The loan extended to Thailand during the financial crisis of 1997 has now been fully repaid, one year ahead of schedule. The Thai economy has successfully emerged from the crisis and is now enjoying a healthy growth rate.
Two days ago we received the last instalment for the repayment of the loan extended to Thailand in 1997. Readers will recall that in August 1997 Hong Kong decided to contribute US$1 billion to the US$17.2 billion financing package organised by the International Monetary Fund (IMF) to assist Thailand in its economic adjustment. At the time Thailand was suffering badly from highly contagious financial turmoil and there was an urgent need for external financial assistance to prevent a deepening of the financial crisis brought on basically, with the benefit of hindsight, by a failure to manage the risks of financial globalisation. Financial assistance was also needed for the additional reason of containing the contagion within the region and beyond. It was then quite clear that Asia had to help Thailand if it was to help itself in coping with the financial turmoil that was sweeping across the region. Nine economies in the region participated in the facility and committed a total of US$10.5 billion out of the US$17.2 billion package, with the rest coming from the IMF, the World Bank and the Asian Development Bank.
There was, at the time in Hong Kong, some concern over the appropriateness in the use of public funds in such a manner and the credit risk associated with it. But there was general understanding that such a contribution was in Hong Kong's interests, given the new market financial dynamics under globalisation and therefore the importance of financial stability in the region to financial stability in Hong Kong. It was a loan, meaning that it had to be repaid, and the credit risk was considered acceptable, given the general economic strength of Thailand before it was hit rather mercilessly by an unprecedented sharp reversal of capital flows. Furthermore, there were, attached as conditions to the facility, stringent but necessary IMF requirements for structural and policy adjustments.
Indeed, the facility proved to be more than adequate to help tide Thailand over its problems. The actual amount of the facility drawn was less than the total amount committed by the lenders. For us, proportionately, US$862 million of the US$1 billion contribution was drawn. The loan was organised in the form of a currency swap agreement between the Bank of Thailand and the HKMA at market interest rates. Repayment was also faster than originally scheduled, by a year. The loan also earned us respectable rates of return, averaging about 5 per cent per annum in respect of the outstanding amount, which of course varied over time, as the facility was increasingly drawn up to the middle of 1999 and reducing from the second quarter of 2001 as repayment started. The rates of return in the earlier years were higher than in recent years, in accordance with market trends.
So, all's well that ends well. From an economic contraction in excess of 10 per cent in 1998, Thailand recorded GDP growth in real terms of 5.3 per cent in 2002. From a current account deficit in the balance of international payments equivalent to around 2 per cent of GDP in 1997, which really is not large at all, Thailand last year ran a balance of payments surplus in the current account of 6 per cent of GDP. External debt has been reduced from US$109 billion at the end of 1997 to about US$60 billion at the end of last year. Official reserves increased sharply from a low of US$0.8 billion at the height of the crisis in August 1997 to US$38 billion, or around 138 per cent of short-term external debt.
We offer our congratulations to Thailand on its success in economic adjustment. And we look forward to continued co-operation, particularly between the Bank of Thailand and the HKMA, in efforts to address financial weaknesses in the region that inhibit efficient financial intermediation in the region and make the region vulnerable to the volatility of international capital. We, along with other central banks in the region, are making good progress in the development of the regional debt market. There is much more to do in order to ensure that we can properly manage the risk and maximise the benefits of financial globalisation.
Joseph Yam
17 July 2003
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