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 In early 1997, Thailand was experiencing rocky economic times. Major Thai banks were undercapitalized, leading to government warnings in March to ten banks to increase their capitalization, and, in April, a Moody's downgrade of the long-term senior debt and deposit ratings of five Thai financial institutions. Furthermore, the U.S. dollar was appreciating significantly, which meant that the Baht appreciated as well, since it was pegged to a basket of currencies, of which the U.S. dollar was the primary component. The Bank of Thailand attempted to defend the Baht against pressure for devaluation, leading to significant depletion of foreign currency reserves as investors anticipated depreciation of the Baht |
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 On July 2, 1997, Thailand announced that the Baht would float. The Baht immediately dropped significantly in value, losing 20% in one month, and falling to less than half its former value within six months. 
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 Thailand entered into the IMF Financial Assistance Program on August 5, 1997 in order to better deal with these adverse economic developments. After receiving $17.2 billion in loans, the Thai government initiated a series of economic and social reforms. Recovery, however, has been slow, partly because other Southeast Asian countries and Japan, who are important trading partners for Thailand, have been experiencing their own economic problems. The depreciation of the Baht meant that the cost of Thailand's external debt and the cost of imported goods and services increased in terms of the Baht. The devaluation also contributed to inflation (which increased from 4.8% at the end of 1996 to 7.7% at the end of 1997), a slowdown in domestic demand and production (real GDP growth was estimated at negative 9% for 1998 versus an average annual rate of 8.5% from 1990-1996), and a sharp rise in the level of bank-held non-performing assets. These negative trends continued in the first half of 1998, with declines in imports, liquidity, domestic production, consumption and investment, and an increase in unemployment. The Stock Exchange of Thailand (SET) suffered considerably, declining an astounding 72% between January 3, 1996 and December 31, 1997.
Interestingly, markets in countries outside of Southeast Asia were initially relatively unaffected by this event. The graph below shows various market indicators, indexed such that a value of 1 for each indicator signifies the same value as on April 1, 1997.
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 First half of 1997: Thailand's persistent current account deficit (7.9% of GDP during 1996) coupled with general economic weakness encourages speculators to begin short-selling the Baht against the U.S. dollar. 3/3/97: Bank of Thailand orders ten finance companies to increase their capital. 4/8/97: Moody's downgrades the long-term senior debt and deposit ratings of five Thai financial institutions (Bangkok Bank, the Export-Import Bank of Thailand, IFCT, Siam Commercial Bank, and Thai Farmers Bank.) 6/26/97: Thai government suspends operations at 16 finance companies. 7/2/97: Thai government announces that the Baht will float in a "managed float system." 8/5/97: Thailand enters into a financial assistance program in conjunction with the IMF. The Thai government suspends operations at an additional 42 finance companies. 1/30/98: The Bank of Thailand announces that Thai financial institutions may now engage in unlimited spot foreign exchange transactions involving the Baht with non-residents. However, to discourage speculation, non-residents can not obtain credit exceeding 50 million Baht per counterparty when there is no underlying investment activity in Thailand. |
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Sources: Philips, Michael M. "One by One: A Look at How the Global Finance Crisis Began - and How it Spread." The Wall Street Journal, 26 April 1999.Web site of the Office of Economic and International Affairs, the Thai Embassy http://www.mof.thaiembdc.org |
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