Thai Currency Crisis- Causes, consequences and government policy

Thai Currency Crisis- Causes, consequences and government policy

Causes of the Crisis

1. Baht was pegged to the U.S. dollar

2. U.S. dollar appreciated, Thailand became less competitive

3. Net exports declined

4. Thailand depreciated its currency to promote exports

5. International financial market lost confidence in Thailand

6. Investors sold their Thai baht

7. Speculator effects

8. Bop deficits

 9. Thai baht depreciated from 25 to 55 per $1 US dollar in the summer of 1997

10. Excessive Spending - both consumer and government expenses

11. Banks lent money to everyone for private real estate and other spending

12. Liberalization of the financial sector encouraged domestic companies to borrow extensively from foreign countries.

Consequences

1. Real Estate Collapse up to 15%

2. More than 150 Financial Institutions where shut down like the Financial One Company a bank

3. Major lay offs

4. Poverty rate increased rapidly

5. Stock market dropped 75% suddenly

6. Fall of the world’s demand of semiconductors which was one of the Thai major exports

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.

Government decisions toward crisis

1. Thailand followed tight monetary policies; it did not allow its monetary base to expand.

2. Monetary authorities extended huge credit lines to its banking systems; central bank credit to deposit money banks rose 761%.

3. Thai government waited 26 days to ask the IMF for help.

4. 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.

5. 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 all steps worked wrongly.