Saturday, 8 March 2014

What is the current situation of Thailand ?

What we have experienced from the crisis ?
From this crisis, Thai people learnt the big lessons such as the dangers of the high leverage ratio, the lack of good governance and the weakening of financial institution policy. 
Nowadays, Thai economic system is developed, especially the financial discipline 
- The banking system is much more stable and transparent
The economy of Thailand is flexible. The inflation is low and the balance of trade overbalances every year. The foreign debt decreases continually.
- Thai government focuses on monetary policy. (the exchange rate, the interest rate and the cash inflow-outflow of country)
- Thai people change their mind set to be more conservative. They restructure their own organizations. (i.e. hold more cash)
The below video is talking about what Thai people have learnt from the Asian Financial Crisis.

However, there are some arguments that people act too conservative for the environment of Thailand which is booming (Li, 2013)

What is the current financial situation ?
Recently, Thai financial system is not stable due to the politics
The first reason is that this current government announced that the minimum of the labour cost is 300 baht ($10). Hence, the employers face the high expenses and they try to move their factories to the country that has low wages or increase the price of commodity. Thus, it can result in the inflation and the mild recession
The another reason is that there is a prolonged series of political protest in Bangkok. Following this, the investors avoid to invest in Thailand due to this stress situation. It impacted on the devaluation of Thai Baht.

However, we have to keep an eye on Asean Economic Community (AEC) that is a gathering of 16 countries for instance Thailand, Singapore, China, and Japan. They became a single market and then it could increase competition with other regions. The economy and financial system are likely to be more improvable. 

Wednesday, 5 March 2014

What is the solution ?

The settlement of this crisis was IMF

IMF or International Monetary Fund lent some money to the countries that incurred from the crisis in order to stabilize their currencies. However, Thai government had to sign the agreement to borrow the money.
Here is some detail about the contract
- Thailand had to open free trade. 
- Change the regulation about the percentage of stock that foreigners can hold and decrease the stock price.
- Transformation public enterprise to privatization. 
- The government's budget has to overbalance 1% of GDP.
- Increase tax. (i.e. Value added tax was increased from 7% to 10%)
- Restriction on the interest rate. ( increase the rate to protect the devaluation of Thai baht)

Some economists argued that this agreement let the foreign countries can take benefits from Thailand. Meanwhile, Thai people faced the high cost of living.

Saturday, 1 March 2014

In 1997

After the currency of Thailand was collapsed , the crisis spread abroad the Southeast Asia.
The most affected countries from the crisis are Thailand, Indonesia and South Korea. However some countries, such as Singapore and China, were less hit.

In this case, I will focus on Thailand.

On 2 July 1997, the exchange rate changed suddenly from 0.03846 USD/Baht to 0.017857 USD/Baht. It implied that the amount of foreign loans that Thai government, Thai corporation and Thai individual investors had to pay back were doubled. It led to the problem of bankruptcy. Lots of financial institutions closed down. The unemployment ratio increased and the GDP per capita and the purchasing power decreased.
All in all, the Thailand faced the depression of the economy, the recession was 1.4% in 1997 and continued to be 10.5% in 1998.

These table and graph illustrate that the exchange rate decreased over time.

The impact of the crisis

This picture can explain the cycle of the crisis. To begin with, there is a weak and unstable in the exchange rate. It leads to the weaken financial institution and people tended to doubt of the financial system. (Bank run) Following this, the government has to impose the higher interest rate. However, the manufacturing and industrial activities are still slowdown and the unemployment rate increase.

Wednesday, 26 February 2014

What exactly happened before 1997 ??

There are some extent that we should know...

What was the Thai financial situation before 1997 ?

1. The accelerating Bangkok International Banking Facility (BIBF)
ฺBIBF is established on 1993. The aim of this bank is to borrow money from foreign countries, espeacially in dollars, and then use these amount of loans for lending inside and outside of Thailand. 
90% of money that is short term loans, was borrowed by the private sector for a long period. In 1997, BIBF borrowed money 70,000 million Baht ( $2,330 million) when the exchange rate was the fixed exchange rate.
Moreover, due to the BIBF, the firms that were in the Thai stock exchange market borrowed heavily in order to meet their need for capital

                                                                                   Source: FRED® Economic Data

As you can see from this graph, the debt to GDP ratio increases significantly from 80% in 1996 to 168% in 1998.

2. In that period, the banking system in Thailand lacked of efficient control, especially the risk management and the corporate governance . Thus, it created lots of non performance loans (NPL) that means that the borrowers cannot repay the loan. Furthermore, people borrowed money in order to invest in land which drove the price overvalued and it could impact on the burst of the real assets. The government force the 58 financial situations and 3 commercial banks to shut down

In 1997, Thai government had to spent money more than 600 billion baht ($20 billion) to support the banking system. Hence, Thai people distrusted in financial system.

3. The imbalance of the balance of Trade

Thai economy had suffered from the unbalance current account from $-7 million in 1992 to approximately $-16 million in 1996 because the expansion in import and export. Hence, the government needed to borrow the money from foreign countries to compensate those gaps.

4. The financial system of Thailand is not stable and the exchange rate was not flexible enough to show the real value of the fundamental economy. Thus, it could be a chance for the investor to do some arbitrages.

George Soros who is the foreign investor found the hedge fund ( Quantum Fund) to hit the Thai baht value. Thus, Bank of Thailand had to use the reserves, 24,000 million baht ($800 million), to protect the value of Thai baht. Moreover, the Malaysian Prime Minister accused him of ruining Malaysia's economic by buying the ringgit while it fell and selling in short term.

Overall, Thai government had lots of foreign debts when the exchange rate was the pegged exchange rate.

What happened when they change the exchange rate system ??

Friday, 21 February 2014

Recently, there was some stress financial situation in Thailand due to the politics.

On 17 February 2014, since the Government Saving Bank (GSB) decided to let the Bank for Agriculture and Agricultural Cooperatives (BACC) that manages the government's rice programme and runs out of money to pay farmers  borrow money 5 billion baht ($155 million), some of Thai people tended to withdraw money approximately 30 billion baht ($1 billion). The reason is that they were afraid that this loan may be contributed to the loss-ridden rice-pledging scheme.

A 30-billion-baht withdrawal is unusually high, compared to 7-billion-baht in normal day. All GSB branches had to order to double the cash reserves to meet the high demand.
Overall, there was 44.8 billion baht ($1.5 billion) was deposited meanwhile 105.7 billion baht ($3.52 billion) was withdrawn between 17 Feb - 20 Feb 2014. Following this, Woravit Chailimpamontri, the GSV's president, resigned  to take responsibility for the phenomenon.

However, GSB has already suspended and recalled money in order to decrease the violence of this situations.

People tended to withdraw money.
GSB union wore black suits to protest this loan.

Saturday, 15 February 2014

Hi ! everyone...Welcome to my blog

As I mentioned at the top of this page, I will discuss about the Asian Financial Crisis in 1977. So some of you are wondering how it is relevant to this picture. Hopefully that I will not teach you how to cook the most delicious Thai's food, Tom Yam Kung.

Asian Financial Crisis, as known as the "Asian Contagion", was started due to the collapse of Thai Baht.

How did it start ?
In July 1997, Thai government decided to use the floating exchange rate instead of using the pegged exchange rate or fixed exchange rate to the U.S. dollar because there was a financial overextension. Following this, the value of Thai baht was devalue immediately. For instance, on 1 July 1997, Thai people paid 25 Baht to get US 1 but after the declaration of the government, on 2 July 1997, they had to pay 57 Baht to receive US 1.

Since the begin of this crisis take place in Thailand, it is called Tom Yam Kung Crisis.

Here is the meaning of the contagion

Next post I will talk about what is the financial situation in Thailand before Asian Financial Crisis.