Shoring up the Baht

Abstract

Despite the fall in the world price of oil, a major item in the country's import bill Thailand's trade deficit rose to a record level in 1983. This culminated in a loss of confidence in the value of the baht. Although the government's policy was to follow a cautious fiscal and monetary policy as laid down in the fifth five-year plan (1982-86), in actual fact, what took place was a very expansionary fiscal and monetary policy following this second global oil crisis. The problems that followed were exacerbated by the government's inability to use certain types of measures particularly the adjustment of the exchange rate. Moreover, the balance of payments crisis occurred at the most unfortunate time. Two finance companies, Thai Land and Housing Credit Foncier, and Equity Development Finance and Securities Company (EDT), collapsed in October 1983 as a result of liquidity problems caused by mismanagement. A chain reaction was set off. More finance companies went down, and many more encountered serious liquidity problems. The collapse of various finance companies and the loss of public confidence in the domestic financial system were partly the consequence of the government's inaction, over the previous four years, in introducing stricter control over finance companies after the collapse of Raja Finance, an important financial house in 1979. From mid-1983, a number of serious problems coincided and confidence in the value of the baht was deteriorating rapidly, yet the government was extremely slow in introducing any measure to alleviate these problems. This was mainly due to the lack of co-operation in the formulation and implementation of fiscal and monetary policies between the key economics agencies: the Finance Ministry, the Bank of Thailand and the Planning Board. As a result the problems were left untouched until the crisis escalated out of proportion and eventually a number of drastic actions had to be taken. The measures had been quite successful in restoring confidence in the value of the baht, but they also caused painful side effects. During the first six months of 1984, the number of bankruptcies and dishonoured cheques rose sharply, and the austerity measures became a political issue. What happened in 1984 was mainly the result of official mismanagement of the economy during the previous four years. Therefore, very drastic actions had to be taken in order to restore confidence in the baht and the financial system. Had a more cautious and consistent policy been taken the crisis could have been avoided.