Exchange Rate Management in Thailand
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In the summer of 1997 Thailand's central bank, after depleting all its reserves of foreign capital, was forced to devalue its currency to fight off the huge demand for foreign currency. This single action has had a tremendous effect on the livelihood of all Thais jeopardizing many of the advancements Thailand has made during the early nineties. These advancements were facilitated through the fact Thailand was able to maintain year after year one of the worlds largest growing GOP's of 8% on average. With good results for many years the government and business started to get over confident about the endless opportunity for growth. This was especially so in the banking sector where banks were lending out money without factoring in the risk involved believing that growth was something that could be counted on. However, this was not the scenario that should have happened in Thailand if the central bank would have done a better job at practicing sound banking practices concerning the exchange rate of the baht. In essence the central bank under the direction of Prime Minister Chavalit took a big gamble by doing everything they could to avoid a devaluation of the baht. By honoring all the legal requests for exchange of the baht into Dollars regardless of how big the demand was getting the government was committed to maintaining 25 baht per Dollar exchange rate. Hence when the government finally ran out of Dollars, the Central Bank was forced to devalue. By allowing the currency to float, it raised into question the ability of the Central Bank to manage the market forces in the long run. When the currency was allowed to float after the government for so long argued that all was fine and the Baht was correctly valued, the currency depreciated 15 to 20 percent on July 2, 1997. This sudden change in policy caused a panic effect where everyone was desperately attempting to get rid of their Bahts having lost faith in the Central Bank's reliability and transparency. When a country takes such a large chance in regards to their currency the risk is enormous in a world where foreign investment and currency flows have a large role in determining the ultimate market value of the currency. Now Thailand is faced with trying to rebuild itself from the crisis and has started this process by appointing a new prime minister Chuan Leekpai. Prime Minister Leekpai has appointed a new finance cabinet and has demonstrated acceptance of IMF policies telling the public that many problems are still to come but that is the best course of action for Thailand in the long run. He has also committed himself to tackling a major bank reform and the issues of corruption within the banks and government in an effort to clean up the system, to enable banks once again to have the ability to lend money. The future holds many questions for Thailand since there is no agreed upon solution to Thailand's problem or any agreement about how long it will take for a recovery. There also exist many outside factors that will shape the future for Thailand mainly being whether China also devalues and how long it will take for Japan to get out of its recession. If China were to devalue its currency this would have an enormous negative impact on Thailand. What is saving the Thais right now is that their goods are competitively priced but with increased price competition from China Thailand's new trade surplus could be hurt. It should also prove to be interesting to see how other countries with similar problems like Malaysia, which has taken a very different approach to solving their economic problems: will do. In essence Thailand has undergone huge changes that spurred an economic collapse all around South East Asia and is faced with learning from their mistakes. The central bank was wrong to believe they could manipulate market forces against the baht in the long run. Hence, overconfidence has placed Thailand in a weak position that will take a long time to repair.