Remarks from the Thailand Crisis
From the analysis of the causing factors of the Thailand currency crisis in 1997, several remarks are made in order to provide recommendations. It is hoped that these recommendations would help avoid future financial crisis similar to the 1997.
Sequence of Financial Liberalization
Thailand’s economies before the financial crisis have put a lot of weights on exports and the baht’s stability was the key to the export ratios. Generally speaking, changes in foreign exchange rate and financial liberalization would trigger a significant impact on the fluctuation of the currency, as well as the country’s export revenues. According to Hansanti, financial ...view middle of the document...
If the cost of maintaining the fixed system exceeds the benefit, government should not delay its review on the appropriateness of the exchange rate system, in order to reduce the risk of having a currency crisis similar to the Thailand 1997’s.
Control on Capital Flows
The financial liberalization adopted by Thailand government has loosened control of the capital. Loosen control on capital inflow reduces the costs of borrowing and leads to excessive lending and borrowing at the same time (Hansanti, 2005, p171). In Thailand, capital inflows went to unproductive and inflated sectors such as the real estate, not benefiting the country’s economies in the long run. Poor control of capital outflows has weakened the domestic financial sector when there is no cost for fund movement out of the country (Hansanti, 2005, p171). To improve the stability of domestic financial market, government should have certain degree of control on capital inflows and outflows. For instance, according to Oliver, control on capital outflows can be used to limit the downward pressure on currencies and it is “mainly applied to short-term capital transactions to counter speculative flows that threaten to undermine the stability of the exchange rate and deplete foreign exchange reserves” (u.d.). In summary, capital control is used to insure monetary and financial stability during persistent capital flows.
Attention on Rapid Credit Expansion
Another lesson is that rapid credit expansion by banks and other financial institutions which far exceeds the growth of real economy often is a signal of a trouble in financial sector. When it happened with a concentration of credit in real estate and equity markets, especially in the case that most of the lenders do a bad job checking borrowers’ creditworthiness, the likelihood of a financial crisis could be even larger (Goldstein, 1998). Government regulatory agencies for financial sectors should pay special attentions to these signals and take effective preliminary measures to prevent a financial crisis in case of a similar situation.
Moreover, countries with high level of foreign liabilities should hedge against currency risk. As discussed in earlier part of this paper, the rapid deterioration of the economic situation is partially due to excessive offshore borrowing by domestic firms. These firms were facing with large foreign currency denominated debt. After the exchange rate of the baht against US dollar plunged, the value of the debt in baht term vastly increased leaving these firms insolvent. So it is recommended for central bank to enforce a regulation forcing domestic firms to hedge at least a certain proportion of outstanding foreign liabilities (Jacque, 1999).
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