The modern world is full of complex financial nets, spanning across the entire world. The global system is so interconnected that a single flaw in one part of the world can result in devastating consequences elsewhere on earth. This is why today, after a number of painful lessons, countries have learned to treat certain matters with more caution whilst showing solidarity to regional struggles, cooperating to overcome them. Why is this factor important for regional stability, economic growth and prosperity? 

At a glance, every developing region in the world is striving to have an open market for investment inflows and outflows. Such nations usually live in extremely competitive environments, trying to overtake each other and become regional centers of certain industries. Nevertheless, some such countries have previously failed to acknowledge the importance of regional peace. In an extremely globalized world, any change in a neighboring country has the potential of making a significant impact. 

1990s Asia –  a rapidly growing continent 

The early 1990s were the golden years for Southeast Asian nations. Their economies were flourishing amidst the rapid growth of China which managed to become the rival to the United States. This was the decade of major breakthroughs for the Southern and eastern parts of Asia. The region was finally put on the map, becoming visible in the west. The Chinese influence was covering the southeastern countries, promising to have a significant positive impact on their future development. 

At this time, Thailand was also booming. The economy was doing well and the country was becoming a well-known international tourist destination, visited by millions of people each and every year. The development of the tourism and hospitality sectors along with the country becoming more visible on the international market attracted lots of investments. Overseas companies would mostly invest in hospitality, building luxury casinos, hotels and restaurants in some of the most celebrated areas of Thailand. 

Back then, Asian currencies were pegged to the United States dollar. The country was experiencing a constant and significant influx of foreign currency. It is enough to search for equity in FX explained to understand, that the total amount of currency capital in Thailand was growing rapidly. Yet, the US dollar was going through an extended period of soft patch back then. As such, the countries in southeastern Asia opened themselves up for inward investments, funding favored sectors. The main aim was to become an export-based economy, producing more than ever before. They eventually managed to do so as the Southeast Asian countries granted themselves double-digit economic growth rates. 

The 1997 Thai Baht devaluation 

In 1995 a number of Southeastern Asian leaders made bold statements about moving onto a slightly different model. Those were aimed to foster and popularize “Asian Values”, which the new models would be based on. Importantly, such models were to replace the flawed systems of the developed world. Nevertheless, amidst the extravaganza around the new models across the continent, a number of issues were arising on the other side of the world. 

Back then, in 1995, the US dollar hit the absolute low. This was a tragic event for many people, resulting in lost jobs and incomes across the country. However, it did not immediately have a global impact, particularly on the countries in Southeastern Asia. Yet, the time for those countries to experience the turmoil was coming soon. 

Shortly after the US dollar fell, it gained its value back. The influence was now already visible across Asia as the Thai central bank was obliged to keep the interest rates at an extremely high rate to safeguard its US dollar peg. High local currency interest rates supported the idea of borrowing in the US dollar across Thailand. Therefore, many Thai investors and businesspeople borrowed in foreign currency, primarily in US dollars and Euros. From their perspective, there were no risks whatsoever because the government guaranteed the exchange rate between the Thai Baht and the US dollar. 

Due to the situation, exports were no longer competitive or profitable. The investors needed to find something more appealing. There was a need for a quick and good return on investment. Therefore, the vast majority of investors channeled their borrowed money into sectors that promised good returns in a short period of time. Such industries ranged from tech to transportation but the biggest catch was the property market, which was blossoming in the 1990s. 

Shortly, after the vast investments in the property market and foreign currency borrowings, Thailand’s surplus turned into a deficit. The amount of lending to the property sector more than tripled whilst the amount of foreign currency debt, which initially was supposed to be a short term solution, kept increasing. Soon, the total amount of foreign currency debt exceeded the country’s central banks’ foreign currency exchange reserves. With the full-on property bubble and the foreign currency debt flooding the nation, the classic scenario of the currency crisis was achieved. 

The government fought back for quite some time, pushing the short term interest rates up to 25%. They also tried to limit the access to the Bahti funds whilst the central bank kept speculating. The government even declared victory over the economic turmoil. Nevertheless, in just a few weeks, they had to admit the loss and devaluate Bahti.