Assignment -4

Thailand Imbalance of Payments

Sumeet Kant Kaul-G20088
Introduction:
The Asian Tiger has seen good and bad days. From a period of economic growth to a period
of economic downfall, Thai economy has experienced some very intense moments of
economic decisions. One can’t blame the real estate market or banking market alone for
unfolding this crisis. When the government allowed initially loans to be taken at a lower rate
from foreign countries and then invested in the economy thus this not only caused inflation
but also spoiled the habits of local investors and corporations who kept on borrowing and
borrowing in order to explode housing prices. Not only housing prices created bubbles but
also these funds that were borrowed created stock margin issues.
Thailand before world war had witnessed game of thrones where multiple changes in
monarchy over centuries had eventually created a Buddhist culture.
There were immigrations from china but majorly the population was Buddhism centric and
they had control over major policies due to hold on politics. Chinese immigrants however
had a grip on banking and brought their expertise with them. The country was
diplomatically very strong and after world war 2, it convinced the world that it didn’t fight
against allies. It eventually supported USA during the tough times of cold war and also got
the benefit in terms of aid. USA made its military base in Thailand creating a stronger
geopolitical hold in the area. This gave Thailand prominence and more power. Eventually
USA moved out and Thailand ushered in a new era.

GDP US$Mn
200000
183932
180000 167557
160000 145232
140000 126810
120000 113237
100265
100000 87342
80000 74280
62392
60000 51997
38081 42260
40000
20000
0
1981 1985 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996

Source:Asian Development Bank

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Economically speaking, Thailand had its Baht pegged with USA dollar since the times of
world war. Even after Breton Woods system collapsed, Baht was still fixed with dollar. Thus,
it got the benefit of a stable exchange rate and trade mushroomed. Before 1960s the
economy was largely Agri oriented but afterwards banking and manufacturing sector took
the lead. However, there was one downfall, since the 1950s government pursued a policy of
import substitution. Thus, many companies that could have become competitive lost its
steam and the economy was not producing global standards of products. This later on
created a brunt on the economy as it was no longer competitive in international markets. In
the 1970s and early 1980s, oil prices shot up due to various geopolitical issues, also USA had
to raise interest rates due to inflation thus even Thai Government had to raise its interest
rates in order to keep the exchange rate pegged to Us dollar. This had negative side effects
because Baht got weaker relatively. Also, a major recession hit along with increasing oil
prices and a fiscal deficit and account deficit that was rising to almost 2 to 5 % of GDP. The
economy was not in good shape obviously so the government took help from the World
bank which in turn advised Thailand to open up the economy, allow trade and change its
Import substitution policy. This also made the Baht devalued from 20 to 25 against Us
dollar.

6000
Overall surplus/deficitUs$Mn 5050
5000
4220 4308
3895
4000
2912
3000 2429 2389
2000 1732
1463
1000

0
-222
-1000
-1061
-2000 -1803
-3000
1981 1985 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996

Source:Asian Development Bank

Expansion During the 80s

In the mid-1980s, Thailand grew as an economy from 42 bn$ in 1985 to approximately 52

bn$ that’s a growth of 25% in 2 years. It had caught wind and there was a strong tailwind
that was supporting the country to grow and expand .FDI was pouring in especially from
Japan which invested around 47bn$ in Asia. So, trade and manufacturing industry grew
exporting from 7 bn$ merchandise exports in 1985 to 11.6 bn$ merchandise export in
1987.The country had found a new lease of life and was growing as a powerful emerging

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economy and one of the best performers all over the world. Plaza accord helped Us dollar
plan devaluation of its currency thus allowing baht also to get devalued further making it
export competitive. The domestic players were making merry by entering into labour
intensive sectors contributing to exports of the country.
In 1990s the country went through a process of financial liberalisation where in it opened its
banking sector and its foreign exchange policies. This seemingly productive move was
miscalculated and rather misused to put the country in biggest financial risk later on. In
1993 Bangkok International Banking Facility was created bringing international and national
players thus easing on the borrowing of international funds and tax privileges were given on
account of BIIBF licenses. So many companies and residents borrowed international funds at
lower competitive rates and took advantage of higher rates domestically thus making
money on arbitrage .This profitable move eventually creates asset class bubbles in the
economy as there was huge supply of money .Thus inflation as well grew because too few
assets were being chased by too much of capital. The central bank had to raise interest rates
in order to curb inflation. But this was like adding fuel to the fire because the high interest
rates only increased the arbitrage opportunity. The banking sector had largely invested in
these schemes. They had further loaned to many companies domestically. This money was
largely invested in stock margins, property and hire purchases.
In mid 90s the Us dollar rose against Yen and so did Baht, its export-oriented
competitiveness was in threat. Although the government showed initial signs of confidence
because even though imports had risen the exports growth couple with strong financial
reserves in the past had maintained confidence. But situations were changing, exports
growth had reduced to 0. Much of the foreign exchange reserves were invested in handling
the swap future contracts. The fault lines started to emerge when large property developers
and manufacturing companies started defaulting. Market was down and economy was hit,
the account deficit was rising and foreign exchange reserves were used to handle deficits
and maintain exchange rate. Although IMF advised to devalue Baht but the government
didn’t listen ad the risks kept on increasing.
The economy was on a ticking time bomb as liquidity was drying up. Information wasn’t
being shared as well with international banks on the current situation going on inside the
financial positions in the country.

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 Total debt outstanding Us$Mn
90621
83082

65596

52717
41864
37772
28165
23536
20385 21763
17545
10851

1981 1985 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996

Source:Asian Development Bank

Speculation War
There was a speculation war going on where speculators were borrowing baht in order to
sell it. The currency was under tremendous pressure and foreign exchange reserves were
being used to manage this risk. This furthered depleted countries reserves. Thus, the
government took on the mantle of blocking international speculators from getting access to
baht. Interest rates were increased by 1300% in order to deter them. Countries financial
position was in abysmal state. They also bough Forward Contracts of Baht for the whole
year. This left them with almost no liquidity and foreign exchange reserves were almost 0.
On top of that IMF advise was rejected and the currency wasn’t devalued. There was a
change in Finance Ministry in these tough times and the leadership had to decide how to
come out of this war like situation. Just few years ago, Thailand was called the Asian Tiger
and now it was at a pathetic situation of balance of payments. Leadership was more worried
about political oppositions rather that precarious situations of the county due to this
financial crisis.

Reference: Thailand ,an Imbalance of Payments ,James Newton and Michael Enright.