Remember when Thailand was riding the crest of the Southeast Asian economic miracle? An emerging tiger with the highest growth rate in the world between the years 1985-95. It doesn't seem like that long ago, does it? So what happened? Many of us still don't know. 

Peter Suozzo

 Peter Suozzo, an analyst with Warburg Dillon and Read, recently gave Scott Murray some background on Thailand's current economic crisis, how it happened, and where we should go from here.

What are the roots of the current economic crisis?

It all started back in 1984, when the baht was devalued thirteen percent and pegged to a basket of currencies: approximately eighty percent US dollar, twelve percent Japanese yen and eight percent deutschemark. The Bank of Thailand would revalue the baht each day to reflect the weighted change in the value of those currencies.

The devaluation made Thai products competitive to begin with, and when the dollar began to weaken against the yen beginning in 1985, Japanese manufacturers found it cheaper to relocate production here and re-export. The result was an explosion of exports, which grew 700% between 1985 and 1995.

This was good news?

Yes, but where did the money go? Look around. The massive influx of wealth created its own demand: new businesses sprung up, which needed office space; rising personal incomes meant more demand for better housing; the pressure led to higher land prices, which fueled a speculative fever and a tremendous boom in property investment. Demand for office space and housing grew rapidly during the boom years of the late 1980s. Prices rose sharply, drawing in speculators - by 1992, everyone, it seemed, was speculating on property investment, buying property, condos, houses and office blocks. In just seven years (1987-1995), spending on real estate grew a staggering 1800%!

The real estate boom reached a frenzied pitch in 1992 when real estate projects that would eventually add three million sq. feet of space were initiated. These would take two-three years to complete, and when this new office and residential space actually came into the market in 1995 investors began to realize that perhaps even Thailand's turbocharged growth would not permit all of this space to be filled.

Where did the money to support the boom come from?

The boom created a tremendous demand for money. Local banks had more lending opportunities than they could handle - their loan books twenty-four percent per year between 1986 and 1996, and still there was a demand for more. The finance companies sprung up as a means to channel the surplus generated by exports into riskier projects, and to supply funds for the nouveau riche and wannabes to buy BMWs and Mercedes-Benzs. Fast loan growth and fat loan spreads meant big profits and rapid growth for these companies. They listed on the stock exchange, creating further momentum for the boom and then financed margin loans so investors could buy more stock!

The powerful demand for money put a strain on the local banking system there as there was simply not enough local savings to fund the investments. So, in March 1993 then-Finance Minister Tarrin Nimmanhaeminda opened the Bangkok International Banking Facility, or BIBF, which would allow Thai companies to obtain loans in US dollars. With the baht effectively pegged to the dollar, and interest rates in dollars about six percent lower than local interest rates, the decision was simple: between 1992 and 1996, foreign borrowings grew 750%. This would have been fine if the peg held but as we know, it didn't

So what pushed Thailand over the cliff?

In 1995, the Bank of Thailand, concerned that economic growth was out of control, began clamping down on the amount of lending allowed to real estate projects. This was a problem for property developers who would use downpayments to obtain loans to build the projects which they would then sell to pay back the loans. Without loans, developers couldn't finish projects and buyers couldn't buy them. And with a glut developing, buyers - often speculators - had second thoughts about buying and would change their minds with increasing frequency. Developers were hit from both sides, and suddenly it appeared that the banks and finance companies had made a lot of loans that might not be so easy to collect and that the value of the property collateralizing those loans might be worth a lot less than they originally thought. What hurts developers also hurts banks and finance companies, and since these made up about seventy percent of the SET index, the concerns began to ripple through the stock market. And then came the export crash.

Why did exports crash, and why is it significant?

Thailand imports more than it exports, which means that the country must find a source of foreign currency to pay for the difference. That foreign currency comes from either from the Bank of Thailand's reserves or from foreign investors looking for higher returns. As long as foreign investors feel comfortable with the risk of investing in Thailand, they will continue to put their money here. At the end of 1995, though, only five percent of this foreign money was in long-term investment; seventy-five percent was short-term foreign loans; and twenty percent "portfolio investment" - nervous, short-term capital that leaves at the first sign of trouble.

And trouble happened: in a span of eighteen months the US dollar rebounded forty-three percent from a historic low of eighty-one yen per dollar in April 1995 to 116 per dollar at the end of 1996. As the value of the dollar rose, the baht became ever more expensive compared to the yen and mark, making Thailand's exports to Japan, Europe and Southeast Asia more costly and these countries take sixty-three percent of Thai exports. Thailand's exports especially low-end products such as clothing and shoes, where labor costs are critical, were becoming more expensive anyway, as the boom years had driven up wage rates in Thailand to levels far above those of its lower-cost competitors in other countries. The final blows came from China, which devalued its currency forty-three percent between 1993 and 1996, causing an export boom similar to Thailand's, and NAFTA, which caused the US to increase imports from Mexico at Thailand's expense.

The result was a collapse in exports, from a twenty-four percent growth in 1995 to zero percent in 1996, while imports continued to grow, although at a lesser rate, four percent in 1996. Suddenly the current account deficit, which at eight percent of the GDP could be shrugged off while money was flowing into the country, was now extremely worrisome. Foreign investors became nervous about the ability of Thailand to continue to attract foreign money to fill the gap. If Thailand couldn't, it would have to spend its reserves, and it is reserves that back up a country's currency. The baht was now vulnerable.

The sharks began to circle in late 1996, after several months of poor export numbers, with speculators shorting (selling) the baht. The Bank of Thailand was forced to spend its reserves buying baht back from the speculators, and raised interest rates high to attract foreign money (i.e., to create buying pressure under the baht, which would push up the currency's value). The high interest rates made life impossible for finance companies, which were short of cash anyway: their loans were not being paid back and the stock market was slumping, driving away customers from their retail brokerage operations. The Bank of Thailand, worried about the impact of massive failures of finance companies, pumped 430 billion baht into them, to no avail - eventually most of them were shut down. And with reserves draining rapidly, the Bank of Thailand gave in to the inevitable, broke the baht's link to the dollar and sought an injection of new reserves from the IMF.

How does Thailand get out of this?

With difficulty, frankly. Thailand squandered an opportunity to channel its new-found wealth into productive enterprises, to upgrade its schools and to force foreign investors, especially the Japanese, to transfer technology and expertise to Thais (as Malaysia has done far more aggressively). Property investment does nothing to add to the skills of Thais. So structurally, Thailand has a long way to go to improve its competitiveness.

In the short term, first, Thailand needs to boost its exports. That's hard to do when the financial system is frozen and even good exporters can't get operating funds, so these businesses need to be given priority for funds. This is beginning to happen.

Second, foreign lenders must roll over or restructure $70 billion in loans, about half of which is coming due this year. Tarrin's efforts in Japan are a good start, with Japanese lenders apparently willing to convert dollar loans into yen loans, at lower interest rates.

Third, Thailand could relax its restrictions on foreign ownership of assets. The United States relatively free investment climate has allowed it to develop as it has substantial British ownership of American assets funded the country's industrial base. So foreign investors need to be seen as a positive force for Thailand's growth and not as carpetbaggers or economic colonialists.

Finally, and hardest of all, Thailand needs to develop a coherent vision of the future. You may disagree with (Malaysian PM) Dr Mahathir's views, but he knows what he wants for the country. Thailand, with its weak political system, has never been able to craft and implement a consistent social and industrial policy.

A last point to remember is that crises are largely self-curing. Imports are falling off and exports are rising, which means that in a very short time Thailand will have a current account surplus. Soon the country will not need external financing (although it should still promote direct foreign investment). Once the country gets past the payments of maturing foreign debt, the baht will recover, perhaps to thirty-five, and the recovery can begin.

How will the IMF help?

The IMF lends emergency funds on condition that the borrowing country put its house in order through strict economic policies. With the IMF providing a standby credit line, regional countries felt secure enough to lend Thailand funds, which will be used primarily to rebuild its foreign reserves. The IMF's measures to stabilize the economy should also reassure foreign investors (both short-term and long-term) that Thailand is a safe place to put their money, and they will cause speculators to back off. The IMF always requires a strict program to stabilize the economy.

What is the current account deficit?

The current account is the country's foreign currency earnings (exports and services such as tourism) less foreign currency expenses (imports and such things as money spent by Thais overseas). Thailand's rapid growth has given it a great appetite for imported goods that it doesn't yet produce, such as construction equipment and BMWs. In fact, the more Thailand wants to export, the more it has to import to build the factories and equip them with machinery. And as Thais have become wealthier, they have tended to buy more foreign consumer goods.

Since Thailand's expenses have been greater than its earnings (that is, it has a current account deficit), the difference has to be made up by importing funds from overseas. This is normal for developing countries populations are young and there are many growth opportunities, while more developed countries are slower-growing and often have older populations with savings to invest.

Unfortunately, much of the funds were invested poorly. Thai property developers went on a binge during the boom years adding huge amounts to the country's housing stock so that today the existing supply is ten times higher than the demand. Much of the building (and the BMWs and Mercedes that came with it) was funded by finance companies, which recycled funds into stock market investments. The price of property and stocks went up and up, and as investors saw the gains to be made jumped in, borrowing from those same finance and brokerage firms so they could invest too.

Unfortunately, property investment does not increase a country's skills or knowledge, and Japanese firms are notoriously sticky about sharing technology. The technology they are willing to share is often third-rate.

Much of the imported funds have been good funds long-term money invested in Thailand to build factories. This money, once committed, tends to stay in the country through good times and bad. But much of the imported funds have been short-term money investors looking for a few more percentage points in interest than they can get at home, or looking to buy Thai stocks. This money is plentiful, but can come and go very quickly if times get tough.

For further info contact Peter Suozzo c/o:
Warburg Dillon Read Securities Limited
93/1 Diethelm Tower A, 13th Floor
Wireless Rd, Patumwan, Bangkok
Thailand, 10330

Tel: (662) 651-5735
Fax: (662) 252-3966
E-mail: This email address is being protected from spambots. You need JavaScript enabled to view it.

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