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Essay on Asian Financial

Economic Crisis- 1997/1998


w.r.t. Thailand

AbstractOn July 2, 1997, Thailand devalued its currency relative to the US dollar. This
development, which followed months of speculative pressures that had
substantially depleted Thailands official foreign exchange reserves, marked the
beginning of a deep financial crisis across much of East Asia.
In subsequent months, Thailands currency, equity, and property markets
weakened further as its difficulties evolved into a twin balance-of-payments and
banking crisis. Malaysia, the Philippines, and Indonesia also allowed their
currencies to weaken substantially in the face of market pressures, with
Indonesia gradually falling into a multifaceted financial and political crisis.

IntroductionThe Asian financial crisis was a period of financial crisis that gripped much
of East Asia beginning in July 1997 and raised fears of a worldwide economic
meltdown.
Indonesia, South Korea and Thailand were the countries most affected by the
crisis. Hong Kong, Laos, Malaysia and the Philippines were also hurt by the
slump. Brunei, China, Singapore, Taiwan and Vietnam were less affected,
although all suffered from a loss of demand and confidence throughout the
region.

Response to the Questions1) Describe the economic performance of the country of your choice; say 10
years before the crisis. What were the strengths of the economy?
Response 1- From 1985 to 1996, Thailand's economy grew at an average
of over 9% per year, the highest economic growth rate of any country at
the time. Inflation was kept reasonably low within a range of 3.45.7%.
The baht was pegged at 25 to the U.S. dollar. The strengths of Thailands
economy was its massive volumes of capital inflow from aboard due to its
accommodating economic policies, goal, healthy-looking conditions, and
some other outside factors such as the stagflation of Japanese economy.
2) Towards the mid 1990s what were the main challenges that the economy
faced?
Response 2- During the mid 1990s, a large part of the capital had been put into
non-productive sectors especially real estate. Those sectors were non-productive
because they produced non-tradable goods which were sold only domestically,
resulting in less national volume of exports and thus weaken the economys
balance of trade as well as the capital account.
3) To what extent did the crisis affect the economy?

Response 3- Amongst the countries affected by the Asian Financial crisis,


Thailand was the most severely affected since there was a big mismatch
between the stock of foreign liabilities and assets which in turn resulted in
further deterioration of Thailands balance of payment and the collapse of the
economy.
4) What caused the crisis in that country?
Response 4- The major reason for Thailands financial crisis was the large
amount of capital which was put into non-productive sectors like real estate.
These sectors were non-productive because they produced non-tradable goods
which were sold only domestically, resulting in less national volume of exports
and thus weakening the economys balance of trade as well as the capital
account.
5) What remedies were proposed and implemented?
Response 5- The Thailand government formulated to policies like
exchange-rate changing, exchange-rate switching, and direct control, to
keep its exchange rate fixed as well as to maintain a fine level of the
overall condition of the economy. More than 90% of the countrys foreign
reserve had been used to defend the value of the baht, and Thailand was
forced to finally switch its exchange rate regime.
6) What are your predictions as to the state of the economy in the next five
years?
Response 6- The financial restructuring encompassing a five year plan will beef
up the investors confidence to bring in credits or capital into the Thai economy.
The Bank of Thailand should be reconstructed so that it becomes independent to
the government in its policy making since politics was proved to be a crucial
source of the unhealthiness of the economy. The current account deficit should
not be much in excess of 5% of GDP especially if the deficit was financed in a
way that could lead to rapid reversals according to the US Deputy Treasury
Secretary Lawrence Summers, Banks should be restricted in how fast their
borrowing could grow.
ConclusionTo achieve Macroeconomic balances, great care and prudent policy management
are needed. In the Thai financial crisis case, policies had not been prudently
thought out. The collapse of the economy was a very tough lesson for the Thais.
Thus, Thailand could not gain much terms of trade after the devaluation of the
baht to help improving its economy. Plus, the slowdown of Japanese economy
had made it unable to give much aid to Thailand unlike Mexico who had a huge
support from the US for the road to its recovery. But hopefully, during that long
road, the Thais would maximally utilize the time to thought out wise policies and
beef up a real strength so that when the next storm came, it would not turn over
again.
References-

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Historical Materials, 1997. Last updated August 2,
2013,http://www.federalreserve.gov/monetarypolicy/fomchistorical1997.htm.
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https://en.wikipedia.org/wiki/1997_Asian_financial_crisis