1. Bad discipline regarding spending and saving behaviour.
Some people may think that because of Geoge Soros, Thailand inevitably had to face a hard time in financial crisis in the year 1997 causing lots of businesses went bankrupt, but never wonder that actually the problem started from the smallest point of economic that is not far from us. Yes, its Thai people. We never question how the individuals spending behaviour can affect the future of Thailand like it seriously did in the 1997 financial crisis. Although, it may seem very small in the eyes of people at large, it was, in fact, the beginning of the whole story.
To sustain the real economic growth and prosperity of 7-8%, there must be an increase production. In order to complete that goal, continuous investment which is approximately 43% of the GDP is needed; however, such investment must come from the saving of the people. The main problem comes from the fact that, overall saving from every sector stood around 34.3 of the GDP due to the big spending in the private sector. This 8% is actually a Deficit in current account. As a result, resources from the foreign countries are required in order to fill this Resource gap so that economic growth can still be sustained.
When Thai people brought foreign currency to buy foreign goods, it indirectly means that we acquired foreign resources to use in our own country, while the usage of Thai goods and services from the foreigners means we export our resources.
Once there are activities that bring foreign currency out of the country more than bring in especially in current account, the deficit is the result. In other words, it is the resource gap. In conclusion, the more we spend, the higher the need for foreign resources to compensate the resource gap.
If there is a balance in current account, the exchange rate then could me maintained. But if there is not quality loans and long term funds, the exchange rate will be fluctuating which increases production costs no matter oil, machinery and etc go up resulting in inflation of the economy.
Thailand had deficit in current account around 300 billion Baht per year, fortunately, there is still a net positive of foreign currency from the investment which will be part of Capital account. This account consists of foreign direct investment or FDI, portfolio investment including foreign loans both borrowed and repaid.
Once we combine current account with capital account, the result is Balance of Payment Account. The excess will be carried forward to International Reserves, which is consisted of gold, and basket of foreign currency. In the opposite, if the capital account cannot compensate the current account, there will be a decline in internal reserves since the government has to bring the foreign currency out to buy back Thai Baht in order to stabilize the exchange rate. This action taken by the bank of Thailand is known as Thai Baht protection.
2. Fixed exchange rate + hedge fund by George Soros
How Georges funds could attack the Thai Baht? Many people may think that he just used his funds worth of 50 billion Baht together with news and circumstances in speculation of Thai Baht. Actually, his idea was more subtle than that.
Knowing for sure that Thai Baht will have a problem in the future due to the policy of fixed exchange rate which could not reflect the true status of Thai economy, and the appreciation of US$, he accumulated Thai Baht that circulated in various countries since the December, 1996. Once he had enough amount of Thai Baht, the first process was to spread rumours in Singapore that there was going to be Thai Baht devaluation. Simultaneous, he made a picture that his funds was about to attach Thai Baht currency by selling Thai baht for US$, but not transferred the money yet in 3 banks.
When all the speculators witnessed this action, they followed Soros by selling Thai Baht for speculation. Like normal goods, when there was an excess of supply, the price will eventually fall. Thai Baht devalued from 25 Baht/US$ to 26 Baht/US$ causing the disruption in Thai economic. To solve this problem, the Bank of Thailand or BOT jumped into the field in order to protect Thai Baht. There were 2 methods that the BOT employed.
Firstly, they brought the international reserves worth of 40 billion US$ that has been accumulated in the last 10 years before the crisis to buy Thai baht back hoping to eliminate the excess of Thai Baht supply in the market, and finally stop the devaluation.
Secondly, they forced the Thai inter bank rate in the short run to so high that will make the speculation harder to do since all the speculators now had higher cost. The high interest rate for Thai baht, also led to high interest rate for Thai baht in foreign banks since they had to get Thai Baht from the Thai financial institution at the end.
Around the middle of February 1997, domestic inter bank rate went up to 40% while it rocketed to 80% in bank in New York since BOT vacuumed lot of Thai Baht out of the system already.
The people who had hard time were no one but those who followed George Soros because they just committed a speculation by means of short sale like the way they normally do. In other words, these people sold Thai baht without having the money on hand. Consequently, when it was time to deliver Thai Baht, they had to borrow with the high interest rate. And guess whom that they asked for Thai Baht? Yes, from George Soross funds. The bottom line that George Soros could bring the profit out from this circumstance was estimated to be around 2 billion Baht.
George Soros did not get profit from the exchange rate directly but high interest rate because he could predict the reaction from the BOT knowing that they would fight with everything they had in order to protect Thai Baht. Unfortunately, in this game Thailand lost and the price was the 40 billion US$ worth of international reserves.
3. Investment in non real sector like stock speculation and real estate
4. Mismatched fund between long term and short term including loan dominated in FXmostly in finance companies.
5. Protection in financial sector
6. Cronyism (patron-client relationship),
7. Poor corporate governance
Why does this problem become one of the major causes that accelerate the collapse of Thai economy? We believe that the following case of Bangkok Bank of Commerce, known as BBC, will provide you a good explanation for this question. While everyone was enjoying the economic growth of the country without hesitating that there was also something going on, the two senior managers, Kirkiat Jalichandra and Rakesh Saxena, lent approximately a third of the banks total loan portfolio to themselves. Other parts of their wrongdoings worth total of US$ 3 billion in bad debts also included the loan given to closed politicians, banks funds embezzlement, and creative accounting.
So, it is just the problem of the bank only, isnt it?
Theoretically, the government should let the bank go bankrupt according to the market mechanism; however rather than let the bank closed, Thailands central bank spent large sums of public money to bail it out. In other words, it means more burden for everyone in the country.
Thailands slow down of economic growth
The rise of China in international trade
Fall of world demand of semiconductor
Appreciation of US$
Trade deficit
Resource gap of around 8% from deficit in current account
Saving is less than investment
Filled up by investment from foreigners; unfortunately most of them are not in the form of FDI (only 15.9% from total) but real estate and stock speculation
Serious mismatch between source of
funding and investment types (borrow short
term to invest in long term)
Huge amount of money in real estate which is long term investment
Capital raised from short-term borrowing
Fixed Exchange currency tied to US$
False representation of Thai Baht value
Part of bad decisions in making foreign-denominated loans done by finance firms
Many businesses defaults since loans were primarily dominated in dollar terms
เน้น.. (2)
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a) SET Index เป็นตัวกลางที่สร้างไม่ถูกต้องตามปรัชญาของค่าตัวกลาง มีความเบี่ยงเบนสูง(อันดับที่ 7 ของโลก) อ่อนแอสูง จึงถูกลาก-ทุบได้ง่าย
b) การนำระบบ maintenance margin & force sell มาใช้ในตลาดหุ้น
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