2008

In terms of U.S dollars, the Thai stock index fell by 70% after one year the Baht float. The depression in stock
market resulted in substantial reduction of wealth of households. The growth rate pf private consumption
declined from 11.2% in 1995 to 1.1 % in 1997. Corporate income tax revenue dropped sharply due to losses
and bankruptcy in firms as well as the personal tax revenue also dropped due to layoff.

GDP growth (Annual %) of Thailand from 1994 to 1999

4. What caused the crisis in that country?

a) Fixed Exchange Rates: Many investments were based on money borrowed abroad. Due to high interest
rates in Thailand and a fixed exchange rate policy linking the baht to the US$, foreign investors were eager to
place their money in Thailand. Thai Corporate Borrowers could have even earned money simply by borrowing
abroad and depositing the baht in Thailand. In 1992, as part of a broader financial liberalization package, the
Anand government deregulated foreign exchange. The Bangkok International Banking Facility (BIBF) was
established to attract more foreign funds to cover the increasing current account deficits, to turn Thailand
into a regional financial center, and to ensure a greater degree of competition in the banking sector. The BIBF
made it possible for local and foreign commercial banks to take deposits or borrow in foreign currencies from
abroad and lend the money both in Thailand and abroad. As a consequence, Thailand undertook too much
offshore borrowing.

b) Careless and Excessive Investments: The massive inflow of money let to a tripling in the amount of loans in
the financial system and, as there were not enough places to invest them productively, a misallocation of
investments took place. An investment bubble of careless lending was created. When the economic recession
started in 1996 and the buying power of the middle and upper classes began declining, the property bubble
burst and left substantial bad debts on the balance sheets of the finance companies, which had financed their
investments by borrowing abroad.

c) Currency Mismatch: it arose when the money went massively to nontraded sectors in the economy, i.e.
foreign money went to sectors with no foreign exchange receipts. Third, there was a “term mismatch” as
short-term borrowing was utilized to finance long-term projects with longer term returns.

5. What remedies were proposed and implemented?

Economic Policy implementation:

Data from 1997-98 shows that the output declined in Thailand was much deeper than expected and did not
received much attention from IMF and Thai Authorities. IMF approved financial support for Thailand which
totaled US$ 17.2 billion only. Both Fiscal and monetary policy were designed to contract the domestic
absorption and to improve the current account. Contractionary fiscal measures were taken to move the
public sector deficit to a surplus of 1% of GDP in 1998. The VAT tax rate along with were increased from 7%
to 10% , Tight monetary policies were implemented to halt the downward trend of currency , but excessive
interest rate and shortage of liquidity slowed down the growth and the health of financial and corporate
sector declined further. Such policy mix was proven to be a mistake and the policy failed to stabilize the
currency exchange rate but increased the default risk.

Structural reform:

Financial sector restructuring was necessary for economic recovery, but the program was highly affected by
the unavailability of capital and therefore designed to recapitalization of financial institution. The ministry of
finance disagreed to buy the bad debts and fiscal discipline were strictly held to restrict public money to bail
the private banks. However, the tight money reduced fresh liquidity, and delayed the initiation of debt
restructuring. In June 1998 the corporate debt restructuring committee was established. This period was
marked by external stability rather than growth. Thai government agreed with the IMF advice to buy out the
high interest rate policies to stabilize external account, but this action was highly criticized later as it was
merely focused on external stability rather than internal equilibrium. In sept 1999 the Ministry of finance
encouraged each bank to set up its own asset management company and agreed to transfer non-performing
loans from the state-owned Krung Thai bank to its owned AMC. This measure helped only the state banks.

Gradualism:

In the late 1998, the monetary policies shift to provide more liquidity. The 14 day repurchase rate decreased
from 17.37 % in June 1998 to 3.98% in December 1998. In 1999 December it reached to 1.48%. In February
1999, the bank of Thailand made cut in discount rate to 4% and has maintained an easy money policy
throughout. With easy money, the external balanced started improving steadily without putting pressure on
the domestic currency. The Thai Bhat started appreciating against the US dollar, the net international
reserves leveled as compared to the before crisis level. By the end of 200, Thailand’s foreign reserve
accounted for 2.2 times of its short-term debts compared to 1 times 2 years earlier.
6. What are your predictions as to the state of the economy in the next five years?

The economy of Thailand looks liable to have contracted at a more declining speed in Q3 than in Q2, for
Covid-19 caused lockdowns supporting homegrown activities. Nonetheless, continuous travel limitations
influencing the extremely significant the tourism/travel industry area, production network interruptions and
frail unfamiliar interest are probably going to have weighed vigorously on the outer area.

The economic recovery is dependent upon a bounce back in the tourism/travel industry and fares as large
vaccination will be available till June. The economy is projected to recover in 2021, in the wake of contracting
strongly in 2020. Homegrown interest is set to bounce back firmly on improving family unit and capital
spending. The recovery from illness in key outer business sectors should float trades, even though the drawn-
out nature of the pandemic and its effect on the travel industry area stays a key drawback hazard. The Focus
Economics board sees the economy extending 4.4% in 2021, which is up 0.1 rate focuses from a month ago’
projections, prior to becoming 4.4% again in 2022.

Because of the COVID-19 pandemic, the nation enlisted negative GDP development in 2020 unexpectedly
since 1998, going from +2.4% in 2019 to - 7.1%. As indicated by the IMF's October 2020 estimate,
development is relied upon to get back to 4% in 2021 and 4.4% in 2022, subject to the post-pandemic
worldwide economy recuperation. In its latest January 2021 update of the World Economic Outlook, the IMF
has modified its GDP development projections for Thailand to 2.7% in 2021 and 4.6% in 2022 (addressing a
distinction from October 2020 WEO projections of - 1.3% and +0.2%, individually)
Inflation moved to a negative area at - 0.4% in 2020 and is projected to increase to 1.8% in 2021 and 1% in
2022 (IMF, 2021). General government balance diminished to - 3% in 2020 and is required to be at - 2.9% in
2021 and - 0.7% in 2022 (IMF, 2021

Thailand had a workforce of 39 million individuals in 2020, out of its 69.8 million populaces. Its economy is
vigorously founded on horticulture, which contributed 8% of the GDP and utilized 31.2% of the dynamic
populace in 2020 (World Bank, 2020). The nation is biggest maker of common elastic on the planet and one
of the main makers and exporters of rice; it additionally has sugar, corn, jute, cotton and tobacco among its
significant harvests. The assembling area represents 33.4% of the GDP and is all around differentiated. It
utilized 22.5% of the dynamic populace in 2020 (World Bank, 2020). The principle Thai ventures are
hardware, steel and car. Thailand is a gathering canter point for worldwide vehicle brands. The tertiary area,
including monetary administrations, is rising and adds to 58.6% of the GDP. It utilized 46.3% of the dynamic
populace in 2020 (World Bank, 2020). The travel industry assumes an always significant part in the Thai
economy.

Conclusion:

Eventually, we would say that the Asian Financial Crises was a huge effect on the economy and the positions
of individuals of Thailand as well as different nations also infect it started from Thailand. Thailand was
flourishing before the emergencies, yet soon the economy and the GDP fell. Presently we see Thailand at
perhaps one of the most developed economy on the planet, and in gratitude to its tourism industry and
imports and fares, they have prospered in financial matters and furthermore thrived in exchanging. In a
couple of words, we can say this record as-Thailand's Downfall and Rise. Thailand is an incredible and
different country to contemplate and consider upon.

Asian arising economies endured huge decreases in both their money and value markets in the second half of
1997. This Asian monetary unrest emerged basically from three interrelated arrangements of components, in
particular: weaknesses in the monetary area when worldwide liquidity conditions were accommodative,
worries about equilibrium of installments advancements, and virus across economies. The significant channel
of virus seems to have been the abrupt acknowledgment by the market after the sharp devaluation of the
Thai baht that various other Asian economies had weaknesses like those in Thailand.

**END OF REPORT**
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