1. ASIAN ECONOMIC CRISIS 1997 - 1998
TomYungKungCrisis- Toughtime for Thailand economy
- Suchorita Ghosh, ECONOMICS (MBA),Manipal
Global NXT university, Feb 2021
2. Background
01
Scenario – 1985-1996
02
Strengths of the Economy
pre-crisis
03
Major Challenges-mid 1990
04
Causes of the Crisis
05
Effect of the Crisis
06
Reforms for the Crisis
07
Economic prediction- 2020-2025
08
3. Selection of Country:
Adopted virtual Round Robin approach of brainstorming
Team observation: Asian crisis had significant effect over macroeconomic levels
Nominal GDP of ASEAN: 1997 ↓ 9.2 billion $ and 1998 ↓ 218.2 billion $ (31.7%)
South Korea, Thailand, Indonesia and Malaysia - worst hit countries
Origin of the mess THAILAND - finalized by team as ALP project .
Asian continent bucket: Rich fruits (Japan) and
several poor bags (Afghanistan, Cambodia, and Nepal)
1965 to 1990s period: emergence of high performing
Asian economies (HPAE'S)
The Spectacular economic growth in the eight countries:
Four Asian Tigers: Hong Kong, Republic of Korea,
Taiwan, Singapore
Newly industrialized economies: Indonesia,
Malaysia, and Thailand
Japan.
4. Inflation:
GDP Growth
1986 to 1996: highest economic growths with average growth
rate of 9.1% per Annum
Growths in manufacturing sector: most stable period with
the coefficient of variation of growth rates of only 0.27
Inflation
1988 to 1991: stable inflation rate; money deficit was trying to
be solved by granting Bangkok International Banking Facility
(BIBF) licenses to Thai banks in 1993
1994 onwards: inflation unstable due to the poor financial
condition of Thailand
Economy Synopsis - THAILAND
.
5. Inflation:
Current Account balance:
Economy Synopsis - THAILAND
Aggregate Expenditure
Aggregate Expenditure increased 1992 onwards
Hot money, short term , easy loan from abroad,
lax in banking measures – frugal spending
Overvalued asset bubble burst in 1997
6. Inflation:
Economy Synopsis - THAILAND
Current Account Deficit
1988 Thailand experienced a current account
deficit averaging −5.4 percent of GDP per year
with a continued increase of deficit.
A current account deficit of approximately
7.8% of GDP amounting to 14.351 Bn USD
was observed in 1996 leading to gradual
increment in capital shortage over time
7. Inflation:
1991 onwards: unemployment (%) of Thailand
gradually decreased
Growth of the private sector and decline of the
public sector due to fiscal constraints
1987-1996 - Economic boom triggered by the
improved foreign trade and inflow of FDI especially
from Japan.
Economy Synopsis - THAILAND
Unemployment
8. Strengths of Thai Economy – Before Crisis
01
1981-1986 - lowering of world prices
1987 -1991 –most major crops' prices
picked up
Benefits (external price
improvement): reached farmers
substantially
Agricultural exports not subject to
high tax and tariff unlike past
02
1986 - Effective control of public
expenditure and external debt
Reinforced by strong increase in
export
More resources available for boom
of private investment
03
1980-1986: Relatively more political
stability in Thailand
Considerably supported steady
economic development
Encouraged investment.
04
Increasing value of Yen
High wage in Japan
Investment in cheap-labor
Southeast Asian countries including
Thailand
Boom in labor-intensive product
exports
Lucrative to the foreign investors
9. Major challenges faced by Thai economy-mid-1990
Misjudgment of Sector selection
Based on short-term assessments of industrial weakness
rather than on long-term strategy
Promote openness and competitiveness
Results: lag in the exports
↓agriculture to negligible levels for other three countries
↑Industry has increased; service sector - 50-60%.
10. Major challenges faced by Thai economy-mid-1990
Misjudgment of Sector selection
Based on short-term assessments of industrial weakness
rather than on long-term strategy
Promote openness and competitiveness
Results: lag in the exports
↓agriculture to negligible levels for other three countries
↑Industry has increased; service sector - 50-60%.
12. Asian
Financial
Crisis
Timeline
Causes Weak Financial sector - Volatile convergence
of financial issues triggered loss of investor
confidence in Thai economy – led the inception
of the financial crisis.
Pervasive Cronyism and Corruption
- Cronyism, corruption, clientelism and
weak corporate governance - part of the
system even golden period of the
economy.
13. Poor Regulation of the Economy
Inadequate regulatory framework for loan
applications
Billions of non-performing loans with the
banks and financial institutions
55 finance companies permanently shut
down -not able to come up with a successful
rehabilitation plan
Businesses with “sunset industries” -
relation loan disbursement without proper
asset valuation
14. “Hot Money”
Over-Dependence on Short-Term Foreign Funds
Moves easily across borders
Foreign Investment in Thailand - take
advantage of construction and industrial booms
Thai banks took loans in dollars from abroad
than stored in their reserves
Majority debt was short term and financed a
spending binge in over- speculated sectors
Country was filled with excess phone lines,
petrochemical plants, and cement factories.
15. Over-Inflated Asset Prices-
“Real Estate Bubble”
“Hot Money” - encouraged investment in
some overhyped sectors like Real Estate
Real state bubble further led to credit
expansion
Banks gave loans higher than asset –
relation building
Bubble burst- the banks were left with billions of
non-performing loans
August 1997 - Bangkok filled with over 35,000
vacant housing units, unfinished office and empty
hotels
16. Unsustainable Account Deficits
December 1996 - ↑current account deficit - 8.5% GDP
Threshold- 8% (after 1995 Mexican Crisis)
Pegging of Baht continued - vested interest of several high-end
conglomerates
↓Negative export growth but ↑imports - boom of the current account deficit
1995-1997 (2 parties - Political instability) - loss of investor confidence
(domestic and foreign)
1996 - ↓ stock exchange by 20%
17. September 1996 - Banharn government in power:
Ministers mainly provincial bosses
Short-term policies - driven by cronyism and patronage
Not being able to solve current account deficit problems
Decreasing autonomy and increasing control –
Macroeconomic agencies
Fired Heads of three core macroeconomic agencies
Bank of Thailand
Ministry of Finance
Securities and Exchange Commission.
1997 - Government initiated two developments
18. Infamous scandal of Bangkok Bank of
Commerce (BBC)
Rakesh Saxena - financial advisor to BBC:
fraudulent loans to cronies of the bank's
management
Embezzled 88 million USD from BBC
1995 – BBC collapsed;
Bad Debt: 3 Billion USD
Brought out weakness of bank
regulations
Loss of the investor confidence in Thai
banks
Saxena claimed: many prominent
Thai ministers and businessmen involved
19. Bank of Thailand used up a major part of the
economy’s foreign reserved to save the baht
More than 23 Billion USD was committed to
the contracts to defend the currency.
July 2, 1997 : FLOATING CURRENCY SYSTEM –announcement by Finance Minister
20. Financial Sector
Thai baht fell to 1USD= 40 Baht
32 billion USD held in bad debts
↑Unemployment increased by 23%
Stock market crashed to the lowest level
Banks collapsed
Office buildings went empty
Hotels and construction stopped
GDP: 1998 - ↓10.5% & 1999- ↓2%
Unemployment: 1999 - ↑9.5%
Large auctions held to sell off cars, houses,
offices, buildings, fixed assets after
foreclosure and loss of jobs.
21. Financial Sector
Thai baht fell to 1USD= 40 Baht
32 billion USD held in bad debts
↑Unemployment increased by 23%
Stock market crashed to the lowest level
Banks collapsed
Office buildings went empty
Hotels and construction stopped
GDP: 1998 - ↓10.5% & 1999- ↓2%
Unemployment: 1999 - ↑9.5%
Large auctions held to sell off cars, houses,
offices, buildings, fixed assets after
foreclosure and loss of jobs.
Domestic Condition
“Thai Help Thai” campaign:
Help each other
Thai people turned in gold and
dollars
↓Car and motorcycle sales-
30%
↓ Mercedes sales- 45%
Workers owed months of wages
Protests held all over Bangkok
hailing the government for the
condition.
Mental health and suicide rates
Suicide rate increased by 100%
High earning jobbers
Survey in December 1997:
5.8% in real estate business and
2.3% in finance sector
contemplated suicide.
22. MONETARY POLICIES
Increase in national value-added tax
from 7% to 10%
High interest rates
1% surplus in public budget for
covering the restructuring cost in the
financial sector
Limiting inflation at 9.5% in 1997 and 5%
in 1998
Reduction of current account deficit to
5% in 1997 and 3% in 1998 (compared to
8.2% in 1996)
Continuation of “managed float” FEx
system.
Maintain official reserve enough to cover
4 month’s import (23 bn USD in 1997
and 25 Bn USD in 1998)
FISCAL POLICIES
↓Government expenditure
(barring health and
education sector) - 100
Billion Baht in 1997-1998
to maintain a 1% surplus
in public budget
Actual deficit was estimated
to be just under 5% of GDP
in 1998/99 (8.5% in 1996)
Spending - boosting the
social safety programs for
protection of Thais
Ending subsidization of
state companies
Discontinuation to lending
help to finance companies
17.2 billion USD - World
Bank and the Asian
Development Bank
Funds - balance-of-
payment support
Quarterly- a 3-yr period
IMF policies and
reforms called the
“Austerity Program”
FINANCING
23. Bank of Thailand suspended 55 debt-ridden finance companies
Restructuring strategies set up by team of 15 IMF and World
Bank officials
Setting up of 2 new Agencies:
Financial Restructuring Agency (FRA)
* Supervision 58 suspended financial institutions
* Evaluation of the merit of the rehabilitation plans
Asset Management Corporation (AMC)
* Purchase of bad assets of suspended companies
* Managing restructuring and sale of them under the
direction of FRA
Tightening of loan classification:
Period after which a loan - as non-performing was ↓reduced from 12
months to 6 months.
Capital -to-risk assets ratio - considerably higher level at 12-15% as
compared to international norm of 8.5%
New loan classification:
55 companies permanently closed; loan assets of 1.3 trillion baht
Non-performing amounting to 16 billion USD
New rules of foreigner stake in Thailand financial institutions:
Foreigners majority stake 10 years; capacity increase- only Thai
Government guarantee to banks:
All depositors and creditors of 15 local banks and remaining 33 financial
institutions
Financial Institutions Development Fund (FIDF) for execution; gave almost 400
billion baht in liquidity support to the institutions.
Government instability and indecisiveness, the new policies laid down
by IMF were not promptly implemented
STRUCTURAL
REFORMS
24. “Financial Restructuring”
Strongest possible criteria
Only 2 out of the submitted 58
rehabilitation plans approved
Permanent closure of 56 financial
companies.
Liquidation scheme (final announcement in February 1998)
Assets not divided into good and bad assets
Assets divided into core assets (outstanding loans) and non-
core assets (cars, office buildings etc.)
Total book value of the assets totaling to 866 Billion Baht
Nationalization of four medium-
sized banks
Four medium-sized banks viz.
Bangkok Metropolitan Bank, First
City Bank, Siam City Bank and
Bangkok Bank of Commerce -
nationalized for sale to foreign
financial institutions
2
3
Phase II
25. Bounced back to positive growth in late
1998 and reached over 4% in 1999.
Balance of payments became strong
and foreign reserves remained within
32-34 billion USD range.
Foreign exchange stabilized and Thai baht became
stronger at 1USD=30 baht
IMF loan was paid off 2 years before schedule and the
three-year standby arrangement expired on 19th June 2000.
Effect of Reforms
26. GDP have been contracted by -7.5%
compared to 2019
Key forces for sharp decline:
International tourist arrival
Severe decline in private investment
Plunge in export with an increase in imports
Supply chain disruption particularly for
Automobile parts
Worst Hit and unlikely to recover sectors -
Airlines, the Construction sector, the rubber
industry, etc
THAI GDP & Indicators
27. Micro Economy Analysis
2nd highest household debt in East Asia as
80.2% of its GDP in 2020
Household debt ↑7.9% compared to last year
and highest for the previous 17 years
One trillion Baht's fiscal policy response from
the Government
Implementation of fiscal measures to provide soft
loans to SMEs was difficult - slow overall credit
growth to SMEs
Credit growth was one of the lowest in Asia.
Fiscal deficit↑ - spending to reduce the impact
of the COVID-19 on households and firms
Overall 49.4% increase compared to last year.
May delay the economic revival cycle.
28. Predicting the Economy
Adopting technology enablers like #3D printing, Robotics, AI, and
ML to promote self-reliance for shortening the Global supply chain
Sectors likely to recover first: shipping, Electronics, Building
material part by FY 21-22
Airlines, Metals, Residential estates are worst affected, and the
possibility that it may at least take 2023 and may beyond.
Following longer-term efforts should follow these programs:
Provide policy frameworks - childcare more accessible and
decrease its cost - increase female labor force participation.
Incentivize private sectors - adopting flexible working
arrangements for older people
Strengthen few sectors competitiveness which is doing
good like -Frozen and chicken, Gradual shift from Coal-based
power plant to natural gas-based, Oil Refining Sectors,
ethanol, Biodiesel, Petrochemicals, etc
29. Ageing Population
Thailand's rapidly aging population - most
significant risk for socio-economy welfare.
Reduction of the annual GDP growth per
capita by 0.86% in 2020.
35% population will be the aged one creating
bottlenecks and obstruction for demographic
dividends
Participation in the women workforce to
create more diversity and improve productivity
may mitigate the risk to a certain extent.
30. References
Paul Krugman, The Myth of Asia’s Miracle, Foreign Affairs; Nov/Dec 1994; Vol.73, Iss. 6; 62
EIU Country Report: Thailand 1997:2; & 3
Ywin (1993), “Beware of the boom,” The Nation., Year In Review 1992 (January, 1993)
https://openknowledge.worldbank.org/bitstream/handle/10986/13973/multi0page.pdf?sequence=1&isAllowed=y
Laurids s. Lauridsen, The Financial Crisis in Thailand: Causes, Conduct and Consequences?
Roskilde University, Denmark World Development Vol. 26, No. 8, pp. 157551591, 1998
Thailand: crisis, reform and recovery https://en.wikipedia.org/wiki/1997_Asian_financial_crisis#:~:text=The%20crisis%20started%20in%20Thailand,peg%20to%20the%20U.S.%20dollar.
https://en.wikipedia.org/wiki/1997_Asian_financial_crisis
Medhi Krongkaew, Economic growth and social welfare: Experience of thailand after the 1997 economic crisis
Yilmaz Akyüz, Causes and sources of the Asian financial crisis, UNCTAD, Geneva, Symposium on Economic and Financial Recovery in Asia, Bangkok, 17 February 2000
Chalongphob Sussangkarn, Economic Crisis and Recovery in Thailand: The Role of the IMF,
Thailand Development Research Institute (TDRI)
http://pioneer.netserv.chula.ac.th/~msompraw/Overview.pdf
https://www.imf.org/external/np/exr/ib/2000/062300.htm
Somchai Jitsuchon, Thailand’s Economic Growth; A Fifty-Years Perspective (1950-2000)
https://youtu.be/nw0XLd6Fak8
https://youtu.be/wykaDgXoajc
https://www.britannica.com/place/Asia/Economy
http://econ.tu.ac.th/class/archan/Rangsun/EC%20460/EC%20460%20Readings/Thai%20Economy/Structure%20of%20Thai%20Economy/Thailand's%20Economic%20Growth%201950-2000.pdf
https://www.adb.org/countries/thailand/economy
https://www.bot.or.th/English/MonetaryPolicy/MonetPolicyComittee/MPR/Pages/default.aspx
https://www.thailand-business-news.com/economics/82343-thai-economy-to-grow-4-in-2021-following-6-5-decline-in-2020.html
https://www.focus-economics.com/countries/thailand
https://www.boi.go.th/index.php?page=economic_overview#:~:text=The%20Finance%20Ministry's%20Fiscal%20Policy,to%20grow%20at%20%2D7.7%20percent.
https://www.nesdc.go.th/nesdb_en/article_attach/article_file_20201116105143.pdf
https://www.krungsrisecurities.com/images.aspx?filename=http://www.krungsrisecurities.com/uploads/2020/01/research_en_US_10484_1_IO_Industry_Outlook_2020_2022_EN_EX.pdf