Thailand's Currency Crisis: Solutions
Beyond academic speculation from countries worldwide, the countries affected by the East Asian crisis have learned some hard lessons. These lessons forced the countries into action to remedy the multiple economic problems created by the currency crisis.
Reactions
Lessons: The main lesson Thailand learned as a result of this crisis was that the monetary authorities had stuck too long with the fixed exchange rate. It reached a point where managing the exchange rate was no longer possible, or desirable. Instead, Thailand realized that they should now focus on inflation. They argue that low and stable inflation is the best way to keep the exchange rate competative. They are attempting to align Thailand's inflation level with the international inflation level, which they predict will keep the nominal and real exchange rates stable. In addition, the Bank of Thailand badly needs to restore its reputation: without regaining the confidence of investors, it will never recover. To gain this high confidence level once again, the Bank has decided to experiment with inflation targeting, as described above.
Responses
The initial response to the Thai currency crisis was the closing of many ailing banks, the cleaning up of non-performing loans, the encouragment of surviving banks to merge with other banks, and compelling these banks to meet the capital adequacy ratio set by the Bank for International Settlements.
Corporate sector reforms were also taken. For example, capital structure improvement was encouraged through debt reduction, and business restructuring was undergone to remove excess capacity. In addition, there was a strong push toward the reorientation of conglomerates on core specialists as well as a strong push for the upgrading of corporate governance standards.
Outside Thailand's borders, several factors helped steer Thailand's economy back in the right direction. External payments (foreign loans to Thailand requiring interest payments) were stabilized through IMF-led aid programs, the rescheduling of short-term foreign debts, and reductions in foreign borrowing through painful reversals of current account deficits were all implemented.
- IMF: emergency rescue monies IF the country adopts certain policies that limit vulnerability
- also implemented market-opening measures to facilitate foreign investment
These responses thankfully resulted in several key accomplishments which have helped restore Thailand's economy. Main accomplishments include strengthened financial systems, enhanced transparency of policies and economic data, restored economic competitiveness, modernized legal and regulatory environments for more stringent regulatory oversight, and consistent application of accounting standards.
Aftermath
Thailand today: Fears of significant backtracking in Thailand's existing commitments have not materialized. The Thai government has announced it's intention of adhering to all existing commitments with regard to trade policy reform. However, the currency crisis has made it more difficult for the government to contemplate tariff reductions and/or relaxation of the non-tariff barriers in industries badly affected by the crisis.
In addition, the currency crisis led the Thai government to reconsider policies of liberalization (which characterized the first half of the 1990's). Debate over which type of liberalization contributed to the crisis falls into two categories: trade policy liberalization or capital account liberalization. The generally accepted outcome of this debate resulted in the decision that capital account liberalisation was responsible. Therefore, major changes to exchange rate policy were implemented but the commitment to trade liberalization has remained essentially intact.
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Thailand's currency: the baht
