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What was Thai Banking Crisis of 1997?

08 Aug 2023 Zinkpot 192
What was Thai Banking Crisis of 1997?
  1. Asia witnessed one of the biggest financial crises in 1997 which began in Thailand and swept over East and South East Asia. This financial crisis heavily damaged currency values, stock markets, and other asset prices in many of these nations.
  2. The causes of this Asian Financial Crisis are complicated and disputable. A major cause is considered to be the collapse of the hot money bubble. 
  3. Course of events: During the late 1980s and early 1990s many Southeast Asian countries, including Thailand, Singapore, Malaysia, Indonesia, and South Korea, achieved massive economic growth of an 8% to 12% increase in their GDP. This achievement was known as the ‘Asian Economic Miracle’.
  4. These economic developments were mainly boosted by export growth and foreign investment Therefore, high interest rates and fixed currency exchange rates (pegged to the US Dollar) were implemented to attract hot money. The exchange rate was pegged at a rate favorable to exporters.
  5. Hot money refers to funds that are controlled by investors who actively seek short-term returns. These investors scan the market for short-term, high-interest-rate investment opportunities.
  6. As a consequence of which both capital markets and corporates were left exposed to foreign exchange risks due to the fixed currency exchange rate policy.
  7. When the US recovered from a recession in the mid-1990s, the Fed raised the interest rate against inflation. The higher interest rate attracted hot money to flow into the US markets leading to an appreciation of the US Dollar.
  8. Consequently, the currencies pegged to the US dollar also appreciated, thus hurting export growth. With a shock in both export and foreign investment, asset prices that were leveraged by large amounts of credit began to collapse. This panicked the foreign investors, and they began to withdraw.
  9. The massive capital outflow caused depreciation pressure on the currencies of the Asian countries. The Thai government first ran out of foreign currency to support its exchange rate, forcing it to float the Baht (Thai currency).
  10. The value of Thai currency thus collapsed immediately afterward. The same also happened to the rest of the Asian countries soon after.
  11. The countries that were most severely affected by this crisis included Indonesia, Thailand, Malaysia, South Korea, and the Philippines. The GDPs of the affected countries even fell by double digits. Hong Kong, Mainland China, Singapore, and Japan were also affected but less significantly.
  12. It also resulted in political repercussions. The Prime Minister of Thailand and the President of Indonesia resigned. An anti-Western sentiment was triggered.
  13. International investors became less willing to invest in and lend to developing countries, not only in Asia but in other areas of the world. Oil prices also fell due to the crisis.
  14. This financial crisis was built upon macroeconomic imbalances of the country and those imbalances were essentially attributable to the faulty structure of the nation’s financial sector.
  15. So the primary lesson that many countries learned from this crisis was structuring their financial sector in a way that it can hedge against external shocks. 
     

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