Reza Baqir

Thailand has gradually ascended to the front lines of high-growth Asia in the last few years. The authorities have successfully introduced a new monetary framework based on inflation targeting, maintained exchange rate flexibility, strengthened the external position, and recently embarked on fiscal consolidation. At the same time, accelerating corporate and financial sector reforms has proved challenging and investment growth has remained modest. This article summarizes recent research by IMF staff on postcrisis Thailand.

In the last four years, growth in Thailand averaged about 4 percent—half the average of the 15 years preceding the 1997 crisis. A key question for policymakers and academics alike is whether Thailand can regenerate the economic momentum of the precrisis years. Griffiths (2000) highlights the role of an investment boom, especially in non-tradable sectors, in driving the growth acceleration of the mid-1990s and sowing some of the seeds of the subsequent instability. As the crisis developed, private investment collapsed—in 1998 it was a third of its 1996 level. Using a growth accounting framework, Jonsson (2001) found that capital accumulation, more than total factor productivity growth, accounted for the high precrisis growth rates. With capital accumulation expected to remain modest in the medium term, he argued that economic growth will need to be driven primarily by higher total factor productivity growth.

Some of the decline in investment and its subsequent sluggish recovery in the postcrisis period reflects the excess capacity from the investment boom of the early 1990s. However, some researchers attributed the decline to a “credit crunch” in the aftermath of the crisis. Greene (2002) finds a strong correlation in the precrisis years between net private capital inflows, bank credit to the private sector, and real private investment and suggests that the sudden reversal of net capital flows during the crisis choked credit and investment. However, using a disequilibrium econometric framework to study the determinants of international capital flows, Mody and Taylor (2002) find that an “international capital crunch” likely lasted only until mid-1998 in Thailand. Schwartz (2000) notes that a slowdown in credit growth is not, by itself, evidence of a credit crunch: it is difficult to make a definitive statement regarding the existence or extent of a credit crunch, as both supply- and demand-side effects were at play. As it turned out, credit continued to languish, even as the economy began to grow. Baqir and Zanello (2003) examine the causes of “growth without credit” and compare Thailand’s experience to that of other postcrisis countries.

One of the lessons learned from the Asian crisis is that exchange-rate pegs and open capital accounts do not mix well. After the July 2, 1997, devaluation of the baht, Thailand has maintained flexibility in its exchange rate and its regime is currently classified by the IMP as “managed floating with no preannounced path for the exchange rate.” Nevertheless, some observers of the crisis-hit Asian economies have pointed to an apparent lack of exchange rate flexibility after the crisis. Hernandez and Montiel (2001) and Baig (2001) consider the volatility of the exchange rate, reserves, and interest rates before and after the crisis and conclude that Thailand is now floating to a greater extent than it did before, though less than “real floaters.”

With the move to a more flexible exchange rate regime, the Thai authorities have adopted inflation targeting as their monetary policy framework. In an effort to better understand the channels of monetary policy transmission, Baqir (2002) uses vector auto regress ions and finds that while changes in the Bank of Thailand’s policy rate are associated with changes in real output with a lag of four to six quarters, the bank-lending channel appears weak. He also finds suggestive evidence of an asset price channel.

The sluggish transmission of monetary policy through the banking sector is symptomatic of the ongoing structural problems in the financial and corporate sectors. Haksar (2000, 2001) provides an in-depth look at the restructuring of the financial system in the aftermath of the crisis, subsequent progress, and prospects for further reform. He concludes that while Thai banks have made substantial progress in reducing their vulnerability, balance sheet fragilities remain. Kim and Stone (1999) present a theoretical framework to illustrate how highly leveraged firms can halt investment to avoid bankruptcy when facing a capital inflow cutoff. They provide supporting evidence from Thailand and other Asian countries. In assessing the early progress with resolving corporate sector problems, Endo and Griffiths (2000) note that, compared to other countries, Thailand’s initial approach was private sector led, market based, and voluntary. Giorgianni (2001) provides detailed information on the design and implementation of the Thai Asset Management Company, which was subsequently set up by the government to accelerate the debt restructuring process, and benchmarks its key design features against international experience. Haksar and Kongsamut (2002) analyze firm-level data for listed companies and find that although debt levels have fallen from their precrisis peaks, particularly for smaller firms, they remain high by international standards, and interest coverage ratios continue to hover just above the break-even point.

Besides the decline in living standards, the crisis has left the Thai taxpayer with a large stock of public debt. Fiscal policy has faced the trade-off of countering the effects of the crisis while containing public debt. Barnett (2000a) finds that the fiscal impulse was mildly expansionary in the precrisis period and turned contractionary in 1997/98 before turning expansionary in 1998/99. In related papers, Barnett (2000b) and Barnett and Haksar (2001) examine public debt dynamics, taking into account the costs of financial sector restructuring, and find key sensitivities to interest rate and GDP growth shocks. Giorgianni (2002) assesses Thailand’s fiscal vulnerability, building in estimated contingent liabilities of the government arising from financial sector restructuring. This yields estimates of gross public debt considerably higher than the headline figures.