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.