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Q: Why was there a run on Thai Baht?

Ans: the performance of Thai economy has been decent between 1991- 96 with a GDP growth over 8%
and an inflation < 6%. But still, there were some structural weaknesses in Thai economy because of
which, there was a run on Baht. Some of these structural weaknesses were,
1. Large current account deficit over the years: Even though the real GDP growth of Thailand was
good, but still Thailand was not able to bring its current account in surplus. One of the reasons
for this was low competitiveness of Thai exports. Moreover, the manufacturing exports had
shifted to Japan and lower assembaly products have shifted to indonecia and Philipines. The
current account deficit which was closer to 8% in 1995-96 indicated that Thailand was unable
balance its current account and sent a message that this situation was becoming dangerous and
thus speculators started betting against the currency.
2. Immergance of asset bubble: The heavy borrowings by Thai banks in foreign currencies lead to
an increase in domestic demand and encouraged investment in marginal projects. Because of
this, the prices of real estate jumped and a property bubble developed. This over investment
also lead to vasted resources and access capacity in the economy. All these factors lead to a
general beleave amongst investers that bubble was about to burst and so they started
withdrawing their investments from the economy. This lead to a downward pressure on Thai
Baht.
3. Dwindling reserves to support the peg: Thai Baht was peged to a basket of currencies dominated
by dollar. The central bank intervened in foreign exchange markets to support the peg. This
created an opportunity for Thailand in initial years when the capital inflows were very high.
These inflows should have caused an appreciation in Baht but Thai central bank rigidly
maintained its exchange rate regeme. Because of this, the Thai Baht was actually at its
deppriciated value which should have helped Thai exporters by improving their competitiveness
in global markets. It couldnt happen because they dint have competitive products and the
labour was inefficient. In may 1997, Thai central bank had to spend 10 billion dollars in a singal
day to maintain the peg. The entire reserves with central bank were 38 billion dollars only.
Clearely, it was impossible for them to defend Baht in the long run.
4. Adverce effect of high interest rates on domestic economy: The interest rates were increased by
central bank to deter speculators these increased interest rates 20% for banks and 25% for
finance companies created problems for domestic mannufacturors and property companies to
service their debt. This also increased the bad debts in the economy to 15 billion dollars just to
property sector.