THAILAND ECONOMY

Introduction
The economy of Thailand is a newly industrialized economy. It is a heavily export-dependent economy, with exports accounting for more than two thirds of gross domestic product (GDP). Recently, Thailand experienced GDP growth by 7.8% in 2010 making it one of the fastest growing economies in Asia and the fastest growing economy in South East Asia. The country has a GDP of 9.5 trillion Baht, or US$584 billion (PPP) making it the 24th largest economy in the world. This classifies Thailand as the second largest economy in Southeast Asia after Indonesia. Thailand's nominal economic output as of June 2010 is $313.8 billion USD, while holding some $172 billion in foreign exchange assets which ranks 11th in world. Thailand has strong automobile industry which grew by 63% in 2010 with 1.6 million cars produced ranking it as 13th in the motor vehicle producing countries in the world. Experts predict that by the year 2015 Thailand will be one of the top 10 motor vehicle producing countries in the world. Thailand is becoming a center of automobile manufacturing for the Association of Southeast Asian Nations (ASEAN) market. By 2004 automobile production had reached 930,000 units, more than twice as much as in 2001. Two automakers active in Thailand are Toyota and Ford. The expansion of the automotive industry has led to a boom in domestic steel production. Tourism revenues are on the rise and contributing to about 6% of GDP. The GDP growth of Thailand was 8.0% in 2010, higher than previous highs of 5-7% under the previous civilian administration. Thailand enjoys high foreign investment and consumer confidence. Unemployment is at 1.2% as year 2010, with estimations of falling to 1% by the year 2012 therefore Thailand has one of the lowest unemployment rates in the world. Decades of economic growth reduced poverty in Thailand. Thailand enjoys one of the lowest poverty rates in Asia. In 2010, Thailand, along withJapan, South Korea, Taiwan, Brunei and Malaysia were the only countries in Asia with less than 2% of the country's total population living under $1.25 per day. Rice is the country's most important crop; Thailand is the #1 exporter in the world rice market. Other agricultural commodities produced in significant amounts include fish and fishery products, tapioca, rubber, grain, and sugar. Exports of processed foods such as canned tuna, pineapples, and frozen shrimp are on the rise. Thailand is the world's second largest exporter of gypsum after Canada, even though government policy limits gypsum exports to prevent price cuts. Exports - commodities: textiles and footwear, fishery products, rice, rubber, jewelry, automobiles, computers and electrical appliances Imports - commodities: capital goods, intermediate goods and raw materials, consumer goods, fuels

Thailand's increasingly diversified manufacturing sector made the largest contribution to growth during the economic boom. Industries registering rapid increases in production included computers and electronics, garments and footwear, furniture, wood products, canned food, toys, plastic products, gems, and jewelry. High-technology products such as integrated circuits and parts, electrical appliances, and vehicles are now leading Thailand's strong growth in exports.

History
Thailand had historically been a tiger economy with average growth rates of 10.4% from 1985 to 1996. The administration under prime ministerPrem Tinsulanonda in power from 1980 to 1988 began to open up the country's economy to international trade The Asian financial crisis was a period of financial crisis that gripped much of Asia beginning in July 1997, and raised fears of a worldwide economic meltdown due to financial contagion. The crisis started in Thailand with the financial collapse of the Thai baht caused by the decision of the Thai government to float the baht, cutting its peg to the U.S. dollar, after exhaustive efforts to support it in the face of a severe financial overextension that was in part real estate driven. At the time, Thailand had acquired a burden of foreign debt that made the country effectively bankrupt even before the collapse of its currency. As the crisis spread, most of Southeast Asia and Japan saw slumping currencies, devalued stock markets and other asset prices, and a precipitous rise in private debt. Until 1997, Asia attracted almost half of the total capital inflow into developing countries. The economies of Southeast Asia in particular maintained high interest rates attractive to foreign investors looking for a high rate of return. As a result the region's economies received a large inflow of money and experienced a dramatic run-up in asset prices. At the same time, the regional economies of Thailand, Malaysia, Indonesia, Singapore, and South Korea experienced high growth rates, 812% GDP, in the late 1980s and early 1990s. This achievement was widely acclaimed by financial institutions including the IMF and World Bank, and was known as part of the "Asian economic miracle". From 1985 to 1996, Thailand's economy grew at an average of over 9% per year, the highest economic growth rate of any country at the time. Inflation was kept reasonably low within a range of 3.45.7%. The baht was pegged at 25 to the US dollar. On 14 May and 15 May 1997, the Thai baht was hit by massive speculative attacks. On 30 June 1997, Prime Minister Chavalit Yongchaiyudh said that he would not devalue the baht. This was the spark that ignited the Asian financial crisis as the Thai government failed to defend the baht, which was pegged to the basket of currencies in which the U.S. dollar was the main component, against international speculators. Thailand's booming economy came to a halt amid massive layoffs in finance, real estate, and construction that resulted in huge numbers of workers returning to their villages in the countryside and 600,000 foreign workers being sent back to their home countries. The baht devalued swiftly and lost more than half of its value. The baht reached its lowest point of 56 units to the US dollar in January 1998. The Thai stock market dropped 75%. Finance One, the largest Thai finance company until then, collapsed.

The Thai government was eventually forced to float the Baht, on 2 July 1997. On 11 August 1997, the IMF unveiled a rescue package for Thailand with more than $17 billion, subject to conditions such as passing laws relating to bankruptcy (reorganizing and restructuring) procedures and establishing strong regulation frameworks for banks and other financial institutions. The IMF approved on 20 August 1997, another bailout package of $3.9 billion. By 2001, Thailand's economy had recovered. The increasing tax revenues allowed the country to balance its budget and repay its debts to the IMF in 2003, four years ahead of schedule. The Thai baht continued to appreciate to 29 Baht to the Dollar in October 2010. However, after the 19971998 Asian currency crisis, gigantic financial institutions crumbled, millions of people became unemployed or bankrupted. It wasn't until 2001 that Thailand regained momentum over the baht and economy. Thailand's 23rd prime minister, businessman Thaksin took office in February 2001 with the intention of increasing domestic activity and reducing Thailand's reliance on foreign trade and investment. Since then, the Thaksin administration has refined its economic message, embracing a "dual track" economic policy that combines increased domestic activity with Thailand's traditional promotion of open markets and foreign investment. The Royal Thai Government welcomes foreign investment, and investors who are willing to meet certain requirements can apply for special investment privileges through the Board of Investment. U.S. investors may qualify for additional privileges under the Treaty of Amity and Economic Relations.

Thailands political crisis

In 2006 the Thai armed forces dismissed the Thai Rak Thai Party government and revoked the 1997 constitution. The PPP won the December 2007 general elections. Since then there has been an ongoing political crisis between the Peoples Alliance for Democracy (PAD) and the Peoples Power Party (PPP). The political clashes have a negative impact on the countrys tourism industry and was hurting consumer confidence.

Balance of Trade
The balance of trade is the difference between the monetary value of exports and imports in an economy over a certain period of time. A positive balance of trade is known as a trade surplus and a negative balance of trade is known as a trade deficit. Thailand reported a trade deficit equivalent to 1009 Million USD in October of 2011. The economy of Thailand is heavily export-dependent, with exports accounting for more than two thirds of GDP. Thailand exports mainly: gypsum, rice, shrimps as well as high-technology products like integrated circuits and parts, electrical appliances, and vehicles. Machinery and parts, vehicles, electronic integrated circuits, chemicals, crude oil and fuels, iron and steel are among Thailand's principal imports. Its main trading partners are: European Union, The United States, Japan and China.

Business Confidence
In Thailand, business confidence improved to 62.7 in the fourth quarter of 2011 from 61.6 in the third quarter of 2011. In Thailand, the Business Expectation Index measures the level of optimism that people who run companies have about the performance of the economy and how they feel about their organizations prospects. Index higher than 50, shows that the majority of businessmen expect economic condition to be good in the next quarter and next year. The survey is based on the sample of around 1800 Thai businessman.

Consumer Confidence
Consumer confidence is the degree of optimism that consumers feel about the overall state of the economy and their personal financial situation. How confident people feel about stability of their incomes determines their spending activity and therefore serves as one of the key indicators for the overall shape of the economy. In essence, if consumer confidence is higher, consumers are making more purchases, boosting the economic expansion. On the other hand, if confidence is lower,

consumers tend to save more than they spend, prompting the contraction of the economy. A diminishing trend in consumer confidence suggests that in the current state of the economy most consumers have a negative outlook on their ability to find and retain good jobs. In Thailand, consumer confidence declined to 72.4 in October of 2011 from 81.8 in September of 2011. In Thailand, University of the Thai Chamber of Commerce survey of consumers' expectations measures the level of optimism that consumers have about the performance of the economy. The gauge is based on a survey of 2,240 respondents. Generally consumer confidence is high when the unemployment rate is low and GDP growth is high. Measures of average consumer confidence can be useful indicators of how much consumers are likely to spend.

USD THB Exchange Rate

The Thai Baht exchange rate appreciated 0.29 percent against the US Dollar during the last month. During the last 12 months, the Thai Baht exchange rate depreciated 3.55 percent against the US Dollar. Historically, from 1981 until 2011 the USDTHB exchange averaged 32.77 reaching an historical high of 55.50 in January of 1998 and a record low of 20.36 in July of 1981. The Thai Baht spot exchange rate specifies how much one currency, the USD, is currently worth in terms of the other, the THB. While the Thai Baht spot exchange rate is quoted and exchanged in the same day, the Thai Baht forward rate is quoted today but for delivery and payment on a specific future date.

Inflation
Inflation refers to a general rise in prices measured against a standard level of purchasing power. The most well known measure on inflation is CPI which measures consumer prices, and the GDP deflator, which measures inflation in the whole economy. The inflation rate in Thailand was last reported at 4.2 percent in November of 2011. From 2000 until 2010, the average inflation rate in Thailand was 2.51 percent reaching an historical high of 9.20 percent in July of 2008 and a record low of -4.40 percent in July of 2009. Inflation rate refers to a general rise in prices measured against a standard level of purchasing power.

Thailand Interest Rate

The benchmark interest rate in Thailand was last reported at 3.25 percent. In Thailand, interest rates decisions are taken by The Bank of Thailands Monetary Policy Committee. The main interest rate is the 1-day repurchase rate. From 2000 until 2010, Thailand's average interest rate was 2.39 percent reaching an historical high of 5.00 percent in June of 2006 and a record low of 1.25 percent in June of 2003. With stronger exports and a rise in inflationary pressure, the Bank of Thailand started to tighten its monetary policy in mid-July 2010 after having followed a low interest rate policy since April 2009

Employment Scenario
Thailand's labour force was estimated at 36.9 million in 2007. About 49% were employed in agriculture, 37% in services, and 14% in industry. In 2005 women constituted 48 percent of the labour force and held an increasing share of professional jobs. Less than 4% of the workforce is unionized, but 11% of industrial workers and 50% of state enterprise employees are unionized. Although laws applying to private-sector workers' rights to form and join trade unions were unaffected by the September 19, 2006, military coup and its aftermath, workers who participate in union activities continue to have inadequate legal protection. According to the U.S. Department of State, union workers are inadequately protected. Thailand's unemployment rate lies at 0.7% percent of the labour force As a result of the global financial crisis and business restructuring, employers hired large numbers of short-term contract workers. While employers claimed to have done this in order to maintain business flexibility for greater competitiveness during financially uncertain times, labor advocates viewed these actions as reducing job security and attempts to weaken the organized labor movement. Thailand's growing shortage of engineers and skilled technical personnel may limit its future technological creativity and productivity.

Unemployment Rate
The labour force is defined as the number of people employed plus the number unemployed but seeking work. The unemployment level is defined as the labour force minus the number of people currently employed. The unemployment rate is defined as the level of unemployment divided by the labour force. The unemployment rate is defined as the level of unemployment divided by the labour force. The employment rate is defined as the number of people currently employed divided by the adult population. The unemployment rate in Thailand was last reported at 0.7 percent in August of 2011. From 2001 until 2010, Thailand's Unemployment Rate averaged 1.92 percent reaching an historical high of 5.73 percent in January of 2001 and a record low of 0.85 percent in December of 2007.

Thailand Stock Market

The SET, a major stock market index which tracks the performance of large companies based in Thailand, rallied 53 points or 1.46 percent during the last month. During the last 12 months, the SET rallied 15 points or 1.46 percent, reaching a high of 1133.00 points in July of 2011 and a low of 909.17 points in October of 2011. Historically, from 1987 until 2011 the SET market value averaged 689.19 points reaching a historical high of 1753.73 points in January of 1994 and a record low of 207.31 points in September of 1998.

Before the 1997-98 Financial crisis

The Thai government had done a good job in keeping inflation rate low between 3.36% and 5.7% fiscal balances surpluses. The economy had possessed a characteristic of high saving rates situated at around 33.5% of GDP while its GDP growth had stayed at an impressive level of 8.08-8.94 during 1991-95. As a result, the Thai economy had become very attractive to international speculators, many of whom had channeled their large sum of capital out of Japan which had undergone a lengthy period of stagflation and low interest rate. And by 1995, Thailand had a net capital inflow of US$ 14.239 billion, more than one hundred percent increase from its net capital inflow three years ago. As a consequence of the huge overflow of capital, domestic investment had its prime years and the banking sector had expanded very rapidly. Thailands investment rate between 1990-96 in the first place compared to the other nations of the same region. Stock market prices rose by 175% in aggregate and by 395% in property sector. There emerged more than 50 banks and non-banks financial institutions which had been controlled and monitored much leniently by the Thai central bankthe Bank of Thailand. These financial institutions had made a large sum of money out of the economy as they had had small constraints and difficulties in borrowing quite excessively from abroad and lending with a dear interest at home. By early 1990s, Thailands banks were ranked among the worlds most profitable as the banks could charge up to 4 percentage points more interest for loans than they paid on deposits, a discrepancy which was 4 times bigger than the spreads of less than 1 percentage point in the banking system of many developed economies. And Thailands lending boom measure calculated from the growth of bank lending as a percentage of GDP ratio was 58%, the highest in the East Asian group . However, the growth of the capital inflow and the lending practice of the Thai financial institutions were not very healthy nor wise. A large part of the capital had been put into non-productive sectors especially real estate. Those sectors were non-productive because they produced non-tradable goods which were sold only domestically, resulting in less national volume of exports and thus weaken the economys balance of trade as well as the capital account. A statistic showed that 1035% of bank loans were committed to bricks and mortar. In addition, only a small portion of the capital inflow could be categorized as foreign direct investment (FDI)a non-speculative, thus real, type of investment that went to the build-ups of capital goods, factories, inventories and land. The

proportion of FDI to the Thai economy was low and had decreased over time from 33.57% in 1990 to 15.90% in 1996, compared to that of Malaysia who had a proportion of FDI above 90% throughout the time period. In addition, the financial institutions tended to lend recklessly without a prudent procedure of lending contraction and monitoring. This was an adverse selection problem resulted from moral hazard on the side of the financial institutions as the institutions had expected a safety net provided by the Thai government or the Bank of Thailand if a bank run occurred. The same problem was also with the foreign creditors and depositors sides as they credited money to the financial institutions with little care, having in mind the governments bailout policy.

Reasons for 1997-98 Crisis

Starting from the year 1995, Thailands economic growth became much slow down due to a number of factors such as the contraction in the real estate sector, the emergence of China as an intimidating competitor in international trade, the fall of world demand of semiconductor which was one of the Thai major exports in 1996, and an appreciation of the dollars after Spring 1995. The real estate business had become unprofitable and the business owners, thus, had no capacity to pay back their debts to financial institutions when the maturity came. The percentage of non-performing loans had risen up to 13% in 1996. This soar of the non-performing loans began the era of banking crisis as banks balance sheet had been deteriorated. Besides, in international trade, Thailand had become less competitive in the existence of an emerging trader like China together with a constantly increasing trend of dollar currency which had worsened Thailands terms of trade since the Spring of 1995.The exchange rate of yen for dollar went from 80 in Spring 1995 to over 125 yen per dollar in Summer 1997. Thailands terms of trade had been worsened because the Thai baht needed to appreciate along with the dollar which was the major currency in the currencies basket Thailand had fixed its exchange rate to. And as the world demand of semiconductor had fallen in 1996, Thailands volume of exports decreased, contributing to a balance of trade deficit. Another item should be looked at was the countrys current account balance. Thailand had had persistent current account deficit ranging from -5.08 to -8.10 % of GDP lowest among the other nations for most of the time. This negative sum largely came from the countrys balance of trade deficit. The value of its imports had widely exceeded its export value. This high volume of imports could be expected as the country had had a high GDP growth rate. However, the number could look better if Thai people had been more prudent in spending and could be more competitive exporters. During the boom period, the economy was in a bubble. Thai people had had an expectation of a long run economic growth of their country; thus, their consumption had become quite excessive especially in imported commodities and luxuries. The speculators who had seen Thailands slow growth rate, bank run, and deteriorating balance of payments as signs of unprofitability for their investment. They started selling domestic assets and claimed back their foreign assets. As a result, bank balance sheets became increasingly deteriorated, and the economy had faced a severe credit crunch problem. Even investors with productive investment opportunities could not get loans to run their business. The countrys economic growth, thus, had been even more deterred.

Under a fixed exchange rate system, it was the responsibility of the government or the central bank to conduct policies i.e. exchange-rate changing, exchange-rate switching, and direct control, to keep its exchange rate fixed as well as to maintain a fine level of the overall condition of the economy. An exchange-rate changing policy was the first approach, constituted of a fiscal and monetary policy. As more and more capital flew out of the country or as the country had faced a balance of payments deficit the central bank needed to forfeit its foreign reserves, injecting the foreign currency into the economy to satisfy the currencys excess demand and bring the economy back to its exchange rate equilibrium. So as speculators had kept taking dollars out of the system (i.e. Thai economy) , the Bank of Thailand had a necessity to inject dollars into the system using its stock of foreign reserves. Not for a long time, however, did the central bank could do that. Its stock of foreign reserves was almost used up, and it realized that it could not, in any way, be able to supply the foreign currency to the economy given the enormous size of foreign liabilities. The speculators knew the situation as well and had realized a mammoth gain from a devalued baht as their foreign assets would worth much more. So there occurred the first massive speculative attack in the Thai history on May 14-15, 1997. Only in Spring of 1997, more than 90% of the countrys foreign reserve had been used to defend the value of the baht, and the country was forced to finally switch its exchange rate regime. On July 2, 1997, Thailand had become under a flexible exchange rate system; the Thai baht was devalued by about 15-20 percent (28.80 baht per dollar) after the announcement. The value of the baht had continuously gone down since then and reached the bottom at 56 baht per dollar. If the balances could not be obtained, the economy became unstable and, sooner or later, it would fall down. It might get injured seriously or not seriously dependent on its remaining strength and how and where it fell down. The Thai economy had not well managed its balances. It was too reckless in capital flow management which resulted in an imbalance of bank balance sheets of the nations financial institutions. In trade, however, an imbalance was largely caused by outside factors which were likely to be exogenous to the Thai economy, for instance, the emergence of China in international trade, the appreciation of the dollars, and the fall of world demand of semiconductor. The Thais might be able to do things such as the abandonment of an exchange rate regime that caused the Thai baht to move in the same direction as that of the dollars, and investment in research and development to find other types of exports that Thailand could profitably produce and export.

Thai governments response to the crisis

The economy did expand, however, not quite healthily. It was like a bubble, continuously inflated, but the bigger it became, the more easily it would explode even with a soft touch of a rough surface. The liberalization of the financial sector had been proved to be too reckless. Statistics such as ratio of foreign liabilities to foreign assets, non-performing loans, contribution of inward FDI to current account financing, had been evidences of the recklessness. Thailands GDP growth had been high at around 8.5% during the first half of 1990s. Nevertheless, a large contribution of the growth had come from production of non-tradable good and from pure speculative capital inflow. The structure of the Thai economy was still not ready for that large amount of capital not to be used in real investment. If Thailand had run current account surplus and balance of trade surplus as high as that

of Taiwan or Singapore, it might have a reason and want to liberate itself that much in the financial world. Politics seemed to be much influential in policy making of the government. The majority of Thai people who walked on the street had been made to see only a prosper side of the economy. It had only been shown to them the growing of the cities and business sectors, and statistics such as high GDP growth, high saving rate, government fiscal balance surpluses, high volume of exports, a claim that Thailand had become one of the Asian Tigers. But it had not been shown to them how serious the country had become indebted, and how recklessly capital had been transferred and used in the economy. Thai people should be better informed and made sophisticated. The Thai government had tried to maintain its popularity even in the last minute when it decided not to ask IMF for a rescue package immediately after the devaluation of the baht was announced, but waited until 26 days later to eventually called in the IMF. This delay had a serious consequence as it exacerbated the situation of bank run. The action of the government was highly disadvantageous to the economy. Whereas the US Federal Reserve Bank could engage in a lender of last resort operation in a day in the event of stock market crash of 1987, the Bank of Thailand had postponed for another 26 days before it engaged in a lending operation. Another government conduct was its loose monetary policy during the period right after the first devaluation of the baht. The government showed its steadfast attempt to promote the production and thus the growth of the economy, an objective which had never been set aside. It had kept interest rate low so that the amount of money supply in the economy would be high which would encourage domestic consumption and investment. This conformed to the Laffer curve condition saying that a fall not a rise of interest rate would have strengthen the economy and restored confidence. Unfortunately, the problem of bank panic was so serious that no matter how much money supply the economy had, the creditors would attempt their best to take money out of the system and did not invest. This resulted in a continuous spiral of currency depreciation that dramatically increased the real burden of the foreign-currency liabilities. Seeing that a loose monetary did not work, the government later on had switched to tighten its monetary policy. It raised domestic interest rate, hoping to retain money in the system. However, the policy turned out to be propelling a more serious contraction of the Thai economy and credit crunch.

Conclusion
To achieve Macroeconomic balances, great care and prudent policy management are needed. To be prudent was to be far-sighted and realistic. In the Thai financial crisis case, policies had not been prudently thought out. The collapse of the economy was a very tough lesson for the Thais. It would take long for the economy to recover. It was predicted to be longer than that of Mexico concisely because the other countries of the region were also hit. Thus, Thailand could not gain much terms of trade after the devaluation of the baht to help improving its economy. The slow down of Japanese economy had made it unable to give much aid to Thailand unlike Mexico who had a huge support from the US for the road to its recovery. But hopefully, during that long road, the Thais would maximally utilize the time to thought out wise policies and beef up a real strength so that when the next storm came, it would not turn over again.