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1997 Thai Currency Crisis ECON 462 Professor Castillo Spring 2011 Team 4 Abdiqani Hassan Louisa Pangilinan Yang Qichen.

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Presentation on theme: "1997 Thai Currency Crisis ECON 462 Professor Castillo Spring 2011 Team 4 Abdiqani Hassan Louisa Pangilinan Yang Qichen."— Presentation transcript:

1 1997 Thai Currency Crisis ECON 462 Professor Castillo Spring 2011 Team 4 Abdiqani Hassan Louisa Pangilinan Yang Qichen

2 Team 4 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

3 Team 4 Formation of the Trade Deficit

4 Team 4 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

5 Team 4 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

6 Team 4 Effects of Decreased National Saving

7 Team 4 Thai Baht Exchange Rate (1995-1999)

8 Team 4 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

9 Team 4 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

10 During the Crisis

11 Team 4 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.

12 Team 4 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.

13 Team 4 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

14 Team 4 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

15 Team 4 Effects of a Decrease in Investment Demand

16 Post-Crisis

17 Team 4 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???

18 Team 4 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

19 Team 4 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

20 Team 4 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

21 Team 4 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

22 Team 4 Thank You

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