Sixteen years after the baht's devaluation on July 2, 1997, Thailand appears to have regained its footing. Yet ample risks to economic and financial stability remain because of the volatility of capital flows and a deteriorating trade account.
Over the past three or four months, Thailand has lost a chunk of its foreign-exchange reserves in a hurry. According to the Bank of Thailand's website, as of June 21, the central bank's forex reserves stood at US$172.6 billion (S$218 billion) - down $10 billion from February's $182 billion.
During this time, the baht exchange rate has gone through sharp fluctuations. The Thai unit hit 28.55 against the US dollar in April before weakening to 31.05. A 3 baht fluctuation over a period of three months reflects the enormous risks associated with the forex market.
Thailand's foreign-exchange reserves are also under pressure from the deteriorating external account. In the first five months of this year, Thailand experienced two months of current-account surplus of a combined $3 billion and three months of deficit of a combined $6.6 billion. Overall, the country posted a current-account deficit of more than $3 billion in those five months. This explains why money is flowing out of the country.
Most people believe that the hangover from the 1997 financial crisis has completely gone. The way forward for Thailand is to gain prosperity from expanding trade and exports, from rising disposable incomes of the people, and from the relative strength of the country's competitiveness as the centre of the ASEAN region.
Finance Minister Kittiratt Na-Ranong has even predicted that gross domestic product, now 13 trillion baht, would hit 100 trillion baht by the time the government has completed its mega-infrastructure investment over the next seven years or so. But a closer look at the economic structure shows that Thailand is vulnerable to another shock.
First, foreign investors account for a chunk of ownership in the stock market. Jarumporn Chotikasthira, president of the Stock Exchange of Thailand, has said foreign interests hold about 35-38 per cent of Thai equities, the size of which is equal to the country's GDP.
This makes the Thai equity market vulnerable to a sudden outflow in the event that foreign investors sell off their holdings in a big way to meet their redemptions in their home markets.
Second, foreign investors are major shareholders in the Thai banking system, holding roughly 60 per cent. This also poses systemic risk in the event of an abrupt change of their policy. Banking systems in the Western world are heavily undercapitalized, posing a systemic threat to the global economy.
Third, foreign investors hold 900 billion baht in the Thai bond market, according to the Thai Bond Market Association. Their buying into Thai bonds or selling them off has a huge impact on the baht exchange-rate.
Fourth, as a result of Thailand's obligations under the International Monetary Fund, policy has been relaxed to allow foreigners to own land in Thailand. Last year Sriracha Charoenpanich, the Ombudsman, reported that about one-third of land in Thailand amounting to 100 million rai (16 million hectares) was in the hands of foreigners. This posed a risk to Thailand's social security.
Finally, Thailand's household debt has risen dramatically. Dr Prasarn Trairatvorakul, the governor of the Bank of Thailand, has expressed grave concern over the current level of household debt - 8.8 trillion baht, equal to about 78 per cent of GDP. The big jump in household debt can be attributed to the easy-money policy of the government, which has encouraged Thais to borrow to purchase homes, cars and other items.
As the economy slows in line with the global recession, Thailand will be vulnerable to further shocks because the households have saddled themselves with debt, which will hinder domestic consumption. The government's plan of major infrastructure investment and heavy-handed deficit spending on populist policies will also threaten to raise the public debt, now under 50 per cent of GDP, to 70 per cent if it is not careful enough, according to a recent comment by MR Pridiyathorn Devakula, a former finance minister and former central bank governor.