An Analysis of Thailand's Net Capital Inflows Surges after the 1997 Crises
Wiboonchutikula, Paitoon, Kotrajaras, Polpat, Chaivichayachat, Bundit, Journal of Southeast Asian Economies
Thailand has completed its capital account liberalization in the early 1990s. Immediately after its opening up, a huge amount of foreign capital flowed into the country but most of the inflows were in the form of foreign borrowing invested in the non-tradeable sector. Once the sector and the economy slowed down together with a rising inflation in 1996, the short-term loans ceased to be rolled over and in mid-1997, most inflows eventually dried up along with the collapse of the country's fixed exchange rate system. With this, the twin crises of both the domestic currency and the financial sector began. Both crises sent the country into a deep recession in the following year, and it did not recover until 1999.
After the crises, the country continued to maintain the opened capital account, although it learned the lesson first-hand that capital inflows have their benefits and costs. From these lessons, both the macroeconomic policies and financial sector have undergone some reforms to better insulate the country from future crisis. For example, local-currency-denominated bonds are issued to reduce the problem of currency mismatch, which was a cause of the 1997 crises. Some forms of economic and financial surveillance system, including the derivative and debt markets, were also established to reduce the financial sector risk. As the country continued to open up, a large amount of foreign capital occasionally flowed into Thailand, particularly when the domestic politico-economic conditions were favourable and waves of foreign capital flowed into the rapidly growing East Asian region, resulting in some of the inflows spilling over to the country. These inflows had often created pressures on the appreciation of the domestic currency and this in turn hurt the export sector. The central bank had done its best to mitigate the adverse effects, but was usually reluctant to impose any drastic actions to stem the inflows. More often than not, foreign capital was allowed to move relatively freely in and out of the country as the overall economic policy had still been leaning towards openness.
Nevertheless, a time came in December 2006 when it could not resist the temptation to try a minor form of capital control measure to prevent the resulting appreciation from harming the exports. The impulse was the plunge of the capital inflows of all types before the total flows returned a few months later. In light of the response, the measure was abolished over a year later. In 2010, when there was another surge of short-term capital flowing into the country, the government intervened by imposing a measure to reduce the inflows again, this time by tax measures, out of the concern of the impact of the inflows on the exchange rates and other asset prices. Other than these short-term or mild forms of capital control, the capital account in Thailand remains relatively open.
Under the above policy environment, this paper sets to study the nature, the determinants, and the impacts of net foreign capital inflows into Thailand classified by type of the inflows. The objectives are to find out how the size, the composition, and the nature of the net capital inflows in Thailand have changed after the 1997 crises. How have patterns of the net inflows been altered for the country to insulate better from the risk of capital inflows reversals? What are factors attracting occasional surges of net capital inflows into the country? Ultimately, how have the net inflows affected the country's real exchange rates and the prices of other kinds of assets? Given all the findings, what kind of policy implications one can draw on capital flows management.
The paper is organized as follows. In the following first section we describe the development of the Thai economy under the changing world economic conditions after the period Thailand liberalizing its capital account in the early 1990s. The discussion puts an emphasis on the country's changing political economic conditions. …