Thailand - The Currency Crisis and Beyond

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Background Note Thailand was known in ancient times as Siam. In 1932, young army officers and civilians replaced the absolute monarchy with a constitutional one. This set the tone for seven decades of mostly military rule and frequent coups... Economic Policies Till 1980, the baht had been pegged to the dollar. The Central Bank had little control over monetary policy. But the Bank was able to control inflation through interest rate regulation, credit, bonds and capital controls...

By the 1970s, the active promotion of foreign investment had already created an industrial sector based on import substitution. In the 1980s, an export-oriented manufacturing sector, based on labor-intensive items such as textiles and garments, began to develop. After 1990, the fastest growth was in high-tech goods like computer accessories and motor vehicle parts...

If the world economy picked up quickly, and Thailand's exports and tourist trade rose with it, the debt problem would marginally reduce the country's growth. But the government was worried that a gloomy global outlook, higher public spending and lingering debts might send Thailand into a prolonged deflationary spiral like that of Japan...

Exhibit I: Thailand: The Economy at a Glance
Exhibit II: Thailand: Economic Data
Exhibit III: Comparative Economic Indicators, 2001
Exhibit IV: Thailand: Profile of International Trade
Exhibit V: Thailand: Forecast Summary

1] In July 1997, Thailand devalued its currency, triggering the turmoil that roiled global capital markets for more than a year. Commodity prices plunged, hammering resource-based currencies like the Canadian, Australian and New Zealand dollars. Bond yields in emerging nations soared, while equity markets tanked. In August 1998 Russia defaulted on its debt, spurring a massive capital flight towards liquid, low-risk assets. Not until the Federal Reserve reduced interest rates in the fall of 1998 did the global turmoil subside.

2] Thaksin Shinawatra and his Thai Rak Thai (TRT) party had swept the Thai elections winning the biggest parliamentary majority ever in the history of Thai politics. Thaksin was not a new player in Thailand's political arena. He was once deputy prime minister and had changed parties before he established his own Thai Rak Thai party. He advocated the establishment of a corruption free government and promised to focus on improving the people's welfare.

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