Overview of Capital Account Crisis - IMF

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be made liquid, there remained a potential financing gap of US$21 billion if short-term
liabilities could not be rolled over.
• Of the non-bank sector’s total liabilities, some US$66.4 billion was owed to foreigners in
foreign currency (including equity, which would likely be converted into foreign
currency if foreigners withdrew), of which US$23.6 billion was short-term.
• Commercial banks were covering their overall (short- and long-term) FX-denominated
liabilities of US$48.1 billion 6 with foreign assets of US$7.0 billion and FX-denominated
claims on domestic residents of US$31.5 billion, leaving a net FX liability position of
US$9.6 billion. However, this assumed that domestic residents would be able to cover the
US$31.5 billion of FX-liabilities in the event of a devaluation. The non-financial sector’s
foreign liabilities amounted to US$98 billion (against foreign asset holdings of just
US$0.5 billion). Thus, to the extent that the non-financial sector did not have a natural
FX hedge (i.e., were not exporters), the US$31.5 billion of FX-risk of the banking system
had simply been transformed into credit risk. 7 Compounding this risk was the weak
capital structure of the corporate sector in Thailand (and in Asia, more generally), with an
average debt-equity ratio of 196.
These mismatches meant that Thailand’s vulnerability to a crisis was far greater than the
US$10 billion aggregate short-term liability position to the rest of the world would suggest.
Crisis Trigger
12. In the event, the proximate trigger of the crisis was the asset price deflation (stock
prices fell by 60 percent between mid-1996 and mid-1997, while inflation-adjusted property
prices fell by 50 percent between end-1991 and end-1997). This called into question the
creditworthiness of the non-financial sector and therefore the quality of banks’ assets,
including its FX cover. Against a background of an unsustainable current account deficit
(which had reached 8 percent of GDP in 1996), a significant real exchange rate appreciation,
and a weakening fiscal balance, pressures on the Thai baht increased during 1996 and the
first half of 1997. Of the US$38 billion of foreign exchange reserves at end-1996, the Bank
of Thailand used up some US$7 billion in foreign exchange intervention plus increasing its
FX forward and swap obligations from about US$5 billion to almost US$30 billion.
Information on the counterparties to these off-balance sheet swap operations is not available.
To the extent that these were Thai banks, this would have decreased the (on-balance sheet)
FX exposure of the banking system without implying a loss for the country as a whole. But if
they were nonresident entities, this would have meant that the country had only US$3 billion
6 This assumes that all medium-term liabilities to the external sector were denominated in
foreign currency.
7 Writing off the claims of the banking sector on the non-financial sector would, obviously,
worsen the balance sheet of the former, to US$41 billion.