The Search for a Framework
ADBI series on Asian Economic Integration and Cooperation
Edited by Masahiro Kawai and Mario B. Lamberte
Chapter 15: Managing Capital Flows: The Case of Thailand
Kanit Sangsubhan INTRODUCTION 15.1 The Thai economy showed an impressive growth path for over a decade before the Asian financial crisis in 1997–98. The current account deficit barely exceeded 5 per cent and high growth generated budget surpluses for many years. At the same time, massive capital inflows were accumulated progressively along with a high interest rate differential and under a fixed exchange rate regime, including capital account deregulation. Thailand opened up for a higher degree of capital liberalization in the early 1990s. The Bangkok International Banking Facility (BIBF) scheme was set to facilitate the process. This out–in facility became a new channel for gaining low interest rate funds from abroad. In addition to the BIBF, monetary policies such as defense of domestic currency and high interest rate policy encouraged capital inflows by introducing low currency risk for investors and returns higher than those of the international market. As a result, foreign funds poured into the country to take advantage of the high interest rate differential and to gain from the baht depreciation. Massive short-term borrowing abroad, primarily to finance long-term projects, led to currency and maturity mismatches. In 1996, the short-term foreign liabilities had exceeded international reserves. As soon as the baht was floated, foreign debt in local currency overshot and the sovereign rate decreased, adversely affecting investors’ sentiments. Thailand’s impressive growth path for over a decade before the 1997–98 financial crisis and relatively stable exchange rate naturally led both borrowers and lenders to underestimate the...
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