The 1997 Tom Yum Kung crisis and the COVID-19 crisis of 2020 are different, requiring distinct management and recovery strategies.

Importantly, even though Thailand has managed to control COVID-19 and is now free from the virus, the economic crisis resulting from the ongoing severe global outbreak and Thailand's still shaky economic reopening means that the economy has not yet hit its lowest point. It may still face a more severe decline in income and job losses. In the future, the recovery of the economy this time will be slow if there is no clear planning and strategy on how Thailand aims to position itself in the changing global economy in the post-COVID-19 era.

The crisis in 1997 arose because Thailand overspent inefficiently. From 1989 to 1996, Thailand had a current account deficit of 5-8% of GDP, meaning it was spending 105-108 baht on goods and services while earning only 100 baht per year, leading to borrowing from abroad (relying on capital inflows).

The monetary policy of Thailand also contributed to prolonging and intensifying this deficit. Economists recognized that setting domestic interest rates high (to cool down the economy) was problematic. However, Thailand's acceptance of foreign capital (by promoting BIBF to encourage financial institutions to borrow from abroad in hopes of making Thailand a regional financial hub) and the Bank of Thailand's fixed exchange rate policy were contradictory (impossible trinity). The result was a guarantee against the depreciation of the baht while domestic interest rates were at 13.5% compared to 7% abroad, leading all large companies and financial institutions in Thailand to compete to borrow heavily from foreign sources.

Once the money was acquired, it was invested in low-yield businesses, with high confidence that Thailand was about to become a new economic “tiger.” However, the most “worthwhile” investment at that time was in real estate, as it was a sector of the economy known as non-traded goods, meaning foreign competitors could not produce housing to compete with Thailand. Thus, real estate prices could rise significantly more than exportable goods, which had to compete in the global market. Consequently, Thailand's economic growth led to increased imports, but exports did not keep pace, resulting in a growing current account deficit and a rapid increase in borrowing (relying on capital inflows).

As Thailand's foreign debt rose significantly, foreign banks became more cautious, lending only short-term, until eventually, short-term debt exceeded international reserves. Meanwhile, domestic banks competed to lend to companies investing in projects with significant bubbles and low economic returns.

The attack on the baht and the ensuing crisis accelerated the end of the distorted economic drive. Subsequently, the IMF stepped in to bolster Thailand's reserves but required a sudden contraction in domestic demand through tight monetary policy (interest rates were in double digits at that time) and an increase in the value-added tax to 10%. Combined with the depreciation of the baht from 25 baht to 40-50 baht per dollar, this led to widespread bankruptcies among companies and banks that had borrowed in dollars, marking the 1997 crisis as a “crisis for the rich.”

During that period, around 1.4 million people lost their jobs, but the devaluation of the baht allowed Thailand to sell more goods abroad. The tourism industry emerged, and the agricultural sector benefited significantly. Additionally, the global economy was strong and expanding well. Thus, Thailand's economic recovery occurred rapidly. Exports of goods and services increased significantly from about 35% of GDP in 1996 to 68% of GDP in 2019.

Looking at the crisis today, it is evident that Thailand relies heavily on foreign tourism, accounting for 12% of GDP (with domestic tourism contributing another 8% of GDP). Meanwhile, exports account for about 55% of GDP. Therefore, it can be estimated that if this year, exports decline by 10% and foreign tourism revenue drops to zero, while domestic tourism is expected to be halved, it would mean that demand would be below normal by approximately 5% + 12% + 4% = 21%. This indicates an overall decrease in purchasing power of 21%, with the most severe impact falling on service sectors that require close customer interaction.

The sector with the shortest “financial rope” is the SMEs, which number around 3 million companies employing 12 million people. If we roughly estimate that 1/3 of SMEs are likely to face significant problems, it can be believed that there are a million SMEs and 5-7 million employees at risk of losing their jobs due to pre-existing vulnerabilities, and the future of tourism does not look bright.

At this point, a decision must be made on how to address the debt problem. One approach is for the government to rapidly implement numerous projects (with a budget of 400 billion baht) to create new jobs, but I am not very confident about how timely and effective this will be in generating sufficient employment. Additionally, there is the restructuring of the automotive industry, which is likely to lay off tens of thousands of employees, along with 400,000 new graduates.

Another option is to assist SMEs and employees in obtaining sufficient long-term working capital to maintain their businesses and keep employees from losing their jobs, allowing time to adapt to suitable business practices in the new world post-COVID-19. While some businesses may not be able to adapt, providing time for employees to transition will help millions of people who have done nothing wrong but are facing the impacts of the COVID-19 outbreak and the prolonged economic downturn.

SOURCE: www.bangkokbiznews.com