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CHAPTER 4 Foreign Capital Flows to Thailand: Determinants and Impact Ammar Siamwalla, Yos Vajragupta, and Pakorn Vichyanond 1. CHRONOLOGY Before 1997, relatively low yields in industrial countries together with impressive economic growth and attractive returns in developing economies motivated Western investors to relocate their funds to money and capital markets in the East. This corresponded well with the trend toward trade globalization, international financial linkages, and expansion of production bases overseas. That was why the aggregate volume of net capital inflows to developing countries surged from U.S.$100.8 billion in 1990 to U.S.$338.1 billion in 1997. However, these net inflows plunged to U.S.$275 billion in 1998 after the world was shaken by widespread financial crises. Thailand benefited a great deal from the Plaza Accord in 1985 because gluts of capital inflows from Japan in the form of foreign direct investment, as a result ofthe surging value ofthe yen, spurred up both investment and export activities . Concurrently, the Thai government was successful in achieving several consecutive years of cash balance surplus. The central authority believed that resource inflows represented a key driving force for continual economic expansion . After committing to the obligations under Article VIII of the International Monetary Fund (IMF), the Thai government in 1991 decided to start dismantling its exchange controls and liberalizing the activities offinancial institutions , but it left its pegged exchange rate unchanged. Consequently, Thailand 's net capital inflows grew rapidly from U.S.$10.9 billion in 1990 to U.S.$18.2 billion in 1996. However, once the market began to question Thailand 's micro- as well as macroeconomic situation and the ability of the government to maintain stability, both creditors and investors rapidly withdrew their funds. The scenario was exacerbated by debtors' (p)repayments and speculators' hedging (table 4.1). The resulting capital outflows forced the Thai government to float the baht exchange rate in July 1997, sparking a series of financial crises in East Asia and other regions later on. 75 TABLE 4.1. Net Flows of Private Financial Accounts into Thailand (millions of U.S.S) 1997 1998 QuarQuar Quar Quar Quar Quar Quar Quar 1990 1991 1992 1993 1994 1995 1996 1997 1998 ter 1 ter 2 ter 3 ter 4 ter 1 ter 2 ter 3 ter 4 Bank 1,594 -259 1,933 3,599 13,925 11,236 5,007 -6,442 -13,944 2,369 36 5 ,799 3 ,048 -1,472 3 ,883 -4,394 -4,195 Commercial bank 1,594 -259 1,933 -4,039 3,837 3,103 428 -4,735 -4,310 1,515 -273 -4,459 -1,518 623 -1,756 -2,459 -718 BIBF 0 0 0 7,638 10,087 8,133 4,579 -1,707 -9,634 855 309 -1,340 -1,531 -2,095 -2,127 -1,935 -3,478 Nonbank 9,333 10,544 7,415 6,717 -1,910 9,561 13,183 -1,916 -2,024 -585 -905 -953 527 -2,788 1,716 1,252 2 ,203 Direct investment 2,391 1,848 1,979 1,439 902 1,168 1,454 3,205 4,688 528 568 1,147 961 1,016 1,481 1,218 973 Foreign direct investment 2,531 2,016 2,116 1,732 1,323 2,004 2,270 3,645 4,810 654 780 1,211 999 1,019 1,492 1,248 1,052 Thai direct investment -140 -168 -136 -293 -421 -837 -816 -441 -123 -126 -212 -64 -39 -3 -11 -30 -79 Other loans 4,495 5,638 2,725 -2,420 -5,838 1,530 5,451 -3,786 -4,279 -115 -846 -858 -1,968 -2,052 -808 -737 -682 Portfolio investment 450 151 556 4,848 1,095 3,283 3,485 4,501 539 511 1,228 2,375 387 447 47 -17 62 Equity securities 450 36 454 2,682 -409 2,120 1,123 3,875 354 416 882 2,081 496 449 -142 -77 123 Debt securities 0 115 102 2,166 1,504 1,164 2,362 626 185 95 346 294 -109 -3 190 60 -62 Nonresident baht account 1,342 2,057 1,754 2,682 2,036 3,381 2,913 -5,850 -2,715 -1,694 -1,800 -3,861 1,505 -2,186 1,139 789 -2,457 Trade credits 655 745 307 539 456 256 -146 -242 -494 252 -68 13 -439 -185...

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