BUSINESS ENVIRONMENT PROJECT

SARTHAK MALHOTRA 4850 AMIT SINGH 4853 DIVAM ANAND 4859

INTRODUCTION  20% loss of value by the Baht to US dollar in less than 1 week  Asian contagion spread rapidly across Asia ‡ Stock prices fell ‡ Real estate prices plummeted ‡ Non-repayment of loans in Yen. for example  Malaysian Ringgit  Indonesian Rupiah  Philippine Peso . Marks and Dollar by banks and corporations ‡ Local currencies across Asia went into free fall.

0 1.1 1. 9 01 6 .0 3. 9 01 5 .0 3.0 5.1 1.0 5. 9 01 6 .0 9. 9 01 5 . 9 01 7 .0 1. 98 . 9 01 7 .0 1.0 1.0 3. 9 01 7 . 9 01 8 .0 7.1000 1200 1400 1600 200 400 600 800 BANGKOK SET INDEX 0 Stock Exchange of Thailand SET Index 01 .0 7. 9 01 6 .0 7.0 5. 9 01 7 .0 7. 9 01 6 .0 3. 9 01 5 . 9 01 7 . 9 01 5 . 9 01 8 .1 1. 9 01 6 .0 9. 9 01 7 . 9 01 6 . 9 01 5 .0 5.0 9. 9 01 8 . 9 01 8 . 9 01 5 .0 9.1 1. 9 01 8 .

BACKGROUND ( s)  Thai government tries to revive the financial sector.  1981: Law allows financial institutions to decide interest rates  1980-85: Period of economic difficulties ‡ Effect of worldwide recession on Thai economy ‡ Economy suffers on account of Second oil Shock ‡ Japan¶s capital inflows prevent IMF rescue  Late 80s: Economy starts regaining strength  Government resumes financial sector liberalization .

LIBERALIZATION  Agreement with GATT & WTO: opening up of domestic economy  Lifting of controls on all Forex transactions on the current account  Setting up of financial institutions like BIBF  Pegging of Thai Baht against the US Dollar  Opening up of Bond & Stock market to foreign investors  Development strategy emphasizes the role of private sector .

94% during 1991-95)  Large capital inflows in the economy  Low wages in the economy attracted significant amounts of FDI to build production plants for exports to developed economy  Exports became the engine of the economy  Excessive foreign exchange lending by Thai companies .EFFECT OF LIBERALIZATION  High growth rates in the economy (8.08%-8.

EFFECT OF LIBERALIZATION (FINANCIAL SECTOR)  Domestic Investment reaches its peak & banking sector expands  Excessive borrowing from abroad at cheap rates & lending domestically at higher rates (Spread of 4%)  Companies had no hesitation in taking foreign currency loans  Stock prices increased by 175% & property prices zoomed by 395%. Thailand became a haven for the speculators .

WHAT WENT WRONG  Economy became over-dependent on exports.  A large part of the capital went into non-productive sectors like real estate creating property bubble  A very small part of capital inflows came as a part of Foreign Direct Investment: the non-speculative capital ( 15.06% in 1995)  Lenient control & regulation by the Central Bank allowing nonbanking financial trusts to raise huge amounts from abroad.  Reckless lending by financial institutions with an expectation of bailout by govt. in case anything goes wrong .

drying up capital for Thailand  Fall in global demand of Semi-conductors. leading to lots of loan defaults .Thailand¶s main export  Bursting of property bubble.EVENTS CONTRIBUTING TO DOWNFALL  1994: Depreciation of Chinese Yuan by one third ± reduction in Thai competitiveness  1995: US$ rises against most currencies ± and so does the Baht  Rise in interest rates in other countries.

. Fall in exports ‡ Widening of balance of trade ‡ Excess supply in the economy 2. Loan Defaults ‡ Unhedged foreign currency borrowings ‡ Excessive reliance on short term external debt ‡ Credit crunch for productive investments too A fall in interest rates led to foreign investors withdrawing huge sums of money from Thailand.THE CRISIS The poor export performance of 1996 triggered the first wave of doubts concerning the ability of Thailand to service its large current account deficit 1. leading to a credit crunch in the economy.

inflation & asset bubbles  Speculative runs triggered against the Baht by currency traders hoping to profit from a devaluation  Attack on Baht by hedge fund operators such as George Soros and Julian Robertson intensified (early 1997)  Many investors exchanged Baht for dollars & there is massive sell-off of Baht by companies operating tin the region .IMPACT ON CURRENCY  Link between currencies looked unreasonable due to high current account shortfalls.

To deter speculation. interest rate for offshore borrowers were quadrupled. The Central Bank depletes most of its resources  Devaluation and floating of the Baht on July ‡ Foreign investors fled Thailand ‡ Flurry of loan defaults by many businesses ‡ Many banks on the brink of bankruptcy .GOVERNMENT INTERVENTION  Increase in interest rates.  Suspension of 16 finance companies  Billions of dollars spent on buying forward contracts to defend the currency.

02 .9 02 7 .10 .03 .10 .9 29 7 .07 .9 01 7 .9 09 7 .9 21 7 . 6 month later .9 20 7 .9 22 7 .9 16 7 .9 17 7 . US$ 5th August 97 Entry price into the IMF programm.9 27 7 . approx.THAI BAHT against US DOLLAR 20 25 30 35 40 45 50 55 60 May 97 Attack on Baht by international speculators Thai Baht vs.06 . suspension of 42 more financial companies.03 .9 08 7 .9 28 7 . US$.9 05 8 .03 .9 11 7 .08 .98 10 .9 10 7 .09 .05 .02 .11 .9 25 8 .9 18 7 .12 .9 30 7 .05 .04 .06 .01 .12 . totalling 58 28th June suspension of 16 financial institutions 2nd July 97 "official" start of the crisis low in Baht vs.02 .08 .9 17 8 .9 07 7 .

STABILIZATION STRATEGY  S r .rm ls: ‡ Restoring of market confidence & stability ‡ Stopping massive capital flight due to the Baht devaluation  Long‡ ‡ ‡ rm goals: Macroeconomic stability Implementation of key structural reforms Recapitalization of the banking system  1s Letter of Intent ‡ Fiscal austerity: Tax increases & Expenditure cuts ‡ Stringent Monetary Policy ‡ Slowdown in the economy led to a lrge revenue shortfall .

M2 to expand at 1% annually  3rd Letter of Intent ‡ Fiscal relaxation was allowed to achieve a current surplus  4th Letter of Intent ‡ Change in IMF policy & deficit spending as a stabilization measure Positive growth in late 1998 (GDP growth>4% in 1999) .STABILIZATION STRATEGY  nd Letter of Intent ‡ Further cuts in expenditure & minor tax increases ‡ More stringent monetary policy.

‡ In the end. but the inadequacy of regulation. Was it purely speculation.STABILIZATION STRATEGY ‡ Until the crash of 1997. transparency leads to increased confidence in the financial system and reassures future foreign investments and decreases the probability of a new crisis. The consequent crisis therefore raised many questions as to the root of the problems. the Thai economy had performed exceptionally well. economic factors or a combination of both. that led to the dismay ? ‡ Besides all criticism towards the IMF policy one can conclude that the reason for the crisis has not been financial liberalization. .

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