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Wednesday, 28 January, 1998, 11:44 GMT
Thailand: The crisis starts
It was the devaluation of the Thai baht in July that began a chain of currency devaluations across the region. Gordon Corera considers the origins of Thailand's financial crisis.
After a period of economic decline in the early 80s, Thailand began a recovery after 1985 which peaked in 1988 with 13.2% GDP growth. Growth came thanks to the diversity of the Thai economy, good macro-economic management and a political structure in which technocrats played a key role. The appreciation of the yen over the period also opened the way for significant Japanese investment.
Thailand did see impressive growth in the 80s and early 90s, but the years also saw a growing gap between rich and poor, with the rich centred around a thriving Bangkok. According to some studies, Thailand was rated as the fifth most unequal country in the world in terms of distribution of income, as a new middle class co-existed with massive rural poverty.
Origins of the Crisis
The crisis came about as speculators attacked the baht believing it was vulnerable due to poor economic fundamentals in the country, which did not justify its exchange rate. The economy had seen massive overspending in previous years with levels of debt skyrocketing.
Thailand's current account deficit grew markedly meaning interest rates had to be kept high to protect the currency which was pegged to the dollar.
Fundamental financial reform was increasingly called for to deal with the rising foreign investment and borrowing but nothing was done until the crisis hit.
The liberalisation of the financial sector from 1992 was poorly managed and the desire to maintain the peg to the dollar was ill-thought out. If the government had allowed at least some movement for the baht the crisis would have been far less powerful, but the government failed to act until it was too late, partly due to political disunity and factional fighting which prevented the formation of a coherent policy.
Thailand went through five finance ministers in 1996 and continued to change the key job through the crisis, undermining investors confidence.
Another problem was the growth of the Chinese economy, which increasingly took over export markets that had been dominated by the Asian tigers, leaving them with no option but to devalue to remain competitive. This was especially the problem as Thais could no longer count on foreigners to finance the growing current account deficits due to lack of confidence.
The lack of competitiveness with China was also increased by the rise of the dollar, which the Asian currencies were tied to.
IMF warns of overheating
The IMF singled out Thailand in February 1997 but governments were unwilling to act.
On July 2, the baht had to be devalued after coming under massive attack from speculators and the crisis that many had been waiting for, finally hit.
Unemployment is on the rise, with forecasts seeing it go from its level of 850,000 to one million by the end of 1997 before rising to around 1.5 million in 1998. There is concern that especially in the field of banking reform, Thailand is unlikely to meet IMF targets and conditions. Bankruptcies, closures and job losses are all expected.
In August, car sales were down 73% from a year earlier. Middle class parents are pulling children out of foreign universities as they can no longer pay the fees. Foreign investment has slowed dramatically, ending the previous huge influxes and its loss is likely to hurt for some time. Although, Japan, the main investor, is unlikely to pull out and in the medium term and the devaluation of the baht will help aid recovery, the short term prognosis is not good as currency instability in the country and the region continues.
The main problem for Thailand in recovering from its 1997 crisis, will be doubts over macro-economic management thanks to its shaky political structure. Thailand is suffering from chronic instability with the departure of numerous finance ministers and governments, and elected officials becoming involved in areas previously left to technocrats.
Rural politics are also dominated by politicians who are elected on the basis of delivering local services. This patron-client relationship with vote-buying and strong loyalties means that macro-economic policies are not a priority for politicians.
Despite this, the European and American economies continue to perform well and providing a good market for Thai exports. The main long term danger is if the Japanese economy collapses, since Japan has considerable investments in Thailand.
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