The Asian Financial Crisis in 1998 that stemmed from Thailand

Image from Bangkok Post

Previously, we have focused on how the Asian financial crisis has affected Asia in general and, more specifically, Indonesia. But how did it affect the country from which this historical event stemmed? I remember one day when my dad and his friends were over, and they were nostalgic, talking about the past. That led me to come across this topic and how it has influenced businesses. Furthermore, we will dive into the big financial crisis that hit Thailand in 1998.

The Asian financial crisis, also addressed as the "TomYam Kung Crisis," was such a big event that it caused Thailand to go through economic turmoil and restructure its economy even today. These repercussions were deeply felt across all significant areas, especially Bangkok. Following along, the economy was in a recession, leading to many employees being laid off left and right. The statistics that followed this historical event were the unemployment percentage of the country "increased from 1.1% annual rate to 3.4% in 1998" (Financial constraints and entrepreneurship: Evidence from the Thai financial crisis, pg.3). While not only was large urban areas like Bangkok was affected, but as well as rural areas had experienced a big hit. They even increased by 5% within those areas, and their real earnings fell by 8%. Imagine what this would do to those uneducated and with skills that aren't transferrable to any other lines of work? This financial catastrophe would make life so much harder for them than it already was. The amount of poverty that appeared in numbers was crazy, ranging from a 3% increase to a 40% increase depending on the area in the country. With these numbers, we could tell that this country was in total recession! Eventually, prices would have risen, and who would have known the country's reaction to this would be?

Why did prices even rise during this recession? Citizens' and firms' expectations were a significant factor as they all grew to fear if the economy would do well in the future. This caused Thai currency investors to pull out their money and exchange it for United States dollars (USD). Eventually, the government lost so much money that it was forced to make its currency float. Regarding the term floating in terms of currency, the currency exchange system is determined by the "relative supply and demand of other countries" (Corporate Finance Institute). This was also a learning moment for me because, before this article, I thought the exchange rate was permanently fixed. An example of a fixed exchange system is Hong Kong dollars (HKD) and USD- with 1 USD =7.75-7.78 HKD. So, with the currency floating, the baht (the Thai currency) can quickly depreciate or be appreciated (going up or down). This economic disaster is the epitome of what had set economic expectations within a recession in the short and long run!

The investors' reaction is a significant factor in a country's economy and citizens. The economic expectation is that a bank run will eventually occur when loads of people keep withdrawing their money or when loans increase due to an increase in aggregate demand. Following this economic prediction in economics, this is what happened in 1998. Since loans had increased, there was an increase in the inflow of bank deposits into commercial banks. This created an imbalance between the private bank balance sheets, and due to the rise in loans, it became a liability for the country (Bank of Thailand). Due to their government budget deficit, they had to engage in an expansionary monetary policy that involved a fixed exchange rate (the floating currency, if you remember). An expansionary monetary policy increases the supply of money in the economy and increases purchasing power for individuals, which risks increased capital outflows for the country.

Let's get a first-person account from someone who went through this crisis in 1998. That person is Supavud Saicheua, the head of economic research at Phatra Securities. Supavud emphasized how the debt occurred over time across all businesses. He mentioned that the Thai government promised them that 25 baht = 1 USD; however, when the baht had to be doubled to be 1 USD, that's when everyone's debt doubled as their currency was depreciating (Federal Reserve Bank of San Francisco). This paints out their initial confidence in their currency, which caused a lot of firms and citizens based in Thailand to believe in their exchange rate system's stability. In addition to their belief, they had taken on large amounts of foreign debt due to the floating currency. He explained that "the Thai corporations were borrowing a lot" because they thought they would get a considerable return and equity.

Supavud described that during this time, people were finding similar problems within the surrounding countries of Thailand. As citizens asked themselves, "Is our country's economy going to go bad?" the question has spread across Asia. An example of this was the mass riots 1998 in Indonesia because people's confidence in their country's economy decreased. They got angry with their government exponentially for many other reasons. I will discuss this in more depth in my other article if you want to read about it! This caused the spread of influence of citizens losing confidence in their government and country, so Asia's economy would go downhill in the early 2000s. Nevertheless, after the financial crisis, he has never seen any firm borrow in large numbers again.