This did not happen in Thailand, despite timely and vigorous warnings. On the contrary, policymakers attacked the symptom of the crisis, the pressure on the baht, accumulating large reserve losses and forward foreign exchange liabilities in the process. This, together with delays in addressing Thailand’s severe financial sector problems and lingering political uncertainties, clearly contributed to a deepening of the crisis and its spread to other economies in the region. The second lesson is that other countries can find that their vulnerability to crises in other markets is greater than economic fundamentals would suggest. Consequently, they need to take pre-emptive actions to strengthen their policies. Where might such action be needed? Several suggestions come to mind: •  one, maintaining an appropriate exchange rate and exchange rate regime. Clearly, there is no single “right” choice, but more flexible exchange rates can help provide early and visible signals of the need for policy adjustments and are less likely to invite reckless behavior on the part of borrowers and lenders.
Mr. Camdessus considers the lessons from Southeast Asia Remarks by the Managing Director of the International Monetary Fund, M. Michel Camdessus, at a press briefing in Singapore, on 13/11/97. How could events in Southeast Asia unfold as they did, after so many years of outstanding performance? We have a fairly clear analysis of what happened in Thailand. The more difficult question is how the crisis spread so quickly to other economies in the region. I’m not sure we have the full picture yet, but let me give you my perspective on the causes of the crisis and where we go from here. I. How could it happen? Certainly, the Thai crisis did not strike out of the clear blue sky. On the contrary, there were numerous signs of a gathering storm. Macroeconomic indicators pointed to substantial imbalances: substantial real exchange rate appreciation; a marked slowdown in export growth; a persistently large current account deficit financed increasingly by portfolio inflows, including a substantial amount of short-term capital; and rising external debt. These problems, in turn, exposed other weaknesses in the Thai economy, including substantial, unhedged foreign currency-denominated borrowing by the private sector, an inflated domestic property market, and a weak and over-exposed banking system. Markets issued their own warnings in the form of declining equity prices and mounting exchange rate pressure, as doubts about the sustainability of policies grew. And as you know, the Fund also stressed these problems and pressed for urgent measures in a continuous dialogue with the Thai authorities.