Prior to the Asian crash of 1997, the environment in Thailand in the 80’s and 90’s was one of strong growth of more than 8% per year. Up to the early 90’s investment in the country mainly came from local businesses and savings, with the foreign debt of the country still safely within the normal range. However after the 1990s this changed and investment came in from abroad.
Low interest rates in developed countries resulted in investors seeking better returns in countries such as Thailand and other emerging markets, increasing the flow of private capital to Southeast Asia dramatically. Local finance companies borrowed funds from international lenders and exchanged that currency to the local currency to lend to local companies. As a result there was an increase in credit expansion as money flowed in from countries such as Japan and Germany.
With the foreign financing activities and the foreign exchange activities taking place, the price of the Thai baht would be volatile if left to float. The Thai government’s policy was to keep the baht stable to the US dollar. So when the demand of the baht was high and there was risk of appreciation it would actively enter the foreign exchange market to sell the baht and increase its supply so that the price would not rise and bought foreign reserves of US dollars and Japanese Yen. This process further expanded credit and increased the money supply.
The boom period coupled with increased investments and credit expansion brought speculation to the markets. The speculation mainly occurred in the stock market but also affected the real estate sector. Speculation would further add to the already overheating economy and it was not easy to stop. To counter the effects of the already heated economy and increasing speculation the central bank sold baht and bought foreign reserves but then bought back those baht by selling bonds. This in effect was borrowing back their money and increasing interest rates as a result. A rise in interest rates did not help curb speculation or slow down foreign inflow instead it made it more attractive for foreign investors as higher rates increased the return.
The Thai economy was in overdrive and overheating. Imports grew as a result of the increased disposable income and the growth in the economy put pressure on wages making local products more expensive and thus Thai exports less attractive. This resulted in an increasingly alarming trade gap with the deficit continuously widening.
Throughout the 80’s and 90’s, from the boom to the bust, corruption was rife in Thailand and other Asian countries such Indonesia and Malaysia. The corruption in the region lead to much larger risks being taken by firms with the government connections and increased bailouts came at the tax payer’s expense. Dodgy investments with high risks and high failure rates further increased the speculation and the fact that government guaranteed these actions further increased the speculative boom occurring already in an