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					Thailand

      Michael Erhardt
          PUAF 781
       Thailand: Some Basics
• An “emerging” market; one of the “Asian Tigers”
• Remarkable growth through open-market
  policies, especially mid 1980s-mid 1990s
• Trade dependent; exports to developed
  economies (trade 69% of GDP in 2006)
• Poster child of both benefits and downfalls of
  globalization
• Policies defined by 1997 depreciation of the Thai
  baht and 1997-1998 collapse of Thai economy
                           Growth and Crisis Illustrated

                                        Gross Domestic Product Growth, 1980-2007

                  15


                  10

                                                                                                                                                               Gross Domestic Product per Capita, 1980-2007
% change in GDP




                   5

                                                                                                                                          3500
                   0
                     80


                            82


                                   84


                                          86


                                                 88


                                                        90


                                                               92


                                                                      94


                                                                              96


                                                                                     98


                                                                                            00


                                                                                                   02


                                                                                                          04


                                                                                                                 06
                                                                                                                                          3000
                   19


                          19


                                 19


                                        19


                                               19


                                                      19


                                                             19


                                                                    19


                                                                            19


                                                                                   19


                                                                                          20


                                                                                                 20


                                                                                                        20


                   -5                                                                                          20




                                                                                                                      GDP (current US$)
                                                                                                                                          2500

                  -10                                                                                                                     2000

                                                                                                                                          1500
                  -15
                                                                     Year                                                                 1000

                                                                                                                                          500

                                                                                                                                            0
                                                                                                                                              80

                                                                                                                                                      82

                                                                                                                                                              84

                                                                                                                                                                      86

                                                                                                                                                                              88

                                                                                                                                                                                      90

                                                                                                                                                                                              92

                                                                                                                                                                                                      94

                                                                                                                                                                                                              96

                                                                                                                                                                                                                      98

                                                                                                                                                                                                                              00

                                                                                                                                                                                                                                      02

                                                                                                                                                                                                                                              04

                                                                                                                                                                                                                                                      06
                                                                                                                                           19

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                                                                                                                                                                                                   19

                                                                                                                                                                                                           19

                                                                                                                                                                                                                   19

                                                                                                                                                                                                                           20

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                                                                                                                                                                                                                                           20

                                                                                                                                                                                                                                                   20
                                                                                                                                                                                                     Year
   1997-1998 Economic Crisis
• Why talk about the crisis?
• Fear of similar economic collapse still
  dominates economic policy in emerging
  markets
• Emerging markets in a precarious position
• Velocity of money produces potential for
  quick and economically devastating capital
  outflows
   Capital Flows into Thailand
• Fixed Exchange Rate: 25 baht to the US$;
  theoretically no exchange rate risk
• Expansionary economic growth brings
  international investment
• Relatively high domestic interest rates
  within Thailand leads firms and banks to
  borrow abroad
  Thai Investments Questioned
• Abundance of capital leads to poor
  investments and overvalues Thai holdings
  (i.e. construction bubble)
• US$ appreciates (especially against the
  Yen) making Thai exports more
  expensive; contractionary effect on Thai
  economy
• Scandal at a Thai bank leads investors to
  question transparency
Depreciation Pressure on Baht
            Attack on the Baht
• Currency speculators
  short the baht; Δ in
  expectations
• Investment capital pulled
  out of Thailand
• No one wants to hold
  baht
• Thai Central bank sells
  FOREX and buys baht;
  ineffective
                                  Assets         Liabilities
• Devalue or default             FOREX ↓        Bank deposits
                              Domestic Assets    Currency ↓
      Thailand Abandons Peg
• Thailand unsuccessfully spends          Year   E (b/$)
                                          1994   25.2
  more than $30 billion in FOREX to       1995   24.9
  defend baht, empties reserves           1996   25.4
                                          1997   31.1
• In July 1997, Thailand allows baht to   1998   41.3

  float and lose value                    1999   37.9


• 44 baht/$ by December 1997
    Thai Economy Collapses
• Firms and banks generating money in
  devalued baht, paying of international
  loans in international currencies
• Large number of firms and bank go
  bankrupt or dissolved
• Effects reverberate throughout economy
• Wages fall
 Lessons from 1997-1998 Crisis
• Stability! Stability! Stability!
• Maintain current account surplus, or reasonable
  deficit
• Limit fiscal spending and excessive borrowing
• Integrate financial system into global market;
  allow foreign control of banks and financial
  sector
• Larger FOREX reserves (byproduct of CA
  surplus and to resist potential speculative attack)
• Increased transparency, accountability, and
  oversight
  Economic Indicators: Current
       Account Balance
Year   Current Account, % of GDP
1994             -5.4
1995             -7.9                                         Thailand Current Account Balance, % GDP

1996             -7.9                         15


1997             -2.1                         10


1998             12.8
                                               5




                                   % of GDP
1999             10.2
                                               0

2000              7.6                               1994 1995 1996 1997 1998 1999   2000 2001 2002 2003 2004 2005 2006

                                               -5
2001              5.4
                                              -10
2002              5.5                                                               Year


2003              5.6
2004              4.2                          •       Surplus projected for 2007 due to
                                                       strength of Thai exports and decreased
2005             -2.1                                  imports because of political turmoil
2006             -0.8
   Economic Indicators: Lending Rates

Year    1994    1995                         1996              1997             1998              1999                 2000             2001              2002                 2003      2004      2005   2006

Thai    10.90   13.25                        13.4              13.65            14.42             8.98                 7.83             7.25              6.88                 5.94      5.5       5.79   7.35
rates
US      7.14    8.83                         8.27              8.44             8.35              7.99                 9.23             6.92              4.68                 4.12      4.34      6.19   7.96
rates


                                                                                    Thai, US Interest Rates, 1989-2006

                                            18

                                            16

                                            14
                       Interest Rates (%)




                                            12

                                            10                                                                                                                                        Thai Rates
                                            8                                                                                                                                         US Rates

                                            6

                                            4

                                            2

                                            0
                                                 1989
                                                        1990
                                                               1991
                                                                      1992
                                                                             1993
                                                                                    1994
                                                                                           1995
                                                                                                  1996
                                                                                                         1997
                                                                                                                1998
                                                                                                                       1999
                                                                                                                              2000
                                                                                                                                     2001
                                                                                                                                            2002
                                                                                                                                                   2003
                                                                                                                                                          2004
                                                                                                                                                                 2005
                                                                                                                                                                        2006
                                                                                                         Year
         Economic Recovery
• Thailand has diverse and
  productive industrial sector
  (machinery and auto parts)
• Exports of basic commodities;
  rice, etc.                      Year    Export
                                         Growth, %
• Depreciated baht makes Thai     2004     21.6
  exports more competitive        2005     15.0

                                  2006     17.4

                                  2007     16.6
       Current Issues: Political
• Economic structure relatively sound, though
  threatened by political instability
• Bloodless coup in Sept 2006 as military deposes
  prime minister Thaksin Shinawatra amid
  accusations of insider trading by family
• Upcoming elections in December; need for
  smooth transition and effective new leadership
• Increased risk in Thailand? Prior history of coups
  and sets precedent for future instability
     Current Issues: Political
• Ethnic rebellion in southern Thailand;
  Malay Muslim separatists
• Since 2004, but relatively confined to
  Southern Thailand
• 2007 New Year’s bombings in Bangkok
     Current Issues: Economic
• Recent appreciation of Thai baht due to
  demand for Thai exports, capital inflow,
  and declining value of US $                       Exchange
                                             Year
• Appreciation threatens strong Thai                   rate
                                                     (baht/$)
  export growth
• Current high prices of Thai export         2004     40.3

  commodities (especially rice) could come   2005     40.3

  down                                       2006     37.9

• Global economic downturn could lower       2007     32.4
  export demand
     Current Issues: Economic
• Proposed capital controls in December of 2006
  to make it harder to withdraw investor capital
  from Thailand
• Aimed at reducing baht appreciation and
  reducing volatility associated with money
  velocity
• Investors react negatively and Thai stock
  market takes a huge hit
• Government reneges on policy
• Questions about Thai commitment to open-
  market policies and attempts to control
  exchange rates
    Current Issues: Economic
• Signed free-trade agreement with Japan in
  April 2007
• Reassured market of Thailand’s
  commitment to open-market policies
   Going Forward: Short Term
• Political stability and the need for a
  smooth transition
• Current climate of “wait and see”; market
  waiting on Thailand’s transition, Thailand
  waiting on market’s reaction to transition
• How to curb appreciation without upsetting
  market?
 Going Forward: Long Term Issues
• Successful jump from under-developed country
  to emerging middle-income nation; how to make
  jump from middle-income to developed nation
• Dynamic industrial sector, but little inroads into
  developing high-tech industry or strong financial
  sector
• Export competition from China
• Little R&D investment
• Citizens lacking IT and computer skills relative to
  other emerging SE Asian countries
          Recommendations
• Fiscal expansion
• Increase domestic demand → increase imports
  → reduce current account surplus and reduce
  appreciation pressure on the baht
• With recent CA surpluses and responsible debt
  management, fiscal expansion not so risky
• Direct fiscal policy toward long-term economic
  needs; R&D, education, expanding high-tech
  sector
          Monetary Policy?
• Raise money supply to depreciate
  currency
• Lower interest rates, which could lead to
  renewed worries of excessive private
  borrowing
• Market worries about junta influencing
  monetary policy
• Market worries about Thailand not sticking
  to floating exchange rate
Questions?
                               Resources
•   World Bank
    - “Thailand Economic Monitor, April 2007”
•   Kirida Bhaopichitr
    - “Thailand’s Road to Economic Crisis”
•   Financial Times
    - “After the Coup: Thailand’s Rolling Revolution”
    - “Thailand Trades Credibility for Weaker Baht
    - “Wrong Lessons from Asia’s Crisis
    - “Calling the Shots in Thailand”
•   The Economist
    - “The Long March Back to the Barracks
•   State Department
    - “Background Note: Thailand”
•   IMF
    - “World Economic Outlook Database”
•   Harvard International Review
    - “Recovery Through Reform”
•   Invest in Taiwan, Taiwanese Government
    - “Foreign Exchange Reserves” and “Lending Rates”

				
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posted:3/22/2011
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