This remarkable and stable economic performance over the past 15 years had achieved Thailand the highest bond ratings among the rising markets. As of 24 June 1997, the bond rating for Thailand was A2, and the only country in the region which had a better rating at that time was Malaysia (A1).
The breakdown in real estate and asset prices in Thailand left some financial institutions with a considerable proportion of non-performing loans. But this problem was mostly restricted to second and third tier finance companies.
Reports in the Western press show a picture of the economy of Thailand that is completely negative. It might be useful to offer some facts.
Thailand is a middle-income country that has a population of 60 million, and a per capita GNP of around $3,000 in 1995. The country has faced output growth of 8% per annum since 1980, low inflation (less than 5% per annum since 1980), and a rate of increase of exports which has increased from 14% per annum in the 1980s to 22% per annum in the 1990s.
But no country can effectively absorb such large inflows in such a short period.
The practice accumulated by the World Bank over a number of decades shows that the average period to arrange a large investment project is two years and it takes another four years from the start of creation to full production. Economists refer to this as the unevenness of investment. As a result, capital inflows averaging 12% of GDP per annum over a seven-year period cannot discover productive use, especially when like Thailand, the investment rate is already very considerable.
The only investments which can be rapidly undertaken are in real estate construction, and this clarifies how the surge in inflows is channelled in the banking system and generates a bubble in the prices of real estate and stocks.
A real estate bubble exploded in Thailand. The bubble had been formed by huge inflows of external capital. Private capital flows into Thailand between 1988 and 1995 totaled 52% of gross domestic product. The government took all the recommended actions to control the influence of these large inflows on the economy. The most commonly used measures were designed to decrease the expansion of the domestic capital supply through sterilised intervention. Nevertheless, these measures did not reduce the scale of capital inflows which went on throughout 1996. Investment rates jumped to more than 40% of GDP.
Many informed commentators can be cited who have told that the size and the speed of capital outflows from the fast rising economies of East Asia had nothing to do with basics.
The Director of the World Bank’s office located in Indonesia went so far to say, as he watched the deterioration in the value of the currency caused by the fast pace of capital depletion, that ‘This has nothing to do with economics.’
The President of the World Bank described the crisis as a ‘hic-cup’ in September, and the director of the International Monetary Fund (IMF) told in May that the government of Thailand was taking brave steps to address the problems of the financial sector, and doing precisely what is needed to be done to avoid a Mexican-type crisis, and that he ‘did not see any specific reason for this crisis to develop further.’
There is no reason for the claim that the Asian financial crisis was because of the lack of sound economic fundamentals. The currencies of the affected countries were compulsorily devalued and their financial systems were brought to damage by the activities of speculators. The crisis has, on the other hand, revealed one glaring weakness: the nonattendance of a lender of last resort for the region.
The Asian financial crisis was not produced by macroeconomic imbalances. The basics of Malaysia, Indonesia, Philippines and Korea were and are stable. These economies have high national savings and investment rates, high rates of output growth, solid export performance, low inflation and more equal economic policies than any other region.
In mid-2008, IMF data showed that inflation was highest in the oil-exporting countries, predominantly due to the unsterilized growth of foreign exchange reserves, the term “unsterilized” referring to a need of monetary policy operations which could counterbalance such a foreign exchange intervention in order to preserve a country´s monetary policy target. Nevertheless, inflation was also growing in countries classified by the IMF as “non-oil-exporting LDCs” ( Least Developed Countries) and “Developing Asia”, on expenses of the rise in oil and food prices. Inflation was also growing in the developed countries but stayed low compared to the developing world.
In February 2008, Reuters reported that world inflation was at historic levels, and that national inflation was at 10-20 year highs for many nations. “Excess money supply around the world, monetary easing by the Fed to domestic financial crisis, growth surge supported by easy monetary policy in Asia, conjecture in commodities, agricultural failure, rising cost of imports from China and rising demand of foodstuff and commodities in the fast growing emerging markets,” have been called as possible reasons for the inflation.
The decade of the 2000s faced a commodities boom, in which the prices of most important commodities rose again after the Great Commodities Depression of 1980-2000. But in 2008, the prices of number of commodities, particularly oil and food, rose so high as to cause unadulterated economic damage, intimidating stagflation and a reversal of globalization.
In January 2008, oil prices exceeded $100 a barrel for the first time, the first of numerous price milestones to be passed in the course of the year. By July the price of oil gained as high as $147 a barrel although prices fell afterward.
In the second half of 2008, the prices of the majority of commodities fell noticeably on expectations of reduced demand in a world recession.
In 2008, a world economic crisis was suggested by number of significant indicators of economic downturn worldwide. These included high oil prices, that led to both high food prices (due to a dependency of food production on fuel, as well as using food as an option to petroleum) and world inflation; a considerable credit crisis leading to the insolvency of large and well established investment banks as well as commercial banks in a variety of nations around the world; increased unemployment; and the likelihood of a world recession.