Thailand's financial crisis: its causes, consequences, and implications

Journal of Economic Issues, March, 2007 by Jonathan E. Leightner

Thaksin vowed not to return to office if his Thai Love Thai political party failed to get more than 50 percent of the votes cast in the April 2, 2006 election (Bangkok Post, March 4, 2006). Subsequently, the opposition urged all voters to go to the polls and mark the "no vote" option on their ballots. The author of this paper sees no way out of the current situation that would not damage democracy in Thailand. Indeed, he believes that it is likely that Thailand's King will feel forced to get even more involved.

Thailand's Recovery

The Democrats argue that Chuan Leekpai's government started Thailand on the road to recovery prior to the January 2001 election. The Thai Love Thai party argues that the Thai economy did not begin recovering until after they won the January 2001 election. Although Thaksin tried to begin his administration with rapid change, his efforts were impeded by his corruption case before the Constitutional Court, which was not resolved until August. Almost immediately, the terrorist attack against the World Trade Center in New York on September 11, 2001 produced a worldwide economic slow down.

The major concern about Thaksin's policies was that his social programs would "bankrupt the public purse" without producing sustainable growth (Ingsrisawang 2002). The 2001 budget under Thaksin predicted a 105 billion baht deficit, not including the refinancing costs of 500 billion baht of bonds for the liabilities of the Financial Institutions Development Fund (Sirithaveeporn 2001). The 2002 budget deficit was projected to be 200 billion baht (Sirithaveeporn 2002). The 2003 budget deficit was originally projected to be 174 billion baht, but a 13.6 percent increase in state revenues produced an actual budget deficit of only 40 billion baht. There was hope that the state budget should be balanced in 2005, for the first time in almost a decade (Savanayana 2005). However, preliminary figures indicate that the 2005 budget ended up with an approximately 18 billion baht deficit.

Government spending provided the sole hope for economic recovery in Thailand between 1997 and 2001. The hope of sustained recovery grew significantly brighter in 2002 and 2003 when consumers started to spend again and exports rose (Maneerungsee 2003; Yuthamanop 2004). Consumer spending rose: (1) as consumer confidence increased, (2) as interest rates stayed low, (3) as consumer credit increased, (6) (4) as the stock market improved creating wealth effects, and (5) as tax breaks for the purchase of real estate drew to an end. The increase in Thai exports did not come from Thailand's traditional export markets (especially the United States); instead exports rose significantly to China and to other ASEAN (Association of Southeast Asian Nations) countries (Yuthamanop 2004; Maneerungsee 2004). The shift away from trade with the United States and toward trade with China and ASEAN countries is likely to continue for the foreseeable future, and this shift has direct consequences for the political clout of countries like the United States. (7) The December 2004 tsunami, southern unrest, bird flu, drought, and a surge in oil prices all dampened demand in 2005. However, there is hope that additional government investment and exports will help Thailand's economy in 2006 (Yuthamanop 2006).