Macroeconomic management under the global financial crisis

Bhanupong NidhiprabhaThammasat University

2

Fixed vs. managed flexible regimes

19481951

19541957

19601963

19661969

19721975

19781981

19841987

19901993

19961999

20022005

20080

5

10

15

20

25

30

35

40

45

50

Nominal price of the dollar

baht

Source: International Financial Statistics

3

EC:204 Economic Change in Thailand

• J.C. Ingram(1971) Economic Change in Thailand, 1850-1970

Stanford University Press• Stolper & Samuelson • P.F. Bell

4

Dates and magnitudes of devaluations

Dates Per centMay 1981 1.1July 1981 8.7November 1984 14.8December 1985 1.9July 2, 1997 Baht float

5

Cheaper dollar in the long run

19481953

19581963

19681973

19781983

19881993

19982003

20080

50

100

150

200

250

300

The baht price of the dollar

cpi (index)real dollar price (2005 price)

Baht

Source: International Financial Statistics

6

Important dates in September

• September 11, 2001• September 19, 2006: A turning point in Thailand’s

history• September 7, 2007. The US government seized

control of Fannie Mae and Freddie Mac• September 15, 2008: Lehman Brothers filed for

bankruptcy.• “Have history and precedent no bearing on

current financial crisis?”

7

The last remaining growth engine

19901992

19941996

19982000

20022004

20062008

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

Exports-led growth

InvestmentExportsImports

Ratio

to G

DP

Source: Bank of Thailand

8

The long-run relationship

-40

-20

0

20

40

60

1994 1996 1998 2000 2002 2004 2006 2008

Exports ImportsSource: Bank of Thailand

9

Exchange rate volatility

-20

-10

0

10

20

90 92 94 96 98 00 02 04 06 08

% change y-o-y

Monthly Baht/USD exchange rate

Source: Bank of Thailand

10

60

70

80

90

100

110

120

130

00 01 02 03 04 05 06 07 08

baht dollar yen

Real Effective Exchange Rate Indexes(January 2000=100)

Loss of international competitiveness?

Source: International Financial Statistics

11

A policy faux pasDecember 18, 2006

Jan-05

Apr-05

Jul-05Oct-

05Jan

-06Apr-0

6Jul-0

6Oct-

06Jan

-07Apr-0

7Jul-0

7Oct-

07Jan

-0830

32

34

36

38

40

42

44

-2

0

2

4

6

8

10

12

Baht at different markets

onshoreoffshoreDifferentials (%)

Baht

/USD

Source: Bank of Thailand

12

International reserves

• Accountability • Transparency• Financial loss

13

Increasing fluctuations of long-term flowsWhy?

-3

-2

-1

0

1

2

3

4

5

1994 1996 1998 2000 2002 2004 2006 2008

FDI

Source: Bank of Thailand

14

Capital flows to the banking sector

-6

-4

-2

0

2

4

6

1994 1996 1998 2000 2002 2004 2006 2008

BANK

Source: Bank of Thailand

15

EC330: Economics of Money and Banking

• SS&W• ERTC: Impact of interest income taxes on bank

deposits

16

Dwindling short-term borrowing

-4

-3

-2

-1

0

1

2

3

4

5

1994 1996 1998 2000 2002 2004 2006 2008

OTHER

Source: Bank of Thailand

17

The yen-carry tradeThe breakdown of the interest parity condition

80

100

120

140

160

20

30

40

50

60

1994 1996 1998 2000 2002 2004 2006 2008

BAHT YEN

Source: International Financial Statistics

18

It started in 2002 in response toSeptember 11, 2001

0

2

4

6

8

10

12

14

1994 1996 1998 2000 2002 2004 2006 2008

BOT FED

Source: International Financial Statistics

19

Residential estate price-income ratio rising in tandem with increased debt-to-income ratio

UK USA Spain Sweeden Ireland Japan

93.9

23.4

67.362

86.1

-28.4

% change 1997-2007

20

• The housing price bubble burst in mid-2006 and both housing prices and housing starts began a long period of contraction.

• With declining home prices, borrowers were unable to refinance their loans and default rates soared.

• CDO and CDS are WMD

21

The collapse of housing prices March 2009(y-o-y)

Source: The Economist

22

Policy responses

• Fiscal policy stimulus• Easy monetary policy• Export expansion• Competitive exchange rate• Domestic consumption-led growth

23

-2

-1

0

1

2

3

1 2 3 4 5 6 7 8 9 10

FISCALEXPORTS

BOTRATEREER

CONS

Response of OUTPUT to various shocks

24

Results from A Vector Autoregressive Model

• Exports and domestic consumption contribute most to output growth.

• Exchange rate changes have relatively smaller impact on output when compared to changes in fiscal stimulus and key interest rates.

• Unlike fiscal expansion, monetary policy has longer lag but predictable impacts on output.

25

-12000

-8000

-4000

0

4000

8000

12000

1 2 3 4 5 6 7 8 9 10

Response of EXPORTS to FISCAL

-12000

-8000

-4000

0

4000

8000

12000

1 2 3 4 5 6 7 8 9 10

Response of EXPORTS to BOTRATE

-12000

-8000

-4000

0

4000

8000

12000

1 2 3 4 5 6 7 8 9 10

Response of EXPORTS to REER

-12000

-8000

-4000

0

4000

8000

12000

1 2 3 4 5 6 7 8 9 10

Response of EXPORTS to OUTPUT

Response to Cholesky One S.D. Innovations ± 2 S.E.

26

Impacts on exports of various shocks

• An appreciation of the real effective exchange rate results in a decline in exports.

• Exports depend on flexible and resilient output adjustments.

• Fiscal stimulus does not stimulate exports.• Tight monetary policy does not adversely

affect the export sector.

27

Lights at the end of the tunnel

• There are signs indicating a bottoming out of the 2009 recession.

• A mild recovery in 2010 is expected, provided that improved business sentiment remains.

28

Capital market and flows of hot money

-6

-4

-2

0

2

4

6

1994 1996 1998 2000 2002 2004 2006 2008

Portfolio

29

DJIANikk

ei

China (SSE

A)

India (BSE

)

Indonesia (JS

X)

Malaysia(KLSE

)

Singapore(ST

I)

South Korea(KOSP

I)

Taiwan (T

WI)

Thailand(SE

T)

8.8 15

61.6 68.5

93.1

3552.3 46.8

58.4 58.1

Stock Prices on September 9, 2009% Change on Dec 31, 2008

in USD terms

Source: The Economist

30

Conclusion

• Thailand’s exchange rate policy exhibits long-term consistency of market intervention.

• Output recovery depends on consumption rebound which requires regained consumer confidence.

• Exports are the remaining growth driver in Thailand; they are mainly determined by conditions in the world market rather than the weak currencies.

31

Concluding remarks

• Old habits die hard• Optimistic tendency of human behavior • Tendency to forget the lessons of the past• There will be other banking crises.

32

Time is a great teacher, but unfortunately it kills all its pupils.

Berlioz, Hector (1803-1869)

33

The best teachers taught us to give our best.