Thailand Capital Inflow

FINC401-002

Thailand capital inflow

Contents

i. Pre-1997 economic circumstance in Thailand &1997-1998 Asian Financial Crisis

ii. Types and magnitudes of capital flows in Thailand after 1997

iii. Impacts of Thailand capital inflows

iv. Government policy and recovery after Asian Financial Crisis

v. Recommendations

i. Pre 1997 circumstances

Since the early 1990s, Thailand had a higher degree of capital liberalization.

The Bangkok International Banking Facilities (BIBF) scheme was established to encourage the process. The oversea low interest rate funds can be obtained through the channel of out-in facility.

In order to stimulate capital flows across borders, the defense of domestic currency and high interest rate policy were adopted. Under these policies, capital inflows were facilitated because investors can gain low currency risk and higher returns compared to the low returns in the international market.

However, foreign funds flooded into the country because investors wanted to make profits from the high interest rate differential and to from baht depreciation. The situation worsened through oversea short-term borrowing and led to currency and maturity mismatches.

1997-1998 Asian Financial Crisis

Causes of financial crisis

The weakness of Thailand’s economy

A balance-sheet crisis occurred due to sudden capital outflows. The foreign short-term liabilities had exceeded international reserves in 1996. As soon as the baht was floated, the value of baht depreciated, foreign debt in local currency overshot, the sovereign rate of Thailand decreased, and then investors’ sentiments were adversely affected.

Improper government policies as follows

* Maintain the unsuitable fixed exchange rate

* Allow too many short-term capital flows to accumulate with a high degree of currency arbitrage

* Lack a solid risk management system at both national level and regional level

Impact of Asian Financial Crisis

The Asian...