Lessons of 1997 to help Thailand against future crises
July 02, 2014 00:00 By Erich Parpart
The Baht and financial institutions are much stronger and stable now than during the financial crisis of 1997, so now they can provide the country with a firm foundation against future financial storms, the Thailand Development Research Institute said yes
“Government intervention through the fixed-exchange-rate regime along with lost export competitiveness, lack of supervision of commercial banks and the early practice of financial liberation without preparation were the problems in 1997, but
they are all but gone now,” said Somchai Jitsuchon, research director for inclusive development at the TDRI.
The crash of the baht on July 2, 1997, triggered an unprecedented financial crisis in East Asia.
Chantavarn Sucharitakul, assistant governor for the Financial Markets Operations Group at the Bank of Thailand, also said the situation today was very much different from 1997 when there were imbalances in the economy, ranging from corporate indebtedness and currency mismatches to a highly leveraged banking system.
Somchai said the exchange-rate peg led to the floating of the baht and the eventual collapse of the Thai currency, but monetary policy had changed and now the practice of non-intervention had led to a more stable unit.
The baht plummeted after it was floated, bottoming out at 48.80 to the US dollar in December 1997. Yesterday, it was trading at Bt32.59.
“Before, the government’s monetary policy was not reflecting the true value of the baht, since it was listening too much to exporters, but now the hands-off approach means that the baht is going with the market mechanism and the currency is more stable,” he said.
However, the problem of lost competitiveness in exports still has not been fixed, as manifested by the growing problems in exporting car parts due to oversupply and information-technology products such as hard disk drives from the lack of demand for such components.
The country ran a deficit in its trade and current accounts during 1997 because of weak export competitiveness.
“The declining competitiveness in our export products can lead to a gradual decline in the baht’s strength,” he said.
Chantavarn has given credit for the less turbulent baht to financial institutions.
“The relative stability of the baht is the product of years of development and reform efforts by the corporate, banking and official sectors in rebuilding their balance sheets, improving risk management and avoiding excessive leveraging,” she said.
Somchai said financial institutions were in much better shape now than in 1997, since they are taking lower financial risks and have improved their risk management and governance through closer supervision and a new development policy. “The position of financial institutions is much better now and it is a different movie from 1997 when there was a lack of supervision and high risk-taking, which led to instability,” he said.
Somchai does not see any financial crisis on the horizon.
The situation will evolve around the economies in the United States and the European Union, which are improving.
“I do not foresee any financial crisis in the near future but Thailand now has a greater ability to handle a future crisis if it does occur, since the country’s currency and banking system are much stronger now and monetary policy reflects the market mechanism,” he said.
Besides the strengthening of the baht since 1997, international reserves have climbed from US$27 million in December of that year to $167.54 billion as of the end of May.