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The Asian Financial Crisis — 1997 to 2000 · 2 of 10

The Borrowing Boom and the Baht Float

Explain why the borrowing of the 1990s left Thailand open to a run, and what the Bank of Thailand did about the baht in 1997, and why.

Before you start

What you'll be able to answer

  1. Why did the borrowing of the 1990s leave Thailand open to a sudden run?
  2. What did defending the baht cost Thailand, and what happened when it let the baht float?

Where this sits

The Asian Financial Crisis — 1997 to 2000 · this module is lit

  1. 2 Jul 1997Thailand floats the baht
  2. 14 Aug 1997Indonesia floats the rupiah
  3. 20 Aug 1997The IMF approves a loan of about $3.9 billion for Thailand
  4. Nov 1997The IMF approves a loan of about $10.1 billion for Indonesia, and Indonesia closes 16 banks
  5. 4 Dec 1997The IMF approves a loan of about $21 billion for Korea
  6. 24 Dec 1997Korea's programme is speeded up and international banks agree to keep rolling over their loans
  7. 21 May 1998President Suharto of Indonesia resigns
  8. Aug 1998A crisis in Russia spreads panic beyond Asia
  9. 1-2 Sep 1998Malaysia restricts money leaving the country and fixes the ringgit against the dollar
  10. 1999Growth returns across the region, fastest in Korea

Thailand in 1996, after ten years of fast growth

From 1987 to 1996 Thailand's economy grew by about 9 per cent a year on average. Foreign banks lent freely to Thai banks and to finance companies, lenders that are not banks, and much of the money went into property. The central bank kept the baht, Thailand's currency, close to a fixed rate against the US dollar. Thailand was also buying more from abroad than it sold.

Predict first

A country's current account deficit is how much more it pays the rest of the world, for imports, interest and the like, than it earns from it. How big was Thailand's deficit in 1996, as a share of national income?

Growth and money from abroad

The economies of East and South-East Asia had grown fast for decades, and the World Bank later judged that the gains in living standards were real. That record helped make lending to the region look safe. According to a review by the International Monetary Fund (IMF), the IMF and the countries' own officials knew the inflows were large and had some concern, but took them mainly as a sign of good investment prospects and high growth. Interest rates were low in Japan and Europe, so lenders there looked for better returns in Asia.

Thailand needed that money. Its current account deficit was 7.9 per cent of national income in 1996, and a deficit is paid for by borrowing or investment from abroad. As long as foreign lenders kept lending, the gap was easy to fill.

Borrowing short-term and in dollars

Much of the money came through banks. From 1993 a new banking centre in Bangkok, set up to deal in foreign money, let Thai banks borrow dollars from abroad. The banks lent much of that money on at home, and bank lending grew by more than 10 per cent a year after inflation in most of the region, much of it into property and company investment. Much of that lending at home ran for years.

Much of the foreign borrowing was due within a year, and it was owed in dollars or yen. Dollar loans usually charged less interest than baht loans. With the local currency held close to the dollar, few borrowers paid to protect themselves against a fall, because a fall looked unlikely before the loan was repaid.