The Asian Currency Crisis in Thailand

The first hint of the Asian currency crisis appeared in Thailand. In the summer of 1996, it was
revealed that the Bangkok Bank of Commerce had made billions of dollars in questionable
loans, including lending significant sums to a convicted swindler and biscuit-maker known
locally as the "Biscuit King."

Until the problems at the Bangkok bank exposed system-wide problems with Thailand's
banking and bank regulatory system, Thailand was a model developing country. Thailand was
a country that had averaged over 8% real GDP growth since the late 1980s and joined the
rapidly growing group of countries known as the Asian Tigers. The country consistently
reported a balanced budget in government spending and technocrats who ran the financial
markets and economy were considered to be highly professional. The country had relatively
open trade and financial markets that attracted large amounts of foreign capital in the 1990s.

In the early 1990s, foreign money poured into Thailand's economy through financial markets
and direct investment. In addition, Thailand allowed offshore banking in 1993, and these
banks offered high interest rates on deposit that attracted tremendous amounts of foreign
savings. Loaded with foreign money, the banks loaned carelessly and loan defaults began to
rise.

Combined with the cracks in the domestic banking sector, was a sharp decline in Thailand's
rate of export growth. At the beginning of 1996, the Thai government forecast as usual, strong
export growth for that year of 18 percent. However, by mid-1996, Thai exports were growing
at a much slower rate. Thailand's major exports of footwear, garments and seafood, were
facing increased competition from India, China, Vietnam and Burma. Thailand was losing out
in world markets due to a combination of higher labor and production costs and the strong
value of the Thai baht in foreign exchange markets.

The decrease in export growth was significant, since it also softened the demand for the Thai
currency known as the baht in foreign exchange markets. As foreign savers exited in mass
from the Thai financial markets and offshore banks, the value of the baht came under serious
pressure. Currency speculators, judging that the baht was significantly overvalued, flooded
foreign exchange markets with relatively thinly traded bahts. By increasing the supply of baht
in the foreign exchange market, the baht was under pressure to devalue. Although pegged to
the U.S. dollar, by July 1997, the Thai government's supply of foreign currencies reserves
available to buy baht and thus support it price, were nearly exhausted. Hit with a sustained
speculative attack by currency traders, the Thai government abandoned the dollar peg and the
baht devalued sharply as it became a floating currency.