Thailand: an Imbalance of

Payments

Abinash Mishra
B23005

11/26/2023
1. Case Background

Amidst Thailand's remarkable economic growth in the mid-1980s, a series of warning signs emerged,
signalling impending financial turmoil. Thailand's once-vibrant economy began to exhibit symptoms
of distress, including rising corporate debt levels, a strained banking sector, and a deteriorating
balance of payments. These economic woes were further exacerbated by political instability, with
frequent changes in government hindering effective policymaking.
The depletion of Thailand's foreign exchange reserves, the cornerstone of its fixed exchange rate
policy, proved the tipping point. This depletion rendered the country vulnerable to currency
speculation and threatened its ability to defend the baht's value. The situation was compounded by the
resignation of Finance Minister Amnuay Viravan, a staunch proponent of the fixed exchange rate,
further fueling investor uncertainty.
Thailand's economic crisis was particularly significant given its position as a rising star in the Asian
economy. The country's rapid growth had earned it the moniker "Asian tiger," and its prospects
seemed bright. However, the underlying vulnerabilities exposed by the crisis cast a shadow over
Thailand's economic trajectory and raised concerns about the sustainability of its growth model.
The political backdrop of Thailand's economic turmoil added another layer of complexity to the
situation. Frequent government changes and political instability undermined investor confidence and
hampered the implementation of effective economic reforms. The political landscape was further
complicated by allegations of corruption and cronyism, which eroded public trust in the government's
ability to manage the crisis.
Thailand's balance of payments crisis, marked by the depletion of foreign exchange reserves,
mounting corporate debt, and political instability, posed a severe challenge to the country's economic
future. The decision by the new Finance Minister, Thanong Bidaya, to abandon the fixed exchange
rate would have profound consequences for Thailand's economy and its reputation as an emerging
Asian power, as we shall see in the report later on.

2. Three critical Issues and challenges discussed:

The three most critical issues observed in Thailand: an Imbalance of Payments

1. Fixed Exchange Rate System and Currency Crisis: One of the primary issues was
Thailand's adherence to a fixed exchange rate system, pegging the Thai baht to the US dollar.
This fixed exchange rate made the country vulnerable to speculative attacks and led to a
severe currency crisis when market forces undermined confidence in the baht. The lack of
flexibility in the exchange rate regime aggravated the economic situation, resulting in a
depletion of foreign exchange reserves and making it challenging for the country to maintain
the peg.
2. Overreliance on Short-Term Foreign Borrowing and Debt Levels: Thailand's heavy
reliance on short-term foreign borrowing and high debt levels by financial institutions and
businesses was a significant challenge. The case study highlighted how this reliance exposed
the country to substantial risks when market sentiments shifted or when faced with sudden
currency devaluations. Excessive foreign borrowing contributed to financial vulnerabilities,
leading to a crisis in the financial sector and overall economic instability.
3. Structural Economic Imbalances and Vulnerabilities: The case study illustrated how
Thailand faced structural imbalances in its economy. While the country experienced rapid
 economic growth, there were underlying vulnerabilities, including trade imbalances, asset
price bubbles (particularly in the real estate sector), rising inflation, and a lack of
competitiveness in specific industries. These structural weaknesses were exacerbated by a
fixed exchange rate policy that hampered the country's ability to address these issues
effectively.

These critical issues and challenges intertwined to create a complex economic situation in Thailand,
leading to the imbalance of payments crisis in the late 1990s. The case study emphasises the
importance of understanding the vulnerabilities of fixed exchange rate systems, managing debt levels,
addressing structural economic weaknesses, and implementing prudent economic policies to maintain
stability and resilience in the face of external shocks.
3. Case Analysis and Interpretation

Thailand: Historical Context and Economic Development

Thailand's historical trajectory has significantly shaped its economic development path. The nation
transitioned from an absolute monarchy to a constitutional government in 1932, with the military
playing a dominant role for decades. Diplomatic ties with the US and China contributed to economic
growth during the Cold War era.

Following a period of US military presence and economic aid, Thailand embraced a more democratic
model with the election of Prime Minister Kukrit Pramoj in 1975. In subsequent decades, we
witnessed a mixed political landscape with both democratic and military rule, along with ongoing
economic liberalisation efforts.

These historical events laid the groundwork for Thailand's economic boom in the 1980s. The country
evolved from an agrarian society to a thriving market economy, spurred by factors such as:

 Monarchy and Buddhism: The stability associated with these institutions fostered a conducive
environment for growth.
 Evolving political landscape: The shift towards democratic governance attracted foreign
investment and fostered economic reforms.
 Foreign relations: Strategic alliances with the US and China, followed by regional trade
agreements like ASEAN, opened new markets for Thai goods and services.
 Economic liberalisation: Policies implemented by various governments, particularly those led
by Anand Punyarachun, deregulated financial markets and fostered a more open economy.

Understanding this historical context is crucial for a comprehensive analysis of Thailand's economic
crisis in the late 1990s. The interplay between political developments, social structures, and economic
policies shaped the country's trajectory, ultimately leading to the financial vulnerabilities that
triggered the crisis.
Economic Development of Thailand (1850s to Early 1980s)

For centuries before the Second World War, agriculture was the backbone of the Thai economy.
However, in the mid-1850s, when the country opened up to international trade, agricultural
products became Thailand’s predominant export. These exports mainly comprised rice, teak, and
rubber. During the early post-war period, agriculture dominated, representing around 80% of
Thailand’s exports[1].

The transformation of Thailand’s economy began in the 1960s, influenced in part by US foreign
policy driven by military and strategic concerns in Asia. Local banks and industrial conglomerates,
often linked to immigrant Chinese families and military factions, expanded rapidly. US aid played a
significant role in this growth[1].

However, the US withdrawal from the region in the mid-1970s and the quadrupling of oil prices in
1973 slowed economic growth—the government’s import substitution policy in manufacturing since
the 1950s left few industries internationally competitive. Rising exchange and interest rates
exacerbated the situation. The baht had been pegged to the US dollar for stability in foreign trade.
But when the Bretton Woods era ended in 1973, the baht remained fixed to the dollar. 1980, the US
raised interest rates dramatically, affecting Thailand’s currency. Meanwhile, oil prices remained high
due to OPEC’s second oil shock 1979, impacting Thailand’s oil import bill. By 1981, the current
account deficit rose to 5% of GDP, and the government’s debt service soared [1].

In 1984, Thailand faced a significant recession due to crises in the balance of payments and the
banking sector. The government turned to US-trained technocrats, advocating export-oriented
industrialisation to replace import substitution policies. The baht underwent a traumatic devaluation,
falling from THB 20 to THB 25 against the US dollar. Previously protected from foreign competition,
Thai banks [1].

Economic Expansion: The Late 1980s

Starting in 1985, Thailand’s economy turned around, experiencing double-digit growth rates within
18 months. Foreign direct investment (FDI) and manufactured exports played a crucial role. Japan
became the dominant investor, pouring US$47 billion into offshore manufacturing plants across Asia.
This created a regional production network based on an intraregional division of labour. As FDI
flowed into manufacturing, local investors followed suit, leading to a surge in manufacturing
exports[1].

The 1985 Plaza Agreement also influenced Thailand’s economic expansion. The US dollar
realignment corrected imbalances, and the yen soared against the dollar and the baht. Annual FDI
inflows multiplied more than tenfold. Labor-intensive industries expanded, attracting domestic
investors. By 1987, manufactured exports had overtaken agriculture. From 1985 to 1990, Thailand’s
GDP grew by over 60%. This remarkable performance elevated Thailand to an “Asian tiger”
alongside Malaysia, Indonesia, Hong Kong, Singapore, South Korea, and Taiwan[1].

In conclusion, Thailand’s journey from an agrarian economy to an industrial powerhouse exemplifies

its transformation into an Asian tiger economy fueled by strategic policies, foreign investment, and
export-oriented growth[1].
Financial Liberalisation: 1990s

To establish Thailand as a regional financial hub, the Anand administration, composed primarily of
technocrats and business people, initiated an economic liberalisation program in early 1991. This
program included changes to the foreign exchange system, with two significant milestones marking
its progress.

Firstly, Thailand complied with the IMF's request to eliminate all remaining restrictions on foreign
exchange transactions related to the current account of the balance of payments. Secondly, the
Bangkok International Banking Facility (BIBF) was established in 1993 as an offshore banking
facility connecting foreign lenders with Thai institutional and corporate borrowers. The BIBF offered
favourable regulatory and tax incentives to resident banks through special licenses, enabling them to
borrow in international financial markets and lend in foreign currencies to Thai residents and
foreigners.

The World Bank applauded Thailand's economic openness in 1993. This openness attracted
substantial foreign capital inflows, with total foreign borrowings by Thai resident banks reaching
US$21.8 billion in 1994, a nearly 40-fold increase from 1989. Taking advantage of further
liberalisation measures, Thai companies raised an additional US$4 billion directly from overseas
lenders in 1994.

The interest rate differential between the baht and, mainly, the US dollar served as a primary incentive
for foreign borrowing in foreign currencies. Thai banks and companies found it easy to borrow due to
Thailand's reputation as "an economic tiger, a model of the newly-emerging industrialised economy,"
a perception reinforced by the World Bank's declaration in 1995 that Thailand had achieved a decade
of unparalleled real economic growth, making it the world's best-performing economy.

Similar to the case of FDI, Japan emerged as a significant source of funds. Japanese lenders had a
strong incentive to lend abroad due to the prolonged deflation following the collapse of Japan's
property and stock bubble in the 1980s, which limited domestic lending opportunities. Additionally,
Japan's low-interest rates, reduced almost to zero to rescue ailing banks and borrowers, provided
opportunities to borrow in yen and lend at higher rates in other currencies.

However, these increasing capital inflows to Thailand fueled inflation. The Bank of Thailand raised
the already high local interest rates in response. However, this policy only attracted further capital
inflows under the fixed exchange rate regime. Asset prices, particularly stocks and property, were also
affected by inflation.

Thailand's property market, rising since the late 1980s with the economic boom, took off in the 1990s
due to increased access to finance. By mid-1996, banks and finance companies had outstanding loans
of US$34 billion to the property sector, primarily secured by the collateral value of the land and
property involved. Foreign loans, often with short-term maturities, provided capital for local banks,
finance houses, and corporations to finance increasingly ambitious property schemes, contributing to
a supply glut that outpaced demand.

The increase in foreign capital inflows, fueled by the financial liberalisation policies and the
perception of Thailand as an economic powerhouse, significantly affected the country's
economy. While it initially fueled economic growth, the fixed exchange rate regime and the easy
access to foreign capital led to asset bubbles, particularly in the property sector.
Beginning of the downturn

A convergence of multiple interrelated factors triggered the downturn in Thailand's economy during
the mid-1990s. While the real estate sector experienced buoyancy, the country encountered a notable
slowdown in merchandise exports. By mid-1996, the yen's significant depreciation against the US
dollar amidst Japan's enduring recession led to a loss of export-price competitiveness for Thailand.
The baht shadowed the dollar's ascent against the yen, diminishing Thailand's export advantage and
eventually resulting in nearly stagnant export growth. Despite the current account deficit breaching
8% in 1990 and 1995, Thailand's substantial foreign exchange reserves and robust export growth
acted as a buffer, maintaining international confidence. However, the sudden collapse in export
growth in 1996 incited global concerns, triggering debates on exchange rate policy. The IMF
recommended a devaluation of the baht and a shift towards a more flexible exchange-rate system; a
move resisted due to potential ramifications. While devaluation could favour export industries, it
would adversely affect banks and firms with foreign currency debts, leading to the retention of the peg
at THB 25 to the US dollar, constraining flexibility in the face of currency challenges.

The brewing crisis was not confined to export woes but extended to mounting challenges within the
property and debt markets. Key entities, including property companies, developers, and finance
institutions closely linked to the property sector, grappled with issues as supply exceeded demand.
Default incidents emerged, such as Somprasong Land's failure to meet interest payments, signalling
vulnerabilities in the property sector. Similarly, Alphatec Electronics, a substantial electronics
conglomerate, ceased payments on substantial debts, later exposed for inflating earnings to mask
significant losses. These financial woes extended to Finance One, Thailand's largest finance company,
prompting a denial from its managing director regarding financial difficulties. However, amidst
escalating concerns and fears of systemic risks, the Bank of Thailand intervened through the Financial
Institutions Development Fund (FIDF), lending over US$8 billion to troubled financial institutions by
March.

Thailand's predicament revealed a payment imbalance aggravated by multiple factors, including

growing non-performing loans driven by property, hire purchases and stock margin lending. Finance
One, emblematic of the systemic issues, witnessed a doubling of non-performing loans amidst rising
interest rates and a sluggish economy. The mismatched assets and liabilities of top finance
companies, coupled with stakes in vulnerable smaller entities, exacerbated vulnerabilities in the
financial system. The eventual collapse of the planned merger between Finance One and Thai Danu
underscored the systemic challenges faced by the financial sector, further exacerbating concerns about
the economy's stability and resilience.

What measures were taken by the Thai government of the day and learning from
it

In early February 1997, Thailand faced speculative attacks on its baht currency. This prompted the
Bank of Thailand to spend US$7.8 billion to defend the fixed exchange rate. The Bank of Thailand
responded by:

 Tightening foreign-exchange controls

 Denying offshore speculators access to local sources of baht
 Prohibiting domestic banks from lending or selling baht to foreign investors suspected of
speculation
  Advising domestic banks not to purchase baht-denominated commercial paper outside
Thailand
 Pushing up interest rates for offshore borrowers to more than 1,300%

These measures helped to stabilise the baht in the short term. However, they also had several negative
consequences, including:

 Increased speculation
 Higher borrowing costs for Thai businesses
 Reduced liquidity in the Thai financial system

Ensuing Problems

The Bank of Thailand's intervention also masked the true extent of Thailand's foreign exchange
reserves. The bank had been using forward contracts to buy baht in the future, meaning it had
committed to selling a significant amount of foreign exchange over the next year. This effectively
reduced Thailand's net reserves to a precarious level.

In June 1997, the IMF urged Thailand to devalue the baht by 10% to 15%. However, the Thai
government, led by Prime Minister Chavalit Yongchaiyudh, resisted the IMF's recommendations. The
IMF then sent a more strongly worded letter to the prime minister, warning that a devaluation was
necessary and that further delay would erode Thailand's foreign exchange reserves even further.

Post-June 25, 1997

On June 25, 1997, Finance Minister Thanong Bidaya announced that Thailand had no liquid foreign
exchange reserves to maintain the fixed exchange rate. This revelation forced the Thai government to
abandon the fixed exchange rate and allow the baht to float freely. The devaluation of the baht
triggered a sharp sell-off of baht-denominated assets, and the country's economy entered a full-blown
crisis.

The Thai economic crisis is a cautionary tale about the dangers of fixed exchange rate regimes.
When a country pegs its currency to another currency, it loses the ability to use monetary policy
to respond to economic shocks. This can lead to a buildup of imbalances, eventually triggering a
crisis. The crisis also underscores the importance of sound financial regulation. Financial
institutions taking excessive risks can put the entire financial system at risk.

Macro-economic Theory/Tools used in case analysis

Some of the critical macroeconomic tools and concepts that were discussed or could be relevant for
case analysis include:

 Real Exchange Rates (RER): The RER reflects the relative value of a country’s currency in
terms of purchasing power. It adjusts the nominal exchange rate for inflation differences
between two countries. In Thailand, understanding changes in the RER helps assess
competitiveness and trade dynamics.
  Nominal Exchange Rates: Nominal exchange rates represent the direct conversion rate
between two currencies. Monitoring fluctuations in the Thai Baht (THB) against other major
currencies is crucial for Thailand.
 Trade-Driven Inflation: Trade-driven inflation occurs when changes in exchange rates
impact import prices, affecting overall inflation. Analysing how exchange rate movements
influence import costs and consumer prices is essential in Thailand.
 Currency Pegging System: Historically, Thailand maintained a currency peg to stabilise the
THB against a specific foreign currency (e.g., the U.S. dollar). The 1997 Asian financial crisis
exposed vulnerabilities in this system, leading to speculative attacks on the THB.
 Floating Exchange Rate System: Post-crisis, Thailand shifted to a floating exchange rate
system, allowing market forces to determine the THB’s value. This flexibility enhances
resilience but exposes the currency to volatility.
 1985 Plaza Accords: The Plaza Accords were international agreements to depreciate the U.S.
dollar against major currencies, including the Japanese yen.
 Current Account Balance: Analyzing Thailand’s current account balance (exports minus
imports) sheds light on trade imbalances. Pre-crisis deficits and post-crisis surpluses impacted
the THB’s stability.
 External Debt and Reserves: Monitoring external debt levels (relative to foreign reserves) is
crucial. Thailand faced challenges due to high short-term external debt during the 1997 crisis.
 Fiscal and Monetary Policies: Assessing Thailand’s fiscal stimulus and monetary policy
responses during crises provides insights into economic management.
 Structural Reforms: Thailand implemented structural reforms post-crisis, including financial
sector restructuring and improved governance.

4. Learnings from the case as a manager

There are several key learnings and takeaways from " Thailand: an Imbalance of Payments.":

 Risk Management and Currency Exposure: Managers must assess and manage their
exposure to currency risk, especially in economies with fixed exchange rate regimes. They
should have strategies to navigate sudden currency fluctuations that can significantly impact
businesses reliant on international trade.
 Importance of Economic Policy Understanding: Understanding the implications of
economic policies, such as fixed exchange rate systems and their effects on inflation, trade
competitiveness, and overall financial stability, is crucial for managers operating in
international markets. They need to anticipate how macroeconomic policies might affect their
business operations.
 Adaptability in Challenging Economic Environments: Businesses should adapt and adapt
to changing economic conditions. Managers need contingency plans and the ability to swiftly
adjust business strategies when faced with sudden financial crises, like currency devaluations
or trade imbalances.
 Assessing Market Vulnerabilities: Managers must regularly assess market vulnerabilities
and anticipate potential risks. This includes staying updated on global economic trends,
geopolitical events, and policy changes that could impact markets and their businesses.
 Managing Financial Resilience: Developing financial resilience by diversifying income
sources, reducing reliance on short-term foreign borrowing, and having sufficient liquidity
can help businesses withstand economic shocks and currency crises.
 Seeking Expert Advice and Global Perspectives: Managers should leverage expert advice
from economists, financial advisors, and global market analysts to gain diverse perspectives
 on economic trends, currency movements, and geopolitical developments that could impact
their business operations.
 Building Strong Relationships with Financial Institutions: Establishing solid relationships
with financial institutions, understanding lending terms, and carefully managing debt levels
are critical for businesses to weather economic crises.
 Government Policies and their Impact: Managers should closely monitor government
policies and their potential impacts on business operations. Understanding the interplay
between government policies and market dynamics is crucial for strategic decision-making.
 Preparedness for Uncertainty: Being prepared for uncertainty is vital. To respond swiftly
and effectively to unforeseen economic events, managers must have contingency plans, risk
mitigation strategies, and stress-testing measures.

The case of Thailand's imbalance of payments crisis underscores the importance of proactive risk
management, adaptability, financial resilience, understanding the impact of macroeconomic policies,
and having a global perspective for managers operating in an increasingly interconnected global
economy.

5. References
1. Thailand Economic Monitor July 2021: The Road to Recovery (worldbank.org)
1. Thailand's challenges, lessons from the '97 crisis (bangkokpost.com)
1. Five Things to Know About Thailand’s Economy and COVID-19 (imf.org)