Economics

Singapore, Malaysia, Hong Kong and Thailand had rapid economic growth for quite some time. These newly industrialized countries, known as the Four Asian Tigers, maintained exceptionally high growth rates and rapid industrialization between 1960s and 1990s. Each region soon became highly educated and skilled in specialized areas, which brought them competitive advantages. However, the Asian financial crisis of 1997 had a deep impact not only to the Four Asian Tigers, but on the financial markets around the world. The beginning of the currency depreciation started in Thailand, where the Thai economy attracted large foreign capital inflows and used unhedged debts to expand domestic lending and investments in properties that were overpriced. The floating of the Thai Baht (Thailand’s currency) in July of 1997 resulted in the depreciation of the Thai currency from 25 Baht/USD to about 60 Baht/USD and withdrew support for distressed nonbank financial institutions. This currency depreciation influenced many other Asian countries. Thailand’s prosperity bubble was growing faster than inflators’ could handle and eventually burst due to hyper growth, which began the 1997 Asian financial crisis. In the past decade, Thailand became the fastest growing economy in the world. Thailand, along with the other Asian Tigers experienced high growth rates, GDP of 8-12%, in the late 1980s and early 1990s. In mid 1997, Thailand’s growth rates overall, particularly in manufacturing and industries, set records. But this soon came crashing during the 1997 Asian financial crisis. This domino effect began with Thailand in July 1997. Thailand's economy developed a quickly growing bubble fueled with hot money, money that moves frequently between financial markets as investors attempt to ensure the highest short-term interest rates possible. During the mid-1990s, Thailand, South Korea, and Indonesia had large private current account deficits. The maintenance of fixed exchange rates also encouraged external borrowing, which led to foreign exchange risks. In the early 1990s, the U.S. economy recovered from a recession and the Federal Reserve Bank began to raise interest rates to prevent inflation. This increased U.S investment appeal and raised the value of the U.S. dollar. This caught the attention of Southeast Asia, who was obsessed with hot money. For those Southeast Asian currencies fixed to the U.S. dollar, the increase in the value of the U.S. dollar caused their own exports to become more expensive and less competitive in the global markets. Debt service-to-exports ratios rose only in Thailand and South Korea. During this time, Southeast Asia's export growth rate dramatically slowed in the spring of 1996, deteriorating their current account position. (Reynolds) By being the fastest growing economy in the world and the core of the 1997 Asian financial crisis, Thailand fell victim to hyper growth, experiencing rapid rises and falls in economic development. During the boom and after the economic burst, there were much heated debates about Thailand’s accelerating changes, political reforms, and about the future of the country. All Southeast Asian countries involved with the International Monetary Fund’s (IMF) watched their national economic sovereignty being compromised. In the early 1990s, globalization was the key approach for Thai business. Their strategy was to expand into less developed parts of the region. Globalization meant a “borderless world” to them. Thaksin Shinawatra, a motivated investor, quickly moved into media and telecommunications, which capitalized on the growing hi-tech services. Thai entrepreneurs created new geometrical developments, which proposed an economic quadrangle in the north that would embrace Myanmar, Yunnan, and Laos, and an extension in the south that would compete with Singapore. (Reynolds) However, the pace of globalization needed to be controlled in an orderly fashion to minimize future risks. Domestic financial markets needed to be globalized first and supervision strengthened. Then foreign direct investment can be liberalized. Stock and bond markets third follows and offshore banking last. Thailand began by setting up an offshore banking center. In the early 1990s, wages in Thailand increased much faster than those of their neighboring countries. With the fear that manufacturers would move their production facilities to neighboring countries, the Thai government decided to help their neighbors develop. The theory was that if Thailand could help their neighboring countries grow, they will be grateful and provide future support. Therefore the Thai government established tax breaks and other incentives for businesses to invest in neighboring countries. Thailand decided to establish the Bangkok International Banking Facility (BIBF), which began operating in 1993, to help provide financing. The BIBF was created to attract money from the United States, Europe, and Japan to lend to Thailand's neighboring countries. Although, the Thai government's intentions were good, they were not realistic. Due to Thailand’s much higher interest rates, the foreign money was loaned to native Thais. A portion of this foreign money was used to fuel a theoretical bubble in the Thai property market. Investors purchased property with the expectation of a rise in the price of the property to the near future. However, the increased in purchased property caused the price of the property to rise, which caused another increase in investors. When investors realized that the current price greatly exceeded the real value of the property, they quickly sold. This led to the price to collapse and the burst of the bubble. (Leightner) Due to these upsetting property loans, the Bangkok Bank of Commerce (BBC) experienced serious cash flow problems in 1996. To solve these cash flow problems, the BBC asked politicians to begin paying back these loans. Some politicians had not intended to ever pay back these loans. The Bank of Thailand (BOT) tried covering up the problems to prevent a possible major political scandal. When these problems were surfaced to the public, the BOT's reputation was tarnished. On March 3, 1997, reserve requirements on all financial institutions were increased by the BOT. Banks viewed as stronger when they held higher reserves. However, adjusting to higher reserve requirements decreases the domestic money supply and reduces profits. Prior to announcing their new change, the Thai government decided to suspend the trading of all bank and finance company stocks on the stock market for one day. For the first time in the Thai stock market history, trade was suspended. This caused panic. These events affected finance companies greatly (much more than banks) due to the high percentage of finance company loans made to the property market. The BIBF licenses held by all Thai banks made it possible for them to obtain funds from overseas, which was much cheaper than Thai finance companies. This caused serious concern that all 91 of Thailand's finance and securities companies could possibly go bankrupt. The baht fell from 1 US dollar for 25 baht in June 1997 to 1 US dollar for 54 baht in January 1998, the dollar value of Thai exports split and Thailand had to pay double for imports. This caused Thailand to fall into a serious recession. On August 19, 1997, Thailand accepted a 17.2 billion U.S dollars loan from the IMF and the World Bank. The conditions that came with this loan caused the Thai economy to contract further but improved confidence of foreign investor in the Thai economy. One condition was that the Thai government would not rescue or finance additional financial institutions. In May 1998, only 35 of the 91 finance and securities companies remained. The Thai government took over seven of the remaining firms and four of Thailand's fifteen commercial banks. (Leightner) Since then, the bank lending rates continuously decreased. All throughout 1998, real economic indicators seemed limitless and revealed that the baht and the stock exchange index showed surprising strength (Woo). The Thai government presented a major short-run tax expenditure stimulus package, confirming and reinforcing the gradual easing of its fiscal stance that had begun in 1998. By mid 1999, the indicators started to stabilize and the first quarter of 1999 showed the first positive growth in quarterly GDP since the first quarter of 1997 (Woo). Thailand acted quickly when the financial crisis was first present by attempting to restore stability to the Thai banking system. Loan standards were gradually strengthened, regulations that restricted foreign direct investment in banks were relaxed and markets were invited to resolve the situation of distressed banks. Significant steps have been taken to mobilize private capital, bailouts have been avoided and the risks of moral hazard largely reformed (Hunter 198). One year after the crisis erupted in Thailand and spread to other countries in the region, East Asia was cluttered with idle plants, insolvent financial institutions, loan defaults and bankrupt businesses. The total volume of foreign capital inflows into the four Asian Tigers dwindled into an all time low. Thailand, Indonesia and Korea implemented IMF rescue and restructuring plan, including a macroeconomic policy framework based on fiscal tightening and monetary contraction aimed at stabilizing the nominal exchange rate; financial, corporate and labor market restructuring; and market deregulation and opening (Hunter 207).