Collapse of the Thai Baht
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The Thailand financial crisis and the collapse of the Thai baht provide many lessons for those interested in foreign financial matters. Thailand was not the only country to experience a financial crisis in the latter half of the 1990s, yet the specific series of events in this country provide an interesting case study into the factors that can lead to crisis as well as what can be done to prevent one.
There were several factors that led up to the collapse of the Thai baht in 1997. As discussed in the case study, before this date Thailand had undergone significant growth. By the early 1990s, Thailand was one of the strongest nations in Asia. A major factor fueling Thailand’s economy was its strong exports. The strong economy and low interest rates led to a building boom and significant investment. In January of 1997, Thailand ranked 8th in terms of world foreign exchange position.
The building boom in Thailand caused the following issues associated with the collapse of the Thai Baht:
- The building boom led to an oversupply of residential and commercial buildings.
- The building boom made the country reliant on foreign imports for materials.
A great majority of the building in Thailand at this time was heavily financed with debt. By six months into 1997, visible signs of trouble were evident. Thailand’s inflation rate was growing, an adjustment on the Thai baht was necessary, and the government realized that the building boom had resulted in severe overcapacity.
All of Thailand’s attempts to keep the baht afloat failed. In June of 1997 the exchange rate was $1 U.S. dollar to about 50 baht. During this same year a land developer defaulted on a bank loan and the Thai stock market dropped by 2.7 percent. As other Thai developers and banks began to fail, Thailand plunged from a top spot in the world market to one struggling with a financial crisis.
The case of Thailand’s relatively quick change of status is an example of faulty currency risk management. The collapse was due to several factors including overspending and heavy indebtedness. These two factors in particular had a huge impact on the country’s currency.