Edited by Yung Chul Park, Takatoshi Ito and Yunjong Wang
Chapter 12: The Thai Financial Sector in Transition: Can the Bond Market Prevent a Future Currency Crisis?
12. The Thai ﬁnancial sector in transition: Can the bond market prevent a future currency crisis? Bhanupong Nidhiprabha 1. INTRODUCTION The Thai government wished to establish Bangkok as a regional ﬁnancial center by creating the Bangkok International Banking Facilities (BIBFs) in 1993. It was a prelude to the ﬁnancial crisis in 1997. The huge inﬂows of foreign capital and the unsustainable ﬁxed exchange rate reduced the eﬀectiveness of Thailand’s monetary policy. Loans extended by BIBFs grew from B200 billion in 1993 to 1.9 trillion in 1997. At the end of 1999, the amount declined to just B550 billion. The precarious borrowing foretold a ﬁnancial distress that would come when foreign lenders changed their perception about Thailand’s ﬁnancial risk. There has been a suggestion that short-term ﬂows may not be as desirable as long-term ﬂows. As such, some kinds of capital controls are required to fend oﬀ volatile short-term capital. Some commentators on the ﬁnancial crisis argued that the lack of developed capital markets is the original sin committed by the crisis-hit countries. Heavy reliance on bank loans, instead of equity and corporate bonds, lead to the problem of credit crunch, which was aggravated by the attempt to defend the exchange rate by employing a tight monetary policy. With the emergence of the domestic bond market, the ﬁnancial stress on the banking sector can be reduced because the credit risk can be diversiﬁed into other non-bank ﬁnancial sectors. The structure of business ﬁnancing has been gradually changing, as...
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