domestic flexibility to adjust wages and prices to correct lack of competitiveness. we therefore could not maintain the parity for long. it also led to distortion in risk perception that led to excessive foreign exchange risk mismatch, over investment in the non - traded sector and damaging speculation, especially in real estate. when we had to change to the flexible exchange regime, the exchange rate depreciated to a low point of less than 50 % of its pre - crisis value before backing up to above 60. the exchange losses that occurred was, among other things, one of the major factors causing the level of non - performing loans to go up to the peak of 45 %. this was almost one out of every two dollars lent out. what stress test can really prepare us for such an event? the second is to have the right infrastructure for the domestic financial markets. this topic includes many things like ( a ) having the proper market rules, ( b ) having the legal framework that facilitates the enforcement of creditors ’ rights, ( c ) having the laws and procedures to deal with bankruptcy, ( d ) having proper accounting and auditing standards as well as a reliable system of credit information on individual borrowers. i can still recall that during the 1997 crisis, the inter bank market in thailand ceased up for fear of counter party failure. but the problem also extended to the system of commercial trade credit between ordinary companies, the sellers and buyers of goods. today, five years after the event, the system of trade credit still has not regained its full recovery. this problem can be mitigated with the function of credit bureau that reports regularly on payment behavior of commercial firms. third is to ensure that there exists proper supervision of financial institutions. the country has to ensure that the agency entrusted with this task has sufficient power to act. i can still remember that in thailand long ago, when government successions often did not come from elections but through military actions, it was very common for commercial banks to have army generals sitting on their boards. banking supervision under such an environment was a challenge. but the biggest challenge is what to do when banks suffer such losses that they are unable to continue. this happened when thailand went into the crisis in 1997. we closed down two - thirds of our finance companies. as for the commercial banks, we had 15 local banks then. six banks had to be taken over by the authority. the private shareholders were forced to take full losses, and new capital provided by the authority. management

tarisa watanagase : changes in thailand ’ s economic dynamism after the 1997 crisis speech by dr tarisa watanagase, governor of the bank of thailand, at the international symposium “ ten years after the asian currency crisis : future challenges for the asian economies and financial markets ”, hosted by the center for monetary cooperation in asia ( cemcoa ), bank of japan, tokyo, 22 january 2007. * * * at the outset, i would like to thank governor fukui and the center for monetary cooperation in asia, bank of japan, for inviting me to speak at this special international symposium and for the excellent arrangements made. it gives me both a great honor and pleasure to meet with many people who are genuinely interested in our asean economies. in this first session, i have been asked to speak on changes in thailand ’ s economic dynamism after the 1997 crisis as well as the bank of thailand ’ s view on where the thai economy is heading. due to the time constraint, i will limit my talk to only three key points. the first is that the thai economy is now back on a firm growth path and has become more resilient. for nearly five years after the 1997 crisis, the thai economy went through a period of substantial adjustment. the tough adjustment was unavoidable because the crisis had inflicted a deep wound on the economy. during 1997 - 1998, we underwent a severe economic contraction, thousands of companies went bust, hundred thousands of people became unemployed, and the amount of nonperforming loans in the financial system skyrocketed. the economy staged a rebound in 1999 and 2000. but the recovery was cut short by the global economic downturn in 2001, when growth that year registered merely 2. 2 %. things then started to turn in 2002. despite the continued global slump, the thai economy expanded 5. 3 % that year and has since been on a firm growth path. the resiliency of the economy is evidenced by the fact that during the past two years thailand has weathered several economic storms – the tsunami, avian flu, political uncertainty, and the recent oil shock – with only a moderate slowdown in gdp growth. the key driver behind the current economic expansion has been a combination of domestic demand and exports. the latter, in particular, has always been our main engine of growth. one reason for this is that our export structure has become more diversified, both in terms of product and destination. for example,