Suchorita case study eco_mba_feb 2021

ASIAN ECONOMIC CRISIS 1997 - 1998
TomYungKungCrisis- Toughtime for Thailand economy
- Suchorita Ghosh, ECONOMICS (MBA),Manipal
Global NXT university, Feb 2021

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

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.

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
.

Inflation:
Current Account balance:
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

Inflation:
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

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.
Unemployment

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

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%.

Major challenges faced by Thai economy-mid-1990

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.

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

“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.

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

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%

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

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

 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

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.

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.

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

 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

“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

 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

 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

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.

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

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.

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

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