HKU804

JAMES NEWTON
MICHAEL ENRIGHT

THAILAND: AN IMBALANCE OF PAYMENTS

On 18 June 1997, as Thailand’s balance-of-payments position worsened sharply and currency
speculators threatened the country’s long-standing pegged exchange rate, the prime minister,
Chavalit Yongchaiyudh declared, “We will never devalue the baht.” 1 One day later,
Thailand’s finance minister, Dr Amnuay Viravan, a staunch supporter of the pegged exchange
rate, resigned and the Thai stock market plunged to its lowest level in eight years as investors
feared that currency devaluation was imminent. On 20 June, Chavalit appointed Thanong
Bidaya, former president of the Thai Military Bank, as Amnuay’s successor. Five days later,
Thanong discovered a closely guarded secret: the Bank of Thailand, the country’s central
bank, had virtually no liquid foreign exchange reserves.

In the absence of sufficient foreign exchange reserves, Thailand’s ability to maintain its
pegged exchange rate would be called into question even in good times. But in June 1997, the
former Asian “tiger” economy was facing critical problems. Companies were having
difficulties repaying their loans, the banking sector was under pressure and the balance of
payments was undergoing a sharp deterioration, threatening the country’s ability to defend the
currency from further speculative attacks.

This represented a massive turnaround from years of spectacular economic growth. For 10
years starting in the mid-1980s, Thailand had been the world’s fastest-growing economy, and
in 1995, The Economist had predicted that the country would become the world’s eighth-
largest economy by 2020.2

Many in Thailand believed that currency stability had played a part in Thailand’s economic
success. Linking the baht to an external standard of value, such as gold, sterling and the US
dollar, had been a central policy principle since the country was first opened up to
international trade in the 1800s.3

1
Asiaweek (21 July 1998) “Soundbites from the Slump”, p. 1.
2
Barnes, W. (29 October 1996) “Thailand: What Went Wrong with the High Flyer?”, The Daily Telegraph, p. 30.
3
Phongpaichit, P. and Baker, C. (1996) Thailand’s Boom, Allen & Unwin: Australia, pp. 66–68.

Elyssa Tran, Mary Ho and Ricky Lai prepared this case under the supervision of Dr James Newton and Prof. Michael Enright
for class discussion. This case is not intended to show effective or ineffective handling of decision or business processes.
© 2009 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be reproduced or
transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise (including the
internet)—without the permission of The University of Hong Kong.
Ref. 09/407C

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 09/407C Thailand: An Imbalance of Payments

At the end of June 1997, the new finance minister was faced with a major dilemma. Without
foreign exchange reserves of its own, the government lacked the resources to maintain the
fixed exchange rate.4 What action should he take? And, more importantly, what action could
he take?

Thailand: A Brief History

Geographically situated to the north of the Malay Peninsula and south of China, Thailand was
located in the centre of South-East Asia [see Exhibit 1]. Roughly the size of France, Thailand
extended 1,500 kilometres from north to south and about 800 kilometres from east to west.
The Thai people originated in southern China and migrated south to the great rice plains that
took up much of the centre of the country’s land mass. The first capital of the nation was
Sukothai, which was founded in 1283 in the north of the country. The capital was twice
relocated, first to Ayuddhaya on the Chao Phya River, which ran from the northern hills to the
Gulf of Siam. The second move was further south to Bangkok, at the mouth of the Chao Phya.
Bangkok dated from 1782, when the rulers of Ayuddhaya were overthrown. The victor,
General Phya Chakri, proclaimed himself king and founded the Chakri dynasty, of which
King Bumiphol Adulyadej was the ninth sovereign.

Political Development and Foreign Relations

The role of the monarchy in Thailand was significant, and the institution as well as the
monarch himself commanded enormous public loyalty and affection. A second powerful
social force within Thai society was the Buddhist religion, which was practised by around
94% of the population. Most of the population was ethnically Thai, with the next-largest
group being Chinese. Chinese immigrants had started arriving during the Opium Wars in the
mid 1800s and, over time, most had integrated closely into the mainstream of Thai society.
The Chinese had developed a pivotal role in the economy whilst indigenous Thais retained
political and bureaucratic power.

Political power in Thailand remained vested solely in the monarchy until 1932. The two best-
known of the early kings of Thailand, Mongkut (portrayed, controversially to Thais, in the
musical, “The King and I”) and his son, the reformer Chulalongkorn, were both absolute
monarchs. However in 1932, during the reign of Chulalongkorn’s successor, the absolute
monarchy was replaced with a system of constitutional government through a military coup
d’etat. The king became the ceremonial head of state, but political power lay formally with a
prime minister and parliament. For the next six decades, military coups became a regular
means of transferring political power between factions, and the military dominated the
government for most of those years.

Partly due to the diplomatic skills of the early monarchs during the 19th century, Thailand
had escaped colonisation by the West. The only formal occupation by a foreign power
occurred during the second world war when the Japanese army invaded. Officially, Thailand
became an ally of Japan in the war against Western powers and declared war on the US. The
style of Thai diplomacy was best captured in the story that the declaration was duly signed in
Bangkok by the Japanese military command, but delivery of the document to Washington was
“overlooked” by the Thai ambassador there. As a result, at the end of the war in 1945,
Thailand was able to claim that it had never been at war with the victorious allies.

4
At the end of the second world war, the rate was fixed at 20 baht to one US dollar. Following a devaluation in 1984, the rate
was changed to 25 baht to the dollar. This was maintained through to the time of the case and is the rate used in any
conversion calculations in the case.

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 09/407C Thailand: An Imbalance of Payments

A close alliance then developed between the US and Thailand, largely as a result of the Cold
War and the US’s fear that communism would spread throughout Asia. As a consequence, the
US’s military presence and economic aid made a significant contribution to the Thai economy
from 1949 until the end of the war in Vietnam in 1975. As the US military’s commitment in
Vietnam escalated in the mid-1960s, Thailand became the pivotal South-East Asian base for
the US Air Force. Thailand’s rising political importance was reflected in the US’s growing
aid and influence, as well as support for Thailand’s military governments. As the US’s policy
towards communism began to change, however, especially after US president Richard
Nixon’s 1972 visit to China, American support for Thailand waned. In 1973, the military
regime collapsed in Thailand following violent clashes with student demonstrators. The prime
minister, General Thanom Kittikachorn, was forced to resign in October 1973 and go into
exile. The king appointed Sanya Dharmasakti, rector of Bangkok’s Thammasat University, as
interim prime minister.

In 1975, following a historic meeting with Chairman Mao Zedong in Beijing, the
democratically elected civilian prime minister, Kukrit Pramoj, signed an agreement with
China to establish formal diplomatic ties with the communist country, ending almost three
decades of hostility and antagonism between the two nations. As the US withdrew from
Vietnam and the Thai government closed the US military bases in Thailand in 1976, the
“American era” in Thailand came to a close.

In October 1976, violent clashes between the Thai military and students at the Thammasat
University campus ushered in a new era of anticommunism and military rule. Several
thousand left-wing writers, students and politicians fled Bangkok to join the outlawed
Communist Party of Thailand in the jungles of the northeast and south, from which
insurgency operations were directed against the new regime. The military appointed a right-
wing judge, Tanin Kraivxien, as prime minister, but then replaced him in October 1977 with
General Kriangsak Chomanan. In February 1979, Kriangsak visited the US and received
reassurances of military support. The US also steadily increased its security aid to Thailand
and the two countries participated in a series of annual bilateral military exercises.

In early 1980, General Prem Tinsulanond, considered by many to be the most powerful
political figure of the 1980s, succeeded Kriangsak and established what came to be known as
Thailand’s “semi-democracy”. Under the Prem government, relations between Thailand and
China improved steadily. In 1985, the Chinese–Thai Joint Economic Cooperation Committee
was created and, in 1987, the two countries signed a military assistance agreement under
which Thailand could purchase, on concessional terms, Chinese tanks and various types of
military weapons.

In 1988, following the longest period of continuous government in decades, Prem was
replaced as prime minister by Chatichai Choonhavan, leader of the Chat Thai political group
and Thailand’s first democratically elected prime minister in more than a decade. The core of
Chat Thai was an old military faction that had extensive business interests, particularly in
textiles. Whilst the new government shifted power from the generals to politicians, the
military still retained effective veto power over major policy decisions.

In February 1991, Chatichai’s government was overthrown by a military coup led by two
generals, Sunthorn Kongsompong and Suchinda Kraprayoon. Anand Punyarachun, a former
diplomat and business leader, was appointed prime minister. Anand vigorously pursued a
policy of economic liberalisation. The Association of Southeast Asian Nations (“ASEAN”)
Free Trade Area was created and the liberalisation of the Thai financial market began.
Following elections in 1992, Anand was succeeded by Chuan Leekpai, the leader of

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 09/407C Thailand: An Imbalance of Payments

Thailand’s Democratic Party and the first prime minister to come to power with neither
aristocratic nor military backing.

Further elections in 1995 ousted the Democratic Party, and Chat Thai formed the new
government with Banharn Silpa-Archa as prime minister. However, as the country’s
spectacular economic performance faltered and savage no-confidence debates raged in
parliament, Banharn resigned and called new elections. In November 1996, General Chavalit
Yongchaiyudh, who had resigned from the army and, in 1992, had formed his own political
party, the New Aspiration Party, secured the most seats in the election, formed a coalition
government and became prime minister.

Economic Development
For centuries before the second world war, agriculture had been the backbone of the Thai
economy. When the country opened up to international trade in the mid-1850s, agricultural
products became Thailand’s predominant export. Agriculture remained dominant in the early
post-war period, representing around 80% of Thailand’s exports, which mainly comprised
rice, teak and rubber. Starting in the 1960s, however, the structure of the economy began to
change, partly due to US foreign policy, which was driven by military and strategic concerns
in Asia. Local banks and industrial conglomerates, often formed by immigrant Chinese
families and frequently linked to military factions in the government, expanded rapidly in an
economy in which US aid played a considerable part.5

However, the US withdrawal from the region in the mid-1970s, together with the quadrupling
of the price of oil in 1973, slowed economic growth and led to a rising deficit in the country’s
balance of payments. The government’s policy of import substitution in manufacturing since
the 1950s had left few industries internationally competitive. Rising exchange and interest
rates aggravated the problems. The baht had been linked to an external source of value for
over a century to provide stability for foreign buyers of Thai agricultural exports. Ever since
the second world war, that external source had been the US dollar, to which the baht had been
pegged at a rate of 20. When the Bretton Woods6 era of fixed exchange rates ended in 1973,
the world’s major currencies, including the US dollar, were left to float on the foreign-
exchange markets, but the baht remained fixed to the dollar. In 1980, the US raised interest
rates dramatically to curb runaway domestic inflation. To maintain the currency peg, Thailand
had to raise its own interest rates in tandem with the US. The high US interest rates also drove
up the exchange rate of the dollar, which therefore drove up the exchange rate of the baht,
particularly against key Asian currencies such as the Japanese yen. World agricultural
commodity prices collapsed under high US interest rates, as did Thailand’s commodity-based
export earnings. Meanwhile, oil prices remained high as a result of the Organization of the
Petroleum Exporting Countries (“OPEC”)’s second oil shock in 1979,7 tripling Thailand’s oil

5
Phongpaichit, P. and Baker, C. (1998) Thailand’s Boom and Bust, Silkworm Books: Chiang Mai, pp. 22–25.
6
The Bretton Woods system of monetary management established the rules for commercial and financial relations among the
world’s major industrial states. The Bretton Woods system was the first example of a fully negotiated monetary order intended
to govern monetary relations among independent nation-states. In preparation for post-war rebuilding during the second world
war, 730 delegates from all 44 allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire for
the United Nations Monetary and Financial Conference. The delegates deliberated upon and signed the Bretton Woods
Agreements during the first three weeks of July 1944. Setting up a system of rules, institutions and procedures to regulate the
international monetary system, the planners at Bretton Woods established the International Bank for Reconstruction and
Development (now one of five institutions in the World Bank Group) and the International Monetary Fund (“IMF”). The main
features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained the
exchange rate of its currency within a fixed value—plus or minus 1%—in terms of gold and the ability of the IMF to bridge
temporary imbalances of payments. In the face of increasing strain, the system collapsed following the United States’
suspension of convertibility from dollars to gold. [Adapted from Wikipedia (2008) “Bretton Woods system”,
http://en.wikipedia.org/wiki/Bretton_Woods_system (accessed 5 November 2008).]
7
The 1979 (or second) oil crisis in the US occurred in the wake of the Iranian Revolution. Amid massive protests, the Shah of
Iran, Mohammad Reza Pahlavi, fled his country in early 1979, allowing Ayatollah Khomeini to gain control. The protests
shattered the Iranian oil sector. While the new regime resumed oil exports, it was inconsistent and at a lower volume, forcing

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 09/407C Thailand: An Imbalance of Payments

import bill. From 1978 to 1981, the current-account deficit rose from 2% to 5% of gross
domestic product (“GDP”) and the government’s debt service soared to 23% of GDP.8

In 1984, the Thai economy entered a major recession, fuelled by crises in the balance of
payments and the banking sector. The Prem government turned to US-trained technocrats in
the bureaucracy to improve the policy environment. The World Bank dispensed both financial
assistance and advice to Thailand’s macroeconomic managers, advocating the adoption of
export-orientated industrialisation to replace the import substitution policy that had protected
domestic industrial conglomerates. The depletion of the country’s foreign-exchange reserves
forced a traumatic devaluation of the baht by 14.8% from THB 20 to the US dollar to THB
25.9 Thai banks, protected from foreign competition since the 1940s, faced the prospect of
capital-account liberalisation, which would remove exchange controls and give borrowers
access to alternative sources of finance.

Economic Expansion: The Late 1980s

Beginning in 1985, the economy turned and economic growth accelerated sharply. Within 18
months, the economy was experiencing double-digit growth rates as both foreign direct
investment (“FDI”) and manufactured exports expanded dramatically.

The major source of FDI was Japan, which had become the dominant investor in the country
since the US retreat from Thailand in the mid-1970s.10 Between 1986 and 1993, Japanese
companies invested US$47 billion in offshore manufacturing plants around Asia, creating a
regional production network based on an intraregional division of labour. As FDI poured into
the manufacturing sector, local investors also jumped on the bandwagon and manufacturing
exports soared.

This relocation of production was driven not only by the search for lower labour and land
costs, but also by the US dollar realignment following the 1985 Plaza Agreement. The US
current account deficit had reached an alarming 3.5% of GDP. The administration of US
president Ronald Reagan reached an agreement with the other members of the G511 at the
Plaza Hotel in New York (after which the accord was named) to intervene in order to force
down the value of the US dollar on the foreign exchanges, particularly against the Japanese
yen and the German mark, to correct the imbalance. The yen soared against the US dollar and,
thanks to the baht peg, the yen also soared against the baht. In 1982, the exchange rate for
THB 100 was ¥1,180; in 1988, it had fallen to ¥508.12

During the late 1980s, annual inflows of FDI into Thailand multiplied more than tenfold.13
Foreign funds fuelled the expansion of labour-intensive industries, which in turn attracted
domestic investors as the opportunities from export markets became apparent. Led by the
conglomerates, Thai firms of all sizes ploughed in to the new export industries, helped by a
doubling of the labour force attracted from the country’s expanding rural population.

prices to go up. Saudi Arabia and other OPEC nations, under the presidency of Dr Mana Alotaiba increased production to
offset the decline, and the overall loss in production was about 4%. However, a widespread panic resulted, driving the price far
higher than would be expected under normal circumstances. [Adapted from Wikipedia (2008) “1979 Energy Crisis”,
http://en.wikipedia.org/wiki/1979_oil_crisis (accessed 5 November 2008).]
8
Phongpaichit, P. and Baker, C. (1996) Thailand’s Boom, Allen & Unwin: Australia, p. 73.
9
Ibid., p. 66.
10
Phongpaichit, P. and Baker, C. (1998) Thailand’s Boom and Bust, Silkworm Books: Chiang Mai,, p. 26.
11
G5 countries, the Group of Five, consisted of five of the world’s leading economies: France, West Germany, Japan, the UK
and the US.
12
Phongpaichit, P. and Baker, C. (1998) Thailand’s Boom and Bust, Silkworm Books: Chiang Mai, p. 70.
13
Ibid., p. 79.

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 09/407C Thailand: An Imbalance of Payments

Exports grew on average at 25% per year and, by 1987, manufactured exports had overtaken
the previously dominant agricultural sector. From 1985 to 1990, Thailand’s GDP had grown,
in real terms, by over 60% [see Exhibit 2]. Economic performance of this nature elevated
Thailand to the status of an “Asian tiger” of the Asian newly industrialising economies. Along
with Malaysia and Indonesia, Thailand became one of the World Bank’s seven highly-
performing Asian countries, joining Hong Kong, Singapore, South Korea and Taiwan.

Financial Liberalisation: The Early 1990s

In early 1991, the Anand government, composed largely of technocrats and businessmen,
initiated a programme of financial liberalisation that was intended to make Thailand a
financial centre for the region and which included changes in the foreign exchange system.
Chuan’s government, elected in 1992, continued the policy, bringing in US-educated Tarrin
Nimmanhaeminda from Siam Commercial Bank as finance minister.

There were two important milestones in the liberalisation of the foreign exchange system.
First, Thailand acceded to the IMF’s request to lift all remaining controls on all foreign-
exchange transactions on the current account of the balance of payments. Second, in 1993, the
Bangkok International Banking Facility (“BIBF”) was created to operate as an offshore
banking facility, bringing together foreign lenders with Thai institutional and corporate
borrowers.14 The BIBF could offer special licenses to resident banks to allow them to borrow
on international financial markets and lend in foreign currencies both to Thai residents and to
foreigners. These BIBF licenses offered favourable regulatory and tax privileges.15

In 1993, the World Bank praised Thailand for the openness of its economy. In 1994, total
foreign borrowings of Thai resident banks reached US$21.8 billion, almost 40 times as much
as in 1989. Taking advantage of further liberalisation moves, Thai companies raised a further
US$4 billion directly from overseas lenders in 1994.16 The difference in interest rates between
the baht and, particularly, the US dollar was a major incentive to borrow abroad and in
foreign currencies. Thai banks and companies found it easy to borrow because foreign lenders
viewed Thailand as “an economic tiger, a model of the newly-emerging industrialised
economy”. 17 This view was reinforced by the World Bank, which declared in 1995 that
Thailand had marked 10 full years as the world’s best-performing economy in terms of real
economic growth.18

A major source of funds, similar to the case of FDI, was Japan, where lenders had a major
incentive to lend abroad. The long period of deflation that followed the bursting of Japan’s
property and stock bubble of the 1980s had left Japanese banks with few domestic lending
opportunities. In addition, Japan’s low interest rates, which had been reduced almost to zero
in an attempt to rescue ailing banks and borrowers, provided opportunities to borrow in yen
and lend at higher rates in other currencies.

However, the increasing capital inflows to Thailand raised inflation. In response, the Bank of
Thailand raised the already-high local interest rates but, with the fixed exchange rate, this
only led to further capital inflows. Inflation was also fed through to asset prices, especially the
prices of stocks and property. 19 Thailand’s property market, which had been rising since the

14
Laird, J. (2001) Money Politics, Globalisation, and Crisis—The Case of Thailand, Graham Brash: Singapore, p. 90.
15
Thailand Development Research Institute (December 1999) “Financial Reforms in Thailand”, TDRI Quarterly Review, 14(4),
p. 6.
16
Phongpaichit, P. and Baker, C. (1996) Thailand’s Boom, Silkworm Books: Chiang Mai, p. 40.
17
Laird, J. (2001) Money Politics, Globalisation, and Crisis—The Case of Thailand, Graham Brash: Singapore, p. 96.
18
World Bank (February 1994) “Thailand—Country Economic Report: Mitigating Pollution and Congestion Impacts in a High-
Growth Economy”, p. 1.
19
Laird, J. (2001) Money Politics, Globalisation, and Crisis—The Case of Thailand, Graham Brash: Singapore, pp. 95–97.

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 09/407C Thailand: An Imbalance of Payments

late 1980s with the economic boom, accelerated in the 1990s with the increased availability of
finance. By mid-1996, banks and finance companies had outstanding loans of US$34 billion
to the property sector, largely secured against the collateral value of the land and property
involved.20 Foreign loans, often with short-term maturities, provided capital for local banks,
finance houses and corporations to finance increasingly grandiose property schemes, and
contributed to supply overshooting demand.21

Chill Winds of the Mid-1990s

While the real-estate sector was forging ahead, Thailand’s merchandise exports were starting
to stall. By mid-1996, the yen had depreciated by half against the US dollar as Japan’s
recession showed no signs of improvement. Thailand’s export-price competitiveness, already
under threat from rising wages and Asian competition, declined as the baht followed the
dollar’s rise against the yen. In 1996, export growth slipped to close to zero [see Exhibit 3].
In the previous year, the current-account deficit had once again breached 8% as it had in 1990,
but on both occasions the existence of ample foreign-exchange reserves and the pronounced
growth in exports had allowed the economy to survive without loss of international
confidence. Even the 30% increase in imports in 1995, largely attributable to Thai
consumption of luxury goods, together with international currency concerns sparked by the
Mexican peso crisis, had had no significant impact.

However, the collapse in export growth in 1996 raised international concerns and sparked a
debate about exchange rate policy. In June, the IMF urged Thailand’s policymakers to
devalue the baht and adopt a more flexible exchange-rate system.22 But devaluation would
have been controversial; export industries would benefit whilst banks and firms with foreign
currency debts would suffer. The result was that the peg remained at its 1984 level of THB 25
to the US dollar.

Prominent among the debtors were property companies, developers and finance companies
that were exposed to the property sector. These firms also faced problems as supply began to
outstrip demand. 23 In early February 1997, one of Thailand's largest property developers,
Somprasong Land, defaulted on interest payments of US$3.1 million in a US$80 million loan.

Shortly after, debt-related problems also began to appear in the manufacturing sector when
Alphatec Electronics, a diversified electronics and communications group with registered
capital of US$440 million, halted payments on its US$450 million of debt. The company had
borrowed heavily from major lenders such as the prestigious government-owned Industrial
Finance Corporation and prominent commercial banks such as Krung Thai and Bangkok
Bank. With the default, however, creditors demanded an independent audit, which revealed
that the group had artificially inflated net earnings between 1994 and 1997 by US$400
million, when it had actually made significant losses.

More ominously, rumours began to circulate that the country’s largest finance company,
Finance One, was in trouble. Pin Chakkaphak, the company's managing director, an MBA
graduate of the Wharton School of Business and president of the Association of Finance
Companies, publicly denied that the company was facing any financial difficulty. Fearing a
wide-ranging impact if the problems were to escalate, the Bank of Thailand took preventative
measures. The Bank’s Financial Institutions Development Fund (“FIDF”) lent the company
20
Yap, K.S. and Sakchai, K. (January 2000) “Once Only the Sky Was the Limit: Bangkok’s Housing Boom and the Financial
Crisis in Thailand”, Housing Studies, Harlow, UK.
21
Laird, J. (2001) Money Politics, Globalisation, and Crisis—The Case of Thailand, Graham Brash: Singapore, p. 96.
22
The Economist (24 May 1997) “The Baht Spills Over”.
23
Yap, K.S. and Sakchai, K. (January 2000) “Once Only the Sky was the Limit: Bangkok’s Housing Boom and the Financial
Crisis in Thailand”, Housing Studies: Harlow, UK.

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 09/407C Thailand: An Imbalance of Payments

over US$1.4 billion and proposed a merger between Finance One and a small local bank, Thai
Danu. Unfortunately, Finance One was not alone. By March, the FIDF had been forced to
lend over US$8 billion to struggling financial institutions.

Despite the government’s efforts, in a matter of months the planned merger of Finance One
and Thai Danu collapsed, raising fears that the whole financial system could be put at risk.
According to the London Financial Times:

Partly this was due to the extent of the problems within the system, problems
for which Finance One stood as a striking example. Nearly two-thirds of the
company's loans were in three problem areas—property, hire purchase and
stock margin lending. As interest rates rose and the economy slowed,
Finance One’s non-performing loans doubled in 1996.

Meanwhile, the terms of Finance One’s assets and liabilities were the most
mismatched of any of the top 10 finance companies. It held substantial stakes
in several smaller finance and securities companies which themselves were
even more vulnerable to the dual pressures of high interest rates and a falling
stock market. There was little surprise when Thai Danu walked away from
the deal.24
- London Financial Times

Currency Pressures
Despite the IMF’s advice to introduce greater exchange-rate flexibility, the Thai government
ignored the IMF’s pleas. This was in spite of speculative attacks on the currency which, in
early February, had forced the Bank of Thailand to spend US$7.8 billion to defend the fixed
rate. On 8 May 1997, the speculators attacked again.25

The following day, the Bank of Thailand issued a firm statement denying plans to bring
changes to the exchange-rate system. A week later, a raft of defensive measures were
announced. The bank tightened foreign-exchange controls and denied offshore speculators’
access to local sources of baht. Domestic banks were not allowed to lend or sell baht to
foreign investors suspected of speculation. Banks were also advised not to purchase baht-
denominated commercial paper outside Thailand. To deter speculation, interest rates for
offshore borrowers were pushed up to more than 1,300%. 26 The central banks in Asia,
including those of Singapore and Japan, also assisted the Bank of Thailand in stabilising the
baht in the foreign exchange market.27 In June 1997, new rules were introduced to prevent
speculators from obtaining baht through the disposal of Thai equities.

The Bank of Thailand raised interest rates and intervened in the forward market by buying
forward foreign-exchange contracts for baht at maturities of three, six, nine or 12 months.28
Some observers were concerned that, while Thailand might appear to have ample foreign
exchange reserves, this practice meant that much of those were committed to be sold during
the next year to close the forward contracts. Thus Thailand’s net reserves, after accounting for
the forward contract commitments, could decrease to a precarious level in the short term.

24
Bardacke, T. (12 January 1998) “The Day the Miracle Came to an End”, Financial Times.
25
Laird, J. (2001) Money Politics, Globalisation, and Crisis—The Case of Thailand, Graham Brash: Singapore, pp. 92–93.
26
The Economist (17 May 1997) “Thailand’s Economy: Feeling the Heat”.
27
Gabriel, A. (17 May 1997) “Regional Bourses, Currencies Rebound”, Business Times (Malaysia).
28
Laird, J. (2001) Money Politics, Globalisation, and Crisis—The Case of Thailand, Graham Brash: Singapore, p. 95.

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 09/407C Thailand: An Imbalance of Payments

Less than two weeks later, Michel Camdessus, managing director of the IMF, wrote to
Amnuay, Chavalit’s finance minister, urging him to follow the fund’s earlier
recommendations and to devalue the baht by 10% to 15%. Amnuay, a staunch defender of the
baht, rejected the recommendations. The IMF, despite not being informed of the actual levels
of foreign reserves held by the Thai government, sent a much more strongly worded letter to
the prime minister warning that a shift in exchange regime was overdue and any
postponement would guarantee substantial erosion of the reserves. 29 On 19 June 1997,
Amnuay tendered his resignation to the prime minister.30

The following day, Thanong, the former president of Thai Military Bank, was appointed
finance minister. Chavalit still insisted that the government would not consider a devaluation
of the baht.

However, only days after taking up the post, Thanong realised he faced a critical decision. On
25 June 1997, he confirmed that the Bank of Thailand had no liquid foreign exchange
reserves to maintain the fixed exchange rate. Thailand’s outstanding swap contracts due to
mature over the next 12 months had reached US$23.4 billion. The bank’s governor,
Rerngchai, and his strategists had little understanding of the implications of the foreign-
exchange swap contracts they accumulated as a smokescreen to conceal the bank’s dwindling
reserves in defence of the baht.31

As he pondered his options, Thanong realised that any change to the fixed exchange rate
would generate intense political opposition. Thus perhaps it would be better to maintain the
status quo, but how? And if there was to be a change, what form should it take and what
would be the consequences?

29
Ibid., p. 94.
30
Drummond, A. (20 June 1997) “Thai Economy in Disarray as Finance ‘Dream Team’ Quits”, The Times.
31
Laird, J. (2001) Money Politics, Globalisation, and Crisis—The Case of Thailand, Graham Brash: Singapore, p. 95.

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 09/407C Thailand: An Imbalance of Payments

EXHIBIT 1: MAP OF THAILAND

Source: The University of Texas at Austin (2008) Perry- Castañeda Library Map Collection, Thailand
Maps, http://www.lib.utexas.edu/maps/thailand.html (accessed 5 November 2008).

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 09/407C Thailand: An Imbalance of Payments

EXHIBIT 2A: GROSS DOMESTIC PRODUCT OF THAILAND (1981–1996)

At current prices, US$ m, calendar 1981 1985 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
year
GDP by Industrial Origin 38,018 42,260 51,997 62,392 74,280 87,342 100,265 113,237 126,810 145,232 167,557 183,932
Agriculture 8,120 6,681 8,181 10,094 11,198 10,917 12,683 13,925 13,195 15,609 18,567 20,294
Mining 560 1,038 889 1,064 1,275 1,393 1,575 1,692 1,770 1,946 2,019 2,492
Manufacturing 8,607 9,264 12,612 16,121 19,869 23,760 28,316 31,159 35,695 40,682 47,202 52,231
Electricity, gas and water 541 998 1,331 1,412 1,699 1,910 2,138 2,620 3,030 3,380 3,970 4,262
Construction 1,735 2,156 2,506 2,978 4,085 5,449 6,731 7,621 8,831 10,688 12,167 13,638
Trade 6,930 7,752 8,925 10,650 12,393 15,451 17,078 19,081 21,236 23,947 27,216 28,500
Transport and communications 2,082 3,123 3,974 4,664 5,523 6,263 7,090 8,209 9,510 10,772 12,193 13,493
Finance 1,092 1,411 1,999 2,649 3,387 4,822 5,354 7,287 9,288 11,289 12,648 13,931
Public administration 1,668 1,947 2,109 2,260 2,585 3,062 3,477 4,216 4,707 5,101 6,186 6,714
Others 6,683 7,889 9,471 10,500 12,267 14,314 15,823 17,426 19,548 21,817 25,389 28,377
Net factor income from abroad -602 -704 -896 -991 -947 -1,098 -1,476 -2,518 -2,453 -2,883 -3,498 -4,918
GNP 37,416 41,556 51,101 61,401 73,333 86,244 98,790 110,718 124,357 142,349 164,059 179,013

Expenditure on GDP 38,018 42,260 51,997 62,392 74,280 87,342 100,265 113,237 126,810 145,232 167,557 183,932
Private consumption 24,821 26,295 31,243 35,400 41,223 49,399 55,122 62,020 69,294 78,845 89,604 100,142
Government consumption 4,850 5,717 5,889 6,268 7,072 8,214 9,245 11,208 12,639 14,175 16,521 18,704
Gross fixed capital formation 10,641 11,480 14,371 19,141 25,715 35,271 41,742 44,451 50,117 58,115 68,922 75,542
Increase in stocks 641 456 123 1,193 332 849 1,213 802 532 370 791 1,219

Sep 2021 to Mar 2022.

Exports of goods and services 6,916 9,810 15,024 20,597 25,940 29,811 36,060 41,862 47,954 56,335 69,953 72,241
Less: Imports of goods and services 11,451 10,963 14,733 21,464 27,844 36,378 42,620 46,407 52,705 62,714 80,443 82,979

Per Capita GDP (in baht) 797 819 973 1,148 1,345 1,564 1,772 1,976 2,186 2,474 2,821 3,065
Note: US$1 = THB 20 in 1981; US$1 = THB 25 from 1985 onwards.

Source: Asian Development Bank (1999) “Country Data—Thailand, December 1999”.

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EXHIBIT 2B: GROSS DOMESTIC PRODUCT OF THAILAND (1981–1996)

At constant 1988 prices, US$ m, 1981 1985 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
calendar year
GDP by Industrial Origin 38,708 47,650 55,074 62,392 69,998 77,815 84,474 91,303 98,957 107,802 117,327 123,802
Agriculture 7,761 9,093 9,134 10,094 11,063 10,544 11,310 11,851 11,692 12,315 12,623 13,106
Mining 333 862 964 1,064 1,129 1,242 1,443 1,518 1,631 1,749 1,787 2,092
Manufacturing 8,972 10,725 13,670 16,121 18,705 21,637 24,173 26,905 29,918 32,709 36,373 38,897
Electricity, gas and water 701 1,078 1,253 1,412 1,690 1,874 2,070 2,285 2,490 2,757 3,161 3,310
Construction 1,788 2,371 2,642 2,978 3,822 4,664 5,300 5,548 6,028 6,882 7,399 7,841
Trade 7,115 7,897 9,194 10,650 11,877 13,524 14,505 15,147 16,335 17,783 19,664 19,916
Transport and communications 2,409 3,437 4,023 4,664 5,150 5,872 6,306 6,911 7,657 8,520 9,544 10,511
Finance 1,077 1,526 2,073 2,649 3,217 4,324 4,541 5,937 7,324 8,469 8,969 9,328
Public administration 1,658 2,037 2,149 2,260 2,291 2,455 2,610 2,647 2,725 2,805 3,040 3,103
Others 6,895 8,624 9,963 10,500 11,053 11,678 12,216 12,554 13,158 13,813 14,774 15,697
Net factor income from abroad -371 -751 -932 -991 -886 -947 -1,187 -1,994 -1,852 -2,018 -2,184 -2,884
GNP 38,337 46,899 54,141 61,401 69,112 76,868 83,288 89,309 97,105 105,784 115,143 120,917

Expenditure on GDP 38,708 47,650 55,074 62,392 69,998 77,815 84,474 91,303 98,957 107,802 117,327 123,802
Private consumption 24,822 28,928 32,551 35,400 39,367 44,437 46,847 50,921 55,215 59,631 64,037 68,093
Government consumption 4,916 6,050 6,025 6,268 6,433 6,878 7,304 7,771 8,168 8,838 9,313 10,198
Gross fixed capital formation 11,487 13,346 15,696 19,141 23,453 30,395 34,249 36,522 39,910 44,539 49,514 52,463
Increase in stocks 497 489 71 1,193 337 826 1,138 712 510 357 886 648

Sep 2021 to Mar 2022.

Exports of goods and services 8,525 11,521 16,196 20,597 25,033 28,386 32,684 37,196 41,934 47,896 55,314 54,339
Less: Imports of goods and services 10,909 11,623 15,379 21,464 26,098 32,279 36,456 39,725 44,404 50,773 61,289 60,763
Note: US$1 = THB 25 in 1988.

Source: Asian Development Bank (1999) “Country Data—Thailand, December 1999”.

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EXHIBIT 3: THAILAND’S EXPORTS AND IMPORTS BY STANDARD INTERNATIONAL TRADE CLASSIFICATION SECTIONS (1981–1996)

US$ m, calendar year 1981 1985 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
Total Exports 7,650 7,735 11,994 16,143 20,653 23,593 29,025 32,986 37,434 45,504 56,252 56,484
Food and live animals 4,002 3,463 4,374 5,503 6,939 6,652 7,681 8,438 8,063 9,420 10,723 10,974
Beverage and tobacco 88 66 57 65 71 92 136 180 154 166 143 213
Crude materials excl. fuels 836 784 1,070 1,426 1,413 1,354 1,479 1,621 1,613 2,247 3,253 3,279
Mineral fuels etc. 2 98 84 123 148 196 289 324 386 340 359 884
Animal, vegetable oil and fats 12 23 12 7 6 7 7 7 7 22 20 14
Chemicals 60 98 181 194 258 333 560 608 816 967 1,720 1,548
Basic manufactures 1,347 1,434 2,350 3,075 3,743 4,326 4,835 5,446 7,103 7,584 10,174 9,003
Machines, transport equipment 383 679 1,421 2,552 3,672 5,237 7,028 8,805 11,245 15,231 19,022 21,470
Misc. manufactured goods 587 961 2,311 3,039 4,108 5,050 6,566 7,139 7,598 9,095 10,232 8,298
Unclassified goods 133 57 104 111 249 279 352 361 379 348 512 698
Re-exports 202 70 31 50 45 66 93 57 70 83 95 104

Total Imports 10,837 10,047 13,368 20,525 26,507 33,778 38,353 41,330 46,664 54,761 70,543 73,313
Food and live animals 290 378 558 962 1,200 1,342 1,677 1,793 1,695 1,816 2,055 2,267
Beverage and tobacco 79 90 61 105 141 219 225 215 245 242 262 284
Crude materials excl. fuels 665 660 987 1,384 1,806 2,162 2,374 2,632 2,810 3,137 3,793 3,731
Mineral fuels etc. 3,255 2,269 1,767 1,553 2,393 3,134 3,506 3,350 3,458 3,665 4,610 6,295
Animal, vegetable oil and fats 45 20 7 19 27 25 27 39 43 50 72 73
Chemicals 1,338 1,407 2,035 2,546 2,968 3,424 3,534 4,173 4,558 541 7,130 6,884

Sep 2021 to Mar 2022.

Basic manufactures 1,726 1,685 2,615 4,341 5,992 7,476 9,279 8,975 9,550 11,011 14,536 13,661
Machines, transport equipment 2,719 2,822 4,346 8,166 10,040 13,930 15,529 17,628 21,444 26,408 34,561 35,819
Misc. manufactured goods 545 562 674 958 1,162 991 1,147 1,230 1,482 1,544 1,846 2,024
Unclassified goods 176 155 318 490 779 1,074 1,056 1,294 1,379 1,468 1,679 2,276

Total Trade Balance -3,187 -2,312 -1,374 -4,382 -5,855 -10,185 -9,328 -8,344 -9,229 -9,257 -14,291 -16,829
Note: US$1 = 20 baht in 1981; US$1 = 25 baht from 1985 onwards.

Source: Asian Development Bank (1999) “Country Data—Thailand, December 1999”.

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 09/407C Thailand: An Imbalance of Payments

EXHIBIT 4A: THAILAND’S BALANCE OF PAYMENTS (1981–1989)

US$ m, calendar year 1981 1985 1987 1988 1989

Current account balance -2,569 -1,525 -303 -1,520 -2,395
Merchandise trade balance -2,030 -1,333 -367 -1,957 -2,812
Merchandise exports, fob 6,902 7,077 11,609 15,855 19,939
Merchandise imports, cif -8,932 -8,410 -11,976 -17,812 -22,751
Other goods services and income -708 -358 -161 201 171
Unrequited transfers 169 166 225 236 246

Capital account balance 2,472 1,320 1,083 3,728 5,652

Direct investment 287 159 182 1,080 1,731
Portfolio investment 45 141 499 447 1,429
Other long-term capital 2,020 1,326 -61 -167 1,159
Other short-term capital 120 227 224 1,518 1,630
Deposit Money Banks … -533 239 850 -297

Net errors and omissions 143 133 154 246 734

Overall balance 46 -72 934 2,454 3,991

Change in reserves -46 72 -934 -2,454 -3,991

Source: Asian Development Bank (1999) “Country Data—Thailand, December 1999”.

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EXHIBIT 4B: THAILAND’S BALANCE OF PAYMENTS (1990–1996)

In US$ million 1990 1991 1992 1993 1994 1995 1996 1997
A. Current account -7,281 -7,571 -6,303 -6,364 -8,085 -13,554 -14,691 -3,024
Goods: exports, fob 22,810 28,232 32,099 36,398 44,478 55,447 54,408 56,652
Goods: imports, cif -29,561 -34,221 -36,260 -40,694 -48,204 -63,415 -63,897 -55,100
Balance on goods -6,751 -5,989 -4,161 -4,296 -3,726 -7,968 -9,489 1,552
Services: credit 6,419 7,272 9,288 11,059 11,640 14,845 17,007 15,763
Services: debit -6,309 -8,040 -10,368 -12,469 -15,396 -18,804 -19,585 -17,337
Balance on goods and services -6,641 -6,757 -5,241 -5,706 -7,482 -11,927 -12,067 -22
Income: credit 2,059 2,254 1,532 2,140 2,562 3,801 3,969 3,742
Income: debit -2,913 -3,329 -3,240 -3,546 -4,292 -5,915 -7,354 -7,223
Balance on goods, services, & income -7,495 -7,832 -6,949 -7,112 -9,212 -14,041 -15,452 -3,503
Current transfer: credit 278 411 1,000 1,222 1,901 1,190 1,651 1,392
Current transfer: debit -65 -150 -355 -473 -774 -704 -891 -913
Total, Group A -7,282 -7,571 -6,303 -6,364 -8,085 -13,554 -14,691 -3,024

B. Capital (financial) account 9,098 11,759 9,475 10,500 12,167 21,909 19,486 -15,811
Direct investment abroad -140 -167 -147 -233 -493 -886 -931 -401
Direct investment in Thailand 2,444 2,014 2,113 1,804 1,366 2,068 2,336 3,745
Portfolio investment assets -5 -2 -41 -446
Equity securities -5 -2 -41 -446
Debt securities
Portfolio investment liabilities -38 -81 924 5,455 2,486 4,083 3,585 4,807
Equity securities 440 37 455 2,679 -389 2,123 1,164 3,899
Debt securities -478 -118 469 2,776 2,875 1,960 2,421 908
Other investment assets -163 352 104 -3,265 -1,027 -2,738 2,661 -1,228
Monetary authorities
General government -220 247
Banks 104 -3,265 -1,027 -2,737 2,741 -1,281
Other sectors 57 105 -1 -80 53
Other investment liabilities 6,997 9,642 6,480 6,739 9,839 19,382 11,876 -22,242
Monetary authorities -9,438
General government -999 9 -611 -464 -705 46 -58 524
Banks 1,027 213 1,758 6,589 14,295 13,218 2,909 -3,608
Other sectors 6,969 9,420 5,333 614 -3,751 6,118 9,025 -9,720
Total, Groups A and B 1,817 4,188 3,172 4,136 4,082 8,355 4,795 -18,835

C. Net errors and omissions 1,419 431 -142 -230 87 -1,196 -2,627 584
Total, Groups A, B, and C 3,235 4,619 3,029 3,907 4,169 7,159 2,167 -18,250

D. Reserves and related items -3,235 -4,619 -3,029 -3,907 -4,169 -7,159 -2,167 18,250
Reserve assets -2,961 -4,618 -3,029 -3,907 -4,169 -7,159 -2,167 9,900
Use of Fund credit and loans -274 -1 2,437
Exceptional financing 5,913

GDP of Thailand at current prices 85,345 98,234 111,453 125,573 144,525 168,356 185,045 149,072
in million US$

Source: IMF (1998) “IMF Balance of Payment Statistics Yearbook 1998”, p. 578.

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 09/407C Thailand: An Imbalance of Payments

EXHIBIT 4C: THAILAND’S BALANCE OF PAYMENTS (Q1–Q2 1997)

In US$ million 1997

Q1 Q2
Exports (f.o.b.) 13,647 13,670
Imports (c.i.f.) -16,820 -16,754
Trade balance -3,173 -3,084
Net services income & transfers 1,072 -50
Current account balance -2,101 -3,134
Capital and financial account 3,038 -1,736
Monetary authorities 1,362 -325
Government -73 568
Bank 2,425 -717
Others -676 -1,262
Net errors & omissions -1,029 -1,025
Overall balance -92 -5,895
Change in foreign reserves 92 5,895

Source: Bank of Thailand (2008) “Table 52: Balance of Payments (Summary) (US$)”,
http://www.bot.or.th/BoThomepage/databank/EconData/EconFinance/Download/Tab
52.xls (accessed 15 April 2008).

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EXHIBIT 5: GOVERNMENT BUDGET OF THAILAND (1981–1996)

At current market prices, US$ m 1981 1985 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
Current surplus/deficit 329 -251 854 2,585 4,039 6,498 7,156 7,369 8,707 11,898 13,692 14,157
Current revenue 5,592 6,426 8,081 10,327 13,086 16,466 18,504 20,453 22,999 27,213 31,091 34,128
Taxes 5,045 5,798 7,428 9,670 12,082 15,430 17,089 18,263 20,882 24,776 28,444 31,271
Non-taxes 547 628 653 657 1,004 1,036 1,416 2,190 2,117 2,437 2,648 2,857
Current expenditure 5,263 6,677 7,227 7,742 9,047 9,968 11,349 13,084 14,292 15,316 17,400 19,971
Capital account surplus/deficit -1,409 -1,324 -1,253 -1,182 -1,505 -2,211 -3,141 -4,621 -6,551 -7,853 -8,309 -12,792
Capital receipts
Capital expenditure 1,409 1,324 1,253 1,182 1,505 2,211 3,141 4,621 6,551 7,853 8,309 12,792
Overall surplus/deficit -1,061 -1,803 -222 1,463 2,429 4,220 4,308 2,912 2,389 3,895 5,050 1,732
Domestic borrowing 1,105 1,264 426 -1,153 -446 -475 -1,875 -1,145 -1,774 -2,355 -1,223 -1,005
Foreign borrowing -51 568 -131 -181 -248 -1,569 -151 -694 -174 -697 -194 -147
Use of cash balances 7 -28 -73 -128 -1,735 -2,177 -2,282 -1,074 -441 -843 -3,633 -581
Note: US$1 = THB 20 in 1981; US$1 = THB 25 from 1985 onwards.

Source: Asian Development Bank (1999) “Country Data—Thailand, December 1999”.

Sep 2021 to Mar 2022.

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EXHIBIT 6: DEBT OF THAILAND AT END OF YEAR (1981–1996)

US$ m 1981 1985 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
Total debt outstanding and 10,851 17,545 20,385 21,763 23,536 28,165 37,772 41,864 52,717 65,596 83,082 90,621
disbursed
Long-term 7,115 13,222 16,748 16,301 17,152 19,842 25,280 27,137 30,083 36,417 41,987 53,008
Public and publicly guaranteed LT 5,017 9,853 13,911 13,285 12,512 12,530 13,309 13,363 14,775 16,265 16,870 16,773
Private non-guaranteed LT 2,098 3,369 2,837 3,016 4,639 7,311 11,970 13,774 15,307 20,151 25,117 36,235
Short-term 2,878 3,200 2,664 4,800 6,112 8,322 12,492 14,726 22,634 29,178 41,095 37,613
Use of IMF credit 858 1,211 972 662 272 0 - - - - - -

Source: Asian Development Bank (1999) “Country Data—Thailand, December 1999”.

EXHIBIT 7: MONETARY INDICATORS OF THAILAND (1981–1996)

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

Sep 2021 to Mar 2022.

Money Supply (M1) in billion baht 73.9 85.9 132.4 148.5 174.7 195.4 222.4 249.7 296.2 346.4 388.3 423.7
Money Supply (M2) in billion baht 292.9 593.5 808.6 956.1 1,207.1 1,529.1 1,832.4 2,117.8 2,507.1 2,829.4 3,310.6 3,726.6
Exchange Rate (baht per US$1)* 21.82 27.15 25.72 25.29 25.70 25.58 25.51 25.40 25.31 25.15 24.91 25.34
Interest Rate (Interbank)* 19.00% 17.50% 15.00% 15.00% 15.00% 19.00% 19.00% 16.25% 14.50% 14.38% 16.25% 15.25%

US Fed Funds Rates 16.38% 8.10% 6.66% 7.57% 9.22% 8.10% 5.69% 3.52% 3.02% 4.20% 5.84% 5.30%
Note: *Averages over the period.

Source: Compiled from Asian Development Bank (1999) “Country Data – Thailand, December 1999”.

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EXHIBIT 8: THAILAND STOCK EXCHANGE INDEX (JANUARY 1985–JUNE 1997)

1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
Jan 85
Jul 85
Jan 86
Jul 86
Jan 87
Jul 87
Jan 88
Jul 88
Jan 89
Jul 89
Jan 90
Jul 90
Jan 91
Jul 91
Jan 92
Jul 92
Jan 93
Jul 93
Jan 94
Jul 94
Jan 95
Jul 95
Jan 96
Jul 96
Jan 97
Source: Compiled from CEIC Database, October 2000.

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