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INTRODUCTION

Financial Crisis Began in July 1997

Epicentre Thailand led to crisis dueto Fixed Currency to Floating

Currency Excessive foreign exposure Real Estate Speculation

Resulting crisis affected Phillippines,

Malyasia, Indonesia and Korea

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PRE-CRISIS SCENARIO

Rapid expansion of economy since 1990 in Thailand

High growth rates due to Maintain high interest rates to attract foreign capital Rapid industrialization Real estate speculation

Encouraged exports by extending line of credit beyond capacity

Banks continued to raise capital in international markets

Money raised went to few families or groups close to government

Bottom-line of companies started deteriorating

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1. Reason to move Thai Baht from Floating to Fixed Rate Regime

Rapid expansion of economy through borrowed capital

Excessive investment led to creation of Bubble in the economy

Speculation started about fall of Thai baht globally

In May and June 1997, Government took steps to quell fears

Direct measures Using hard currency reserves Indirect measures Raising interest rates

Speculation started again early July was the final nail for Thaiauthorities

Finally on July 2, 1997, Thai Central bank moved from fixed rate regimeto floating rate regime

Thai Baht fell from THB25/USD to nearly THB40/USD (roughly 40%)till November 1997

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2. Reasons for Thai Baht to depreciate by 38%

Thai currency moved from fixed rate regime to Floating rate regime inJuly 1997

Capital Outflows increased as rates in USA started increasing

Thai economy expanded rapidly in early 1990s due to strong inflows

This created a bubble and concerns over Thailands ability to paystarted rising

Government already used precious hard currency reserves to supporteconomy and raised interest rates beyond sustainable levels

Due to these factors, once the currency was pegged to market rates(floating rate regime) Thai Baht declined 38% from THB25/$ toTHB40/$ in 4 months till November 2007

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3. Reasons for Currency crisis spreading to NeighbouringCountries

South Asian countries like Philippines, Korea, Thailand, Malaysia

grew rapidly during early 1990s

Some countries had similar characteristics while others haddifferent characteristics than Thailand

Thailand was under tremendous speculative pressure samespeculation started to spread to neighbouring countries

This was due to tequila effect currency devaluation affected allSouth Asian nations except China as Renminbi was not freelyconvertible

Once overly valued Thailand Baht declined, all countries followedsuit, partly due to structural weakness and partly due to speculation

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