This Selected Issues report on Thailand discusses the rapid growth years of the country before and after the 1997 balance-of-payments crisis. The report discusses development of the crisis and the steps taken to normalize the situation; credit growth before and after the crisis; public debt dynamics in the aftermath of the crisis; export performance before and after the crisis; and an analysis of the role of fiscal policy that led to the 1997 crisis. The report also highlights weaknesses that were threatening the sustainability of Thailand's economic growth.


This Selected Issues report on Thailand discusses the rapid growth years of the country before and after the 1997 balance-of-payments crisis. The report discusses development of the crisis and the steps taken to normalize the situation; credit growth before and after the crisis; public debt dynamics in the aftermath of the crisis; export performance before and after the crisis; and an analysis of the role of fiscal policy that led to the 1997 crisis. The report also highlights weaknesses that were threatening the sustainability of Thailand's economic growth.

I. From Recession to Recovery: A Real Sector Perspective1

1. This chapter presents a real sector perspective on the rapid growth years, highlighting some of the weaknesses that were threatening the sustainability of Thailand’s economic growth even before the 1997 balance of payments crisis. In particular, the years of rapid growth had been powered by over-investment and excessive capital accumulation. This mechanism of growth would eventually encounter diminishing returns, and so prove unsustainable. As the rate of return on new investment fell, and the growth rate slowed, this called into question the sustainability of the persistent current account deficit, which had financed much of this capital accumulation. Resolving these two imbalances would inevitably result in adjustment, in the form of lower domestic demand, particularly investment; an increase in the relative price of tradable goods; and a redirection of production from the nontraded to the traded goods sectors. This necessary adjustment shaped economic developments during the onset of the crisis.

A. Economic Growth Before the Crisis

2. During the mid 1980s Thailand’s economy embarked on a decade of rapid economic growth (Figure 1). From 1981 through 1986 growth had already averaged an impressive 5.5 percent. But from 1987 through 1995 Thailand’s growth rate almost doubled, averaging close to 10 percent per annum. These years of rapid growth brought about an equally decisive reduction in poverty, which fell from more than 30 percent in 1988 to less than 12 percent in 1996. The surge in growth was accompanied by a significant shift in the composition of production, as Thailand moved from a predominantly rural to a more industrialised economy. From 1980 to 1996, agriculture’s share in GDP fell in half, declining from 23 to 11 percent. This was offset by manufacturing (whose share increased from 22 to 28 percent) and, especially in the latter years, in the nontraded sectors of construction, finance and real estate.

Figure 1.
Figure 1.

Growth Performance Before the Crisis

Citation: IMF Staff Country Reports 2000, 021; 10.5089/9781451836813.002.A001

3. The acceleration of Thailand’s economic growth was primarily investment-led (Figure 2). The expansion of investment was the counterpart to the more general industrialization that was taking place. Between 1987 and 1990, investment growth rates exceeded 20 percent, almost double the growth rate of the economy as a whole. As a result, the share of investment in GDP increased by 15 percentage points, to more than 40 percent—high both by historical and international standards. In the 1990s investment growth rates levelled off, rising more in line with overall GDP, and the share of investment in GDP stabilized. But since investment was now a major component of output, the contribution of investment to overall output growth remained substantial, on a par with that of consumption.

Figure 2.
Figure 2.

Thailand Investment and Growth Before the Crisis

Citation: IMF Staff Country Reports 2000, 021; 10.5089/9781451836813.002.A001

Table 1.

Evolution of GDP Growth Before and After the Crisis

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Source: NESDB; Staff calculations.

4. But even before the crisis took hold, there were already signs that Thailand’s rapid growth rate was slowing and would prove unsustainable.

  • First, the years of the investment boom had led to a large increase in Thailand’s capital-output ratio, which rose from 2.2 in 1990 to 2.6 in 1996. Given the scope for diminishing rates of return, it was inevitable that the sustainability of investment-led growth would be questioned. In the end, investment growth slowed, falling to little more than 7 percent in 1996, as compared with an average of more than 10 percent in the five years preceding. Breaking down this investment growth between private and public sectors points to an even more marked slowdown. In 1996 private investment grew by only 3 percent, reflecting signs of excess capacity and earlier over-investment; growth in overall investment was sustained only by a 22 percent public investment increase.

  • Second, export growth declined sharply (see Chapter VII). Thailand’s current accout deficit had always been a potential source of concern. But since it largely financed investment, which was assumed to generate growth (and with it the earnings for future debt repayment), the current account was perhaps viewed with less concern than if it had been driven by a low savings rate. From 1991-94, export growth managed to outpace imports, so that the contribution to growth from the external sector was even slightly positive. However, in 1995 and 1996 competitiveness problems took on increasing importance. With the baht essentially pegged to the dollar, and the dollar strengthening in effective terms, and in particular against the Japanese yen, Thailand’s competitiveness deteriorated. The result was a further increase in the current account deficit, to almost 8 percent of GDP. In 1995 import growth jumped to almost 20 percent, and in 1996 export growth (volume terms) collapsed from the double digit growth rates of 1991-94 to minus 3 percent. Both these years saw sizeable negative contributions to growth from the external sector.

  • Third, consistent with the tendency toward over-investment, there was also evidence of an excessive expansion in the nontraded sector, particularly in real estate. From national accounts data it is difficult to isolate the impact of the real estate sector, in part because of misclassification among sectors, though, as shown earlier, the share of GDP devoted to real estate and the financial sector increased in the run up to the crisis. At first sight, it is difficult to make the case for an over-expansion in construction, at a time when every sector was growing rapidly. Construction investment grew roughly in line (12 percent 1990-94 annual average) with overall investment through much of the 1990s. But this also reflects the fact that during this period construction took up roughly 50 percent of total fixed investment—so the two were bound to grow in line. Also, there were major changes in the composition of construction investment: on average during this period, public investment in construction grew at more than double the growth rate (25 percent), while private investment averaged only 8 percent, less than two-thirds the overall average.

Figure 3.
Figure 3.

Current Account and Export Performance

Citation: IMF Staff Country Reports 2000, 021; 10.5089/9781451836813.002.A001

5. The result was an over-extension of the real estate and construction sectors.2 In the residential sector, the number of housing units in the Bangkok region had increased since 1988 by around 1¼ million, raising the vacancy rate in 1998 to around 14 percent. In the commercial sector, increasing office construction in the pre-crisis years (even though the price of office space essentially peaked in 1991) led to an increase in the vacancy rate to around 20 percent before the crisis. Much of the office construction was built not by professional property developers, but by companies for their own use. Credit data point to a rapid increase in loans to the real estate and housing sectors, especially among finance companies, at a time when overall credit was already growing rapidly (Figure 4). In the end, many of these loans were to turn nonperforming, and the finance companies closed, clear evidence of the overexpansion of property sector credit.3

Figure 4:
Figure 4:

Credit to the Property Sector, 1985-1998

Citation: IMF Staff Country Reports 2000, 021; 10.5089/9781451836813.002.A001

6. Thus, even before the crisis, Thailand’s ability to sustain its impressive growth performance was in doubt. The persistence and then widening of the current account deficit; over-investment, declining rates of return to capital and the over expansion of the nontraded sector; and the slowdown in export growth: all pointed on macroeconomic grounds to the need for current account adjustment.

Asia’s Crisis: The Real Sector Adjustment

Other Asian crisis economies have shared many of the features of the adjustment path outlined in this chapter. In particular, the crisis countries have seen massive current account adjustment and correction of the overinvestment that had characterised the boom years. All of the countries have seen a sharp initial drop in real GDP, followed by a more broad-based economic recovery.


Current Account Adjustment, 1997-99

(percent of GDP)

Citation: IMF Staff Country Reports 2000, 021; 10.5089/9781451836813.002.A001


Real GDP during the Crisis

(1997=100. seas. adj.)

Citation: IMF Staff Country Reports 2000, 021; 10.5089/9781451836813.002.A001

Balance of payments problems resulted in the need for massive current account adjustment. In part this reflected the correction of earlier years’ over-investment, though its extent was exaggerated by panic among international investors. As a result, Thailand’s external current account balance shifted from a deficit of almost 8 percent of GDP in 1996 to a surplus in 1998 of more than 12 percent of GDP, paralleling the adjustment in the other crisis countries.

Contributions to GDP growth: 1997-99

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Source: Staff estimates; figures for 1999 are projections.

The whole of the region has seen a sharp output decline, though this is now giving way to economic recovery. The fall in output came first in Thailand, while recovery took hold across the region in the second half of 1998. Indeed, Korea’s recovery has been so robust that output has already surpassed pre-crisis levels. While the output decline was largest in Indonesia, output in Thailand also remains well below pre-crisis levels.

In all four countries, declining investment contributed most to the output contraction. In part, this represents the unwinding of excess investment of the past, but it also reflects the greater sensitivity of investment behaviour to the business cycle. In Korea especially, but also in Thailand and the Philippines, the extent of the recession and recovery has been amplified by stock adjustment. Finally, in all of the countries the emerging recovery is largely consumption and export-led, though in Korea and Thailand, the net export contribution is turning negative as growth becomes driven by domestic demand, and the current account returns to more normal levels.

B. Adjustment During the Crisis

7. To remedy these macroeconomic imbalances, both expenditure-reduction and expenditure-switching were required. These were need to bring about contraction of the over-expanded nontraded sector, a return of investment to more normal levels, and the “crowding in” of the production and sale of tradable goods. The evolution of the real economy since the crisis has broadly conformed to this classic textbook pattern.


Private Sector Real GDP: Ratio of Traded to Non Traded

(1997q1 = 100)

Citation: IMF Staff Country Reports 2000, 021; 10.5089/9781451836813.002.A001

8. In the event, the current account adjustment proved far greater than anticipated. Once the full extent of the weaknesses in Thailand’s economy became known, including the underlying problems in the financial sector (discussed in Chapter III below) and the collapse of Thailand’s international reserve position, financial market confidence vanished. Thailand’s pre-crisis problem of persistent and excessive capital inflows was transformed into one of managing major capital outflows, with creditors refusing to rollover short term debt and calling in long term debt as it matured.

9. Investment suffered the bulk of the decline in domestic demand (Figure 5). As discussed above, investment had already peaked in 1996 and was falling sharply in 1997q 1, even before the balance of payments crisis took hold. But the impact of higher interest rates, lower domestic demand, and weaker corporate cashflows brought about a further adjustment. Between 1996 and 1998, the cumulative fall in gross investment is estimated at around 70 percent. In addition, the increase in interest rates and the depreciation of the exchange rate worsened corporate balance sheets (many corporations had financed their investments with foreign borrowing, either directly, or by using domestic banks as intermediaries). This made banks reluctant to roll over credit, let alone extend new credit for profitable investment projects, for fear that the money would be diverted to existing debt service obligations.4 While investment fell across the board, the decline in machinery and equipment investment was smallest, while investment in construction—primarily nontraded—was particularly badly hit, its share falling to 35 percent from 50 percent before the crisis.5

Figure 5.
Figure 5.

Gross Fixed Investment Boom, Collapse, Recovery

Citation: IMF Staff Country Reports 2000, 021; 10.5089/9781451836813.002.A001

10. Private consumption also fell markedly (Figure 6). After levelling off in late 1996 and early 1997, the Bank of Thailand’s composite consumption index fell sharply in mid 1997. Consumer durables were particularly hard hit, with vehicle sales falling to around one quarter of their pre-crisis levels. Evidence from VAT receipts points to a broader decline in consumption as a whole. As a result, consumption fell by an estimated 13 percent in 1997 and 1998. The private savings rate is thus estimated to have increased from little more than 20 percent in 1997, to around 27 percent in 1998.

Figure 6.
Figure 6.

Indicators of Consumption Demand

(Three Month Moving Average)

Citation: IMF Staff Country Reports 2000, 021; 10.5089/9781451836813.002.A001

11. What caused this dramatic decline in consumption? High interest rates and the reduced availability of credit (in part because of the closure of finance companies, but also due to difficulties more generally in the financial system) dampened consumption. With the general collapse in demand, unemployment increased and wages declined (in particular, through reduced bonus payments), lowering personal income. As the severity of the recession intensified, proving far worse and far longer than earlier anticipated, uncertainty grew and precautionary saving increased. The unprecedented nature of the recession also reduced permanent income, as consumers lowered their expectations of future income, which would now increase by considerably less than the 10 percent per annum of the pre-crisis years that consumers had grown used to.6

12. Consistent with the increase in the relative price of tradable goods, growth in export volumes after the crisis has been relatively robust. Headline figures, which show dollar exports in 1998 still almost $2 billion lower than in 1996, are misleading. Correcting for falling dollar export prices, in part due to the fall in Thailand’s terms of trade as it exported more, export volume growth was much more robust, exceeding 8 percent per annum in both 1997 and 1998. Conversely, import volumes fell dramatically, falling by more than 40 percent from 1996 to 1998, reflecting the weakness in domestic demand and the relative price effect of the devaluation.

C. Emergence of Recovery

13. Once the balance of payments position stabilized, the exchange rate recovered, and interest rates began falling. Fiscal policy was shifted rapidly to a more expansionary stance, through increased expenditures (in particular on the social safety net, financed partly by the Miyazawa initiative) and through cuts in consumption taxes. Recovery followed.

14. On the supply side, tradable goods have shown the clearest signs of recovery. Manufacturing production, which had already bottomed out by the middle of 1998, grew at double-digit rates through much of 1999, and by September 1999 it had surpassed its pre-crisis peak (measured in seasonally adjusted terms). Transportation equipment has shown the largest increase, output more than doubling, the result of a redirection of production toward export markets. But in recent months the recovery has even extended to products typically associated with the nontraded sector, such as construction materials, though here even these products—such as cement—have become potentially exportable.

15. On the demand side, lower interest rates and improving recovery prospects have stimulated private consumption. Consumption levelled off in the second half of 1998 and has been rising since then. This trend was supported by a temporary VAT reduction which took effect in early 1999, providing an additional stimulus, particularly for consumer durables. Together with the redirection toward export markets, this has allowed for some recovery in investment, mainly through ending the running down of inventories, but also through new private fixed investment in certain sectors of the economy.

16. Latest national accounts data confirm this assessment of recovery, suggesting that GDP bottomed out in the third quarter of 1998 (Figure 7). On the production side, tradable sectors such as agriculture and manufacturing fell least, and are closer to regaining their pre-crisis levels. Conversely, nontraded sectors such as financial services and construction have been hardest hit by the crisis, though even these are now showing signs of recovery. Finally, the production data make clear the role of fiscal stimulus—and increased government expenditure—in cushioning the effect of the recession and in stimulating economic recovery.

Figure 7.
Figure 7.

Real GDP Recent Developments

(1997q1 = 100, seas, adj.)

Citation: IMF Staff Country Reports 2000, 021; 10.5089/9781451836813.002.A001

17. Recovery is still at an early stage. Reasonable estimates suggest that a sizeable output gap still remains and, taken literally, the national accounts data suggest some slowing of the growth rate in the most recent quarters. However, this finding is at odds with almost all other real sector economic indicators, and points to continued data deficiencies in the quarterly national accounts (and future upward data revisions) or end-point problems with seasonal adjustment procedures. Even so, recent data suggest that growth in 1999 should reach 4 percent, far higher than would have been forecast one year earlier.

D. Conclusion

18. Thailand’s recession and recovery mark a rebalancing of the economy away from the over-investment and over-expansion of the nontraded sectors of the pre-crisis years. The size of the balance of payments adjustment, and thus the extent of the recession and the rebalancing of the economy may have proved larger than warranted. However, the character of the economic adjustment—decline in investment, relative price adjustment, shift toward greater tradable goods production—has been in line with the resolution of these earlier imbalances. With the current account position now much stronger, and with the potential for significant improvement in the balance of payments outlook, there is now the prospect of sustained economic recovery, albeit at more modest rates than in the past.


Prepared by Mark Griffiths (APD).


The discussion in this paragraph draws on Renaud, Zhang, and Koeberle (1999).


Chapter IV of this Selected Issues paper gives a full discussion of credit conditions before and after the crisis.


Chapter II of this Selected Issues describes the evolution of Thailand’s corporate debt problem, and the attempts of the authorities to resolve it.


Inventory adjustment also took part of the burden. Data on inventories are unreliable, but the fall in raw materials imports early on the crisis is consistent with widespread de-stocking, consistent with the Korean experience.


If expected future income growth falls, permanent income falls by more than the decline in current income, prompting a decline in the consumption-to-GDP ratio. For example, assuming a 20-year life cycle, and a real interest rate of about 4 percent, a decline in income growth from 8.5 percent (the 1991–94 average) to 5.5 percent (a more cautious projection of future income growth) lowers permanent income by around 30 percent. Consumption may therefore fall by more than the 10 percent fall in current income.

Thailand: Selected Issues
Author: International Monetary Fund