Let's start with the happening of the financial crisis in Thailand in 1997.

As you can see on

the slides, we have listed in great detail the events that happened during that time period. But
in order not to take too long because this is not the main content that we want to present
today, I am going to highlight the outstanding events in this crisis.

1. THE HAPPENING OF THE THAI FINANCIAL CRISIS IN 1997

Time Event
3-6/1997 Bank of Thailand was secretly supported by 66 financial entities
with high liquidity.
A considerable amount of capital was flowed out of Thailand.
29/6/1997 16 financial entities were frozen.
One statement guaranteeing the interests of depositors and
lenders to the remaining financial entities are given.
2/7/1997 Bat was floating and immediately devalued 15-20%.
5/8/1997 A series of measures were taken to strengthen the financial
system.
42 financial entities stopped working.
8/12/1997 46 financial entities that were shut down were permanently
decommissioned
7/1999 A small commercial bank was intervened and then sold.
A large bank announced the establishment of the entity.

2. THE CAUSES AND CONSEQUENCES OF THE THAI FINANCIAL CRISIS IN

1997
Thailand’s crisis was also a classic example of a Balance of Payment crisis, whereby the
economy displayed:
a) An overvalued exchange rate:
 After several devaluation during 1980s, the Thai government adopted a fixed
exchange rate system and the Bath was pegged to package of currencies, especially
the US dollar.
 Since the Bath was overvalued, it made Thai products less competitive, hurting
exports. However, imports kept on increasing, causing a huge trade deficit.
 After several speculative attacks against the Bath, the government was no longer
able to finance its current account deficit and in 1997 abandoned its peg and let the
Bath float.
b) A generally large current account deficit:
- Thailand’s overvalued currency resulted in a trade and current account deficit, posing
external weaknesses.
 By 1996 the current account deficit was -7.6% of the GDP
 Driven by trade deficit of almost $9 billion.
c) Lots of short-term “hot money” flows into the financial account which were balancing
the current account deficit:
- Almost all of the investments in Thailand was based on foreign borrowed money and
was short-term.
 High interest rates along with the fixed exchange rate attracted lots of investment,
however investors were cautious and lent only on short term rates.
 Thai corporations discovered that they could borrow at lower interest rates (5-8%)
abroad rather domestically (13%) & exchange rate was fixed  no risk. 
borrowed abroad in foreign currency and deposited locally
 But after Mexico crisis of 1994, investors were concerned that the Bath could be
devalued and started pulling their money out, draining the foreign reserves.
d) Rising debt
- In 1992, as part of a broader financial liberalization package, the Thai government
deregulated foreign exchange. Local and foreign commercial banks were able to take
deposits or borrow in foreign currencies from abroad, and lend the money both in
Thailand and abroad.
 As a result the country undertook too much offshore borrowing. Government debt
increased from 34% in 1990 to 51% in 1996 of GDP.
 Most of it was generated by the private sector. Of the total debt stock, 80% was
private debt and almost 36% was short term, i.e. matured in 12 months or less.
e) Falling reserves
- Majority of the inflows into the financial and capital account were short-term. Once
the speculation against the Bath started to rise, investors feared that the currency was
going to be devalued, and started pulling their money out.
 Both the current and capital accounts were in deficit, putting a huge dent into the
country’s reserves.
 Reserves fell from $37 billion in 1995 to $27 billion in 1997.
f) Mismatch on the balance sheet (Currency, or Maturity)
- Thai domestic banks and finance companies borrowed foreign currency from abroad
and then matched their short-term external liabilities by making short-term foreign
currency loans to domestic Thai companies.
 As a result, the financial sector’s short-term debt exceeded the liquid foreign
currency reserves of the government causing a maturity mismatch.
 The current account deficit was mostly financed by debt rather than FDI. After the
exchange rate peg was abandoned, the real value of Bath fell and made it more
difficult for the government to pay back its debt, which was denominated in foreign
currency.
g) Erosion of policy credibility and poor regulation
 The reshuffling of the cabinet and the collapse of the government all helped in
triggering the crisis.
 PM Banharn chose as his ministers mostly provincial bosses and the government’s
short-term policies were mainly driven by the logic of patronage and particularistic
connections.
 Starting in 1995, the heads of three core macroeconomic agencies were fired, and
the government was involved in two major scandals.
 As a result, the credibility of the central bank was eroded and foreign investors
were concerned about the practices of the Thai banking sector.