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1997 Thai Currency Crisis. ECON 462 Professor Castillo Spring 2011. Team 4 Abdiqani Hassan Louisa Pangilinan Yang Qichen. Causes of the Crisis. Baht was pegged to the U.S. dollar U.S. dollar appreciated, Thailand became less competitive Net exports declined

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1997 thai currency crisis

1997 Thai Currency Crisis

ECON 462

Professor Castillo

Spring 2011

Team 4

Abdiqani Hassan

Louisa Pangilinan

Yang Qichen

causes of the crisis
Causes of the Crisis
  • Baht was pegged to the U.S. dollar
  • U.S. dollar appreciated, Thailand became less competitive
  • Net exports declined
  • Thailand depreciated its currency to promote exports
  • International financial market lost confidence in Thailand
  • Investors sold their Thai baht
causes of the crisis continued
Causes of the Crisis - continued
  • Thai baht depreciated from 25 to 55 per $1 US dollar in the summer of 1997
  • Excessive Spending - both consumer and government
  • Banks lent money to everyone for private real estate and other spending
  • Liberalization of the financial sector encouraged domestic companies to borrow extensively from foreign countries
liberalization of the financial sector
Liberalization of the Financial Sector
  • Again, liberalization allowed capital to flow freely in and out of the country
    • Supervision was eliminated
    • Domestic banks were now open to outside the world
  • Since the foreign interest rate was lower Thai businesses and investors bought foreign currency and invested in domestic
  • Foreign debt increased from 20 bil to 95.4 bil USD in Nov 1997; the short-term debt accounted for over 40% which was 2.5 times of the foreign reserve, and accounted for over 40% of GDP
  • The US dollar depreciated, so there followed the Baht the speculation; the rest is history
more factors that contributed to the crisis
More factors that contributed to the Crisis
  • Real Estate Collapse
  • up to 15%
  • More than 150 Financial Institutions where shut down like the Financial One Company
  • Major lay offs
  • Poverty rate increased
  • Stock market dropped 75%
  • Fall of the world’s demand of semiconductors which was one of the Thai major exports
effects to the aggregate economy
Effects to the Aggregate Economy
  • Exports declined
  • Cost of raw material and wages increased
  • Lost major customers such as the U.S. and Europe
  • China emerged as an intimidating competitor in international trade
scope of the crisis
Scope of the Crisis
  • Thailand experienced severe banking-financial sector crises that began before its currency crisis
  • Pre-crisis nonperforming loan rates were 19%, or roughly 30% of GDP; in 1998, the delinquency rate increased by 30%.
  • The cost of recapitalizing and restructuring the banking system reached 35% of GDP.
scope of the crisis continued
Scope of the Crisis (continued)
  • The CPI rose about 11% between June 1997 and 1998
  • Thailand’s government domestic debt jumped to almost 10% of GDP; external public sector rose to almost 25%
  • 1997 Q4 RGDP dropped 4.4% vs the previous year; the first half of 1998 dropped another 15%
  • Unemployment rate averaged 1% during 1994-1997; it increased to 3.4% in 1998.
response of policy makers
Response of policy makers
  • Thailand followed tight monetary policies; it did not allow its monetary base to expand
  • Monetary authorities extended enormous credit lines to its banking systems; central bank credit to deposit money banks rose 761%
  • Thai government waited 26 days to ask the IMF for help
response of policy makers continued
Response of policy makers (continued)
  • IMF intervened - reversed the devaluation process
  • Temporarily increased interest rates to halt currency depreciation, and reduce expenditures in all sectors of economic system
the imf s intervention
The IMF’s Intervention
  • IMF gave a lending package of US$ 16.7 billion and asked the Thai government to reduce financial expenditure, increase value-added tax, and prohibit seeking help to those problematic financial institutions and real estates
  • Official foreign reserves increased to about US $14 billion by the end of March 1999------current account turned into substantial surplus----Thailand began to strengthen by Feb 1998

BUT DID THAT REALLY HELP???

bad impact
Bad Impact
  • Thailand faced a huge cost that was severe economic contraction---Real GDP growth declined from the second quarter of 1997, and declined another 8.4% in 1998.
  • IMF had forecasted the following: a positive real GDP growth of 3.5%, a current account deficit of US$ 5.3 billion, and a capital account surplus of US$ 1.8 billion in 1998. BUT EVERYTHING HAPPENED IN THE OPPOSITE

IMF badly misjudged the severity of the economic downturn

what the thai government did
What the Thai Government did
  • Baht used to link to USD. Now government let it free flow. Baht depreciated: 1USD-25 Baht 1USD-56Baht
  • Used tight financial and fiscal policy
  • Shut down problematic financial institutions, and merged the good conditional banks to enhance the power
  • Increased the supervision to the financial institutions, established special entities, and improved the process of auction of laws
recovery of the economy
Recovery of the Economy
  • Turned production from being domestic oriented to more export oriented
  • Currently, Thailand’s banking system is one of the strongest in the region based on capital adequacy ratio
  • Thai banks rely on domestic funding through its deposit base. Lending against deposits is about 88%; therefore, liquidity is no longer a problem
  • Now considering more on reducing risk in order to stimulate lending
what the thai crisis has taught us
What the Thai crisis has taught us
  • Correctly understand financial liberalization
  • Depend on the country itself at the prime time
  • Enhance supervision’s fairness and transparency
  • Preventing is always better than solving problems
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