Introduction to Thailand Case Study and it R l t L PD Rits Relevance to Lao P.D.R.

Financial Programming and Policies (FPP) WorkshopFinancial Programming and Policies (FPP) Workshop5 – 16 May 2014, Vangvieng, Lao P.D.R.

Suppakorn Chotika-arpaSuppakorn Chotika arpaManatchai Jungtrakool

Bank of Thailand

Agenda

Pre Crisis BackgroundPre-Crisis Background

Causes of Thailand Financial Crisis in 1997

Relevance of Thailand Crisis for Lao P.D.R.

Topics The Course will CoverTopics The Course will Cover

2

Agenda

Pre Crisis BackgroundPre-Crisis Background

Causes of Thailand Financial Crisis in 1997

Relevance of Thailand Crisis for Lao P.D.R.

Topics The Course will CoverTopics The Course will Cover

3

Thailand’s Economic Conditions Pre-1997 :Changing from domestically oriented to Int’l connected

TheBOOMofForeignDirectInvestment(FDI)

Export‐Led economy mostly by the manufacturing sectorExport Ledeconomy,mostlybythemanufacturingsector

ExportdestinationwasclusteredaroundG3economies,notwell‐diversified

Introductionof“InternationalBankingFacility”(IBF)

Crawling pegged exchange rate with implicitly knownCrawlingpeggedexchangeratewithimplicitlyknownmovingband(± 0.20frompreviousday)

4

Th F l d E i B ( h )These Factors led to Economic Boom (overheat)

DomesticOverheating:Recap

5

E i G h A i 7 6% d i 1977 1996Economic Growth Averaging 7.6% during 1977 – 1996

Domestic Overheating in ThailandDomesticOverheatinginThailand

400Index 1980=100

300

350

Real GDP

P t ti l GDP

200

250Potential GDP

100

150

6

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

Source:BOT’sstaffcalculation

d C ib d A P i B bbl… and Contributed to Asset Price Bubbles

The Bullish Capital MarketTheBullishCapitalMarket

1,600

1,800Index

1 000

1,200

1,400SET Index

600

800

1,000

0

200

400

7

Jan-80 Jan-84 Jan-88 Jan-92 Jan-96 Jan-00 Jan-04 Jan-08 Jan-12

Source:TheStockExchangeofThailand

d C ib d A P i B bbl… and Contributed to Asset Price Bubbles

RealEstateBubble

NewHousinginBangkokMetropolitant andVicinityUnit200,000

140,000

160,000

180,000

80 000

100,000

120,000

40,000

60,000

80,000

8Source:BankofThailand

20,000

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Agenda

Pre Crisis BackgroundPre-Crisis Background

Causes of Thailand Financial Crisis in 1997

Relevance of Thailand Crisis for Lao P.D.R.

Topics The Course will CoverTopics The Course will Cover

9

Under the boom, vulnerabilities were accumulated led by a number of factors

P i t tl hi h t t d fi it Persistentlyhighcurrentaccountdeficits

FinancialandCapitalaccountliberalization

f Weaknessesinthefinancialsystem

Forbearanceofsupervisoryauthority

Inappropriatemacroeconomicpolicies

Politicalinstability

10

Persistently high current account deficitsPersistently high current account deficits

Percent of GDP CurrentAccountBalance

10

15

5

0

-10

-5

11

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Source:IMFWorldEconomicOutlookDatabase,April2014

Financial and Capital account liberalizationFinancial and Capital account liberalizationTheBIBF,establishedin1993,enhancedthecapacityofThaiFIsininternationalbankingbusinessandfacilitatedforeignborrowingfordomesticinvestment.g g g

6/12/2014

Foreigndebtbuildupfollowed.Mostborrowingwasprivate.

Boomincapitalinflowsdenominatedbyshort‐termdebtdominating

Source:BankofThailand 12

Weaknesses in the financial system

Weak governance at corporate firms and financial institutionsWeakgovernanceatcorporatefirmsandfinancialinstitutions

lendingmoneyrecklesslywithoutaprudentprocedureoflendingcontractionandmonitoring

Large‐scalematurityandcurrencymismatchonbalancesheets

Reliedonshort‐termborrowinginforeigncurrencybutprovidedlong‐termloansindomesticcurrency

13

Forbearance of supervisory authority

A weak and under supervised financial system Aweakandunder‐supervisedfinancialsystem

Delayedpolicyresponsestothemountingproblems

14

Inappropriate macroeconomic policies

TheImpossibleTrinity

FixedExchangeRate

Free Capital Movement Effective Monetary Policy

15

FreeCapitalMovement EffectiveMonetaryPolicy

Political instability

Politicsintransitionperiodof“democracy”withinstability:within6yearsbeforethecrisis,Thailandhad4governments,10financeministers,and4BOTgovernors

16

The trigger points

Sharpfallinmerchandiseexportsin1996dueto Falloftheworld’sdemandofsemiconductorswhichwasoneoftheThaimajorexports

Chinaemergedasanintimidatingcompetitorininternationaltrade

theUSdollarappreciated,ThailandbecomelesscompetitivesincebahtwaspeggedtotheUSdollar

Thailand’sEffectiveExchangeRate

130

150Index 2010 = 100

110

130

70

90NEER

REER

17

50Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14

Source:BIS

Investors’ confidence waned as economic slowdownInvestors confidence waned as economic slowdown, leading to excessive capital reversal

NetFlowofPrivateFinancialAccountMillions of US Dollars

25,000

10,000

15,000

20,000

-5,000

0

5,000

-20,000

-15,000

-10,000

18Source:BankofThailand

-25,000

1988 1990 1992 1994 1996 1998 2000 2002 2004

V l bilit t l ti tt k i d tVulnerability to speculative attacks increased as reserves to short-term debt declined. Under attack, reserves fell

precipitously, leading to the abandonment of the fixed parity.

InternationalReservestoShort‐termDebtRatio ExchangeRate

3.94.1

3.84

5Baht per USD

50

60

1.8

2.22.5

3.33.1

2

3

30

40

0.71.0

1.8

0

1

2

10

20

30

19Source:BankofThailand

01997 1998 1999 2000 2001 2002 2003 2004 2005 2006

10Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11 Jan-14

Asset price bubble burst and banks runAsset price bubble burst and banks run

20

Many businesses closed down and unemployment rose

21

This was one of the worst in Thai economic history

Percent15

Thailand:RealGDPGrowth

5

10

-5

0

-10

22Source:WorldBankandOfficeoftheNationalEconomicandSocialDevelopmentBoard(NESDB)

-15

1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011

Agenda

Pre Crisis BackgroundPre-Crisis Background

Causes of Thailand Financial Crisis in 1997

Relevance of Thailand Crisis for Lao P.D.R.

Topics The Course will CoverTopics The Course will Cover

23

Why the Thailand Crisis is still RelevantWhy the Thailand Crisis is still Relevant

Thailand financial crisis appeared to be very similar toThailandfinancialcrisisappearedtobeverysimilartoMexicancrisisof1994‐95.

Thecrisiswasbuiltuponmacroeconomicimbalancesofthecountry,combinedwithfaultystructureoffinancialsector.

Asimilartypeoffinancialcrisiscouldhappentoanycountryi h finthefuture.

Theglobalfinancialcrisisisthemostrecentinstancewhereelement of the Thailand crisis resurfacedelementoftheThailandcrisisresurfaced.

24

Domestic overheating in Lao PD R ?Domestic overheating in Lao P.D.R. ?

16

Laos:RealGDPGrowthPercent

8

12

4

8

0

25

-4

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013

Source:IMFWorldEconomicOutlookDatabase,April2014

B k dit h d d idl i iBank credit has expanded rapidly, raising concerns about domestic banking sector soundness

Laos: Credit to the EconomyLaos:CredittotheEconomyAnnual percent change

70

50

60

30

40

10

20

26Source:BankofLaoP.D.R.AnnualReportandIMFStaffReport

02007 2008 2009 2010 2011 2012 2013 Avg. 2007-2013

Persistently twin deficitsPersistently twin deficitsIs it going to be sustainable?

Laos:CurrentAccountBalance

Percent of GDP

Laos:FiscalBalance

Percent of GDP

-5

0

5

0

2

4

20

-15

-10

-4

-2

0

-30

-25

-20

-8

-6

27Source:IMFWorldEconomicOutlookDatabase,April2014

-351990 1993 1996 1999 2002 2005 2008 2011

-102000 2002 2004 2006 2008 2010 2012

I t ti l t ff d tInternational reserves may not offer adequate protection against adverse external shocks

Laos:InternationalReservesIn months of imports4.0

2 5

3.0

3.5Traditionallevelatleast3monthsofimports

1.5

2.0

2.5

0.5

1.0

28Source:LaoP.D.R.– StaffReportforthe2013ArticleIVConsultation

0.0

Average 2000 - 2008 2009 2010 2011 2012 2013

Sharp real exchange rate appreciation, partly due to rising inflation, threatens country’s competitiveness

29Source:LaoP.D.R.– StaffReportforthe2013ArticleIVConsultation

Agenda

Pre Crisis BackgroundPre-Crisis Background

Causes of Thailand Financial Crisis in 1997

Relevance of Thailand Crisis for Lao P.D.R.

Topics The Course will CoverTopics The Course will Cover

30

Topics the course will coverTopics the course will cover

Real sectorRealsector

Externalsector

Fiscalsector

Monetary sectorMonetarysector

31

Real sector key issuesReal sector – key issues

Understanding the system of national accountsUnderstandingthesystemofnationalaccounts

MeasuringrealGDP

GeneratingGDPprojectionsusingproductionandexpenditureapproachandreconcilingthose

A l G d d AnalyzingGDPtrendsanditscomponents

32

External sector key issuesExternal sector – key issues

Understanding the current account balanceUnderstandingthecurrentaccountbalance

Discussingtheroleofrealexchangerateforthecurrentaccount

Analyzinglinkagesbetweenrealsectorandcurrentaccount

33

Fiscal sector key issuesFiscal sector – key issues

Understanding the basic principles of fiscal accountingUnderstandingthebasicprinciplesoffiscalaccounting

Generatingbudgetprojections,i.e.revenue,expenditureandfinancingprojectionsg p j

Discussingfiscalpolicyoptionsforaddressingthecrisis

G bl d b Generatingpublicdebtprojections

34

Monetary sector key issuesMonetary sector – key issues

Understanding the monetary accounts and its linkages toUnderstandingthemonetaryaccountsanditslinkagestoothersectors

Discussingmonetarypolicyoptionstoaddressthecrisis,g y p y p ,especiallyexchangerateoptions

35