Effects of Exchange Rates on Debt, Debt Services and Public Debt Management in Thailand in the 1980s

This paper attempts to evaluate the effects of exchange rates on debt, debt services, and public debt management in Thailand in the 1980s. A simple differentiation technique is used to decompose the changes in debt and debt services into 'management' and 'exchange rates' effects. The latter became more pronounced in the second half of the 1980s largely because of the increased volatility in exchange rates among key currencies. The public sector responded to these changes by adjusting the debt portfolio through new commitment and refinancing, as well as restricting the level of external debt. As a result, a significant amount of debt services was saved in 1989, when the exchange rates among major currencies began to settle down, although the same adjustments initially led to temporary increases in the levels of debt and debt services during the mid-1980s.
Moreover, the diversified structure of public external debt made it possible to compensate a change of debt or debt service in one currency denomination by a counter change of those in another currency denomination. Such a compensating relationship (e.g. between Yen and US dollar during 1985–87) helped stabilise the effects of exchange rates. The baht is now pegged to a basket of currencies. In theory the effects of exchange rates may be completely neutralised if the debt portfolio reflects the weight of each currency in the basket. Such relationships may be incorporated to improve the efficiency of public debt management.