What strikes your mind when you hear about Thailand? Clubs, night parties, food, heritage, tourism, and much more. Thailand is a hot destination for tourists. Every year around 32.59 million tourists visit Thailand and add a lot to their GDP (roughly around 20% of their total GDP was from tourism in 2019). Tourists visiting Thailand, usually accompany their trip by visiting neighboring countries like Malaysia, Singapore, Hong Kong, South Korea, and many more. So indirectly the tourism of Thailand also boosts tourism in such neighboring countries. So, Thailand indirectly helps such countries to add a bit in their GDP. But can you imagine that in the ’90s, Thailand led to the economic downfall of all such countries after it was first hit by the Asian Financial Crisis in 1997?

Now you must be wondering that how alone Thailand led to the economic downfall of all such countries. To understand the situation and the conditions at the time of the crisis lets further dive into this article.

Asian Financial Crisis in 1997-98 in Thailand
Thailand experienced great economic growth in the early ’90s. Capital inflow was very good during that period and economic conditions were really very impressive in Thailand at that time. All this was mainly due to heavy exports. Exports had long been the engine of economic growth in all these Asian countries. And so was in Thailand. Thai exports had grown by 16% per year over the 1990-96 period. Labor in Thailand was relatively very cheap and fairly educated. Falling international trade barriers along with such labor force enabled Thailand to gain the position of export powerhouse thus boosting the economic conditions in Thailand.

Thailand witnessed very fast growth in these years. As the opportunities to invest were growing in Thailand due to its fast pace growth, many foreign investors were taking the advantage to invest their funds in the growing economy of Thailand. Speculation was also made around the real estate, thus luring the investors. Huge amounts were invested in real estate at that time.

They were enjoying every bit of this growth unaware of the fact that such a huge inflow of foreign direct investment was leading to the soaring value of real estate thus creating asset bubbles. Many large public infrastructure projects were also started during that period thus leading to bolder corporate spending. Heavy borrowings were also done by the banks to support such projects. All this ultimately led to huge amounts of capital inflow in the economy.

Everything seems to be perfect as of now. Dream economy, right. But what unfolded ahead was shocking for the economy of Thailand.

Ready investors and easy lending lead to reduced investment quality, and excess capacity soon began to show in the economy. The U.S. Federal Reserve also began to raise its interest rates around this time to counteract inflation, which led to less attractive exports and less foreign investment. The situation worsened as the investors realized that the rate of appreciation in the country’s property market values had stalled, and its price levels were unsustainable. This was confirmed by property developer Somprasong Land’s default and the 1997 bankruptcy of Finance One, Thailand’s largest finance company. Economic conditions in Thailand became unstable and ultimately led to the devaluation of the Thai Baht.

Another problem was faced by Thailand in 1994 when China devalued the yuan against the dollar by 33 percent, making Chinese labor considerably cheaper than Southeast Asian labor and making Chinese products considerably cheaper than those in Asia. In 1994 and 1995, the dollar strengthened against the yen and countries that had pegged their currency, the dollar began to suffer as companies in search of cheap labor began looking at China instead of Southeast Asia. The devaluation of the Chinese currency and the increase in the value of the dollar also caused exports in the United States to plummet. The cost of imports started to outstrip revenue brought in by exports and “the current accounts deficit rose unhealthy levels.” In the case of Thailand, overseas debts rose to 43 percent of GNP.

Soon Thailand’s economy was facing a crisis. The Asian Financial Crisis in 1997-98 produced the worst economic slump in Thailand since World War II. The financial sector was left holding $31 billion in bad debts, unemployment increased by 23 percent to 1.3 million people, stocks fell to their lowest levels in recent memory, banks collapsed, construction stopped, and to top, all the Thailand Baht (as discussed earlier) also collapsed. As a result, Thailand experienced negative 10.51% growth.

Now you see how such a rosy picture of a great economy, to pieces in no time. This marked the beginning of the Asian Financial Crisis after Thailand became the first to experience the crisis.

Asian Financial Crisis Spread from Thailand to Southeast Asia
Now you will be interested to know how such a financial crisis in Thailand led to the downfall of other Asian countries too.

So, the economies of Southeast Asia are closely tied to each other. The meltdown in Thailand set off a chain reaction throughout the region. After the currency crashed in Thailand, it also crashed in Malaysia, the Philippines, and Indonesia. Investors took a look around Southeast Asia and saw Thailand-like problems in Malaysia, the Philippines, and Indonesia and pulled out their money, and the stock markets and currencies plummeted there as well thus experiencing the contagion effect of the fall of the economy in Thailand.

Following the devaluation of the Thai Baht, wave after wave of speculation hit other Asian countries. The Malaysian Ringgit, Indonesian rupiah, and the Singapore dollar were all marked sharply lower. The reasons for the fall of all such currencies were similar to that of the Thai Baht.  A combination of excess investment, high borrowings, much of it in dollar-denominated debt, and a deteriorating balance of payments position.

Let us now take a brief look at the economy of other Asian countries too experiencing the Asian Financial Crisis.

Asian Financial Crisis in 1997-98 in neighboring Asian countries
During the Financial Crisis, the stock market in Malaysia crashed by 75 percent and the currency plummeted 40 percent to a 24-year low. One of the causes of the financial crisis in Malaysia was that it had a high current account deficit i.e. when imports exceed exports. But as such the conditions were not as bad as in Thailand. Corruption wasn’t so bad; banks were not in so much debt as in Thailand.

Singapore’s growth fell from 8 percent in 1997 to 1.5 percent in 1998. The value of the Singapore currency fell by more than 25 percent and property values dropped by 40 percent. Singapore had strong financial conditions and it didn’t owe much money to anyone. But it could not help being dragged down by the collapsing economies around it.

Hong Kong faced its first recession after World War II during the Asian Crisis 1997-98. Its GNP was the worst since the records were kept. Hong Kong’s economy shrunk by 4%. The stock market crashed and so-called rich people were now left with nothing other than hopes for the economy to rise again. Although Hong Kong came out of the crisis better than most, the crisis exposed Hong Kong’s weaknesses.

In the Philippines, the stock market had declined by 32 percent and the currency against the dollar had depreciated by as much as 48 percent. Because many of its exports go to Europe it was not hurt that badly by a lack of demand from crisis-hit Asia. The level of bad loans never got that high. Even so, the Philippines recovered more slowly than some other Asian countries that were much harder hit.

So, after all this discussion I would like to conclude by saying that all these countries faced the financial crisis mainly due to financial sector weaknesses. Thailand became the first to experience a financial crisis. Although other Asian countries too experienced the crisis their economy was much stronger than that of Thailand’s. I believe that no other country would have faced the crisis if Thailand could have detected the problem in their economy at earlier stages only and rectified them. Although financial weaknesses in the economy of other countries too led to the rise of crisis in each one of them.

So although the crisis in Thailand led to the crisis in other Asian countries it was also due to the weak links in their economy which further aggravated the crisis and led to the Asian Financial Crisis in 1997.

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