Thailand an Imbalance of Payments

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Narjess Ben Sedrine November 10th, 2013

Thailand an imbalance of payments In the later 1980’s, Thailand saw an economic booming that made it become an “Asian Tiger” due to its industrialization and the fast growing of its industrial exports. However, in the early 1990’s, it started to face many issues that led to a financial contagious crisis. So, what are the main issues that Thailand was facing? And what is their source? In the first part of this report on Thailand’s imbalance of payments, we will present the main issues that it was facing. In the second part, we will explain the source of these issues. The US Dollar was inflating at the late 1990’s, which led to an increase of the interest rates to overcome this inflation and meet the Yen exchange rate that was very low. Thailand adopted a fixed exchange rate regime to the US dollar that forced the country to increase its interest rates following the rise of the dollar against the yen. Which caused a sharp decrease in its exports of agricultural and industrial goods, loosing export-price competitiveness. Thailand suffered then by a chronic deficit in its current account balance due the greater imports than its exports; which is the first major issue that it was facing. The second issue was the volatile international flows that occurred after its capital liberalization. In fact, Thailand was lending money to insolvent foreign borrowers that attracted many speculators. And, its current account deficit was financed by

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borrowings into foreign currencies although it had low official reserves as they had to spend them to keep a fixed exchange rate. Adopting a fixed rate regime helped Thailand gaining investors’ confidence as the government couldn’t print money to finance its deficit. Furthermore, exporters and importers do not worry about exchange rate floating and the possibility of losing huge amounts of money when converting the Baht. Then, this exchange rate regime is based on a simple concept...