I am obviously talking about 1997, when the Baht lost its value against the dollar and the Thai central bank had to prop up the Baht's value by supplying more dollars into the market. But what caused the Thai Baht to lose value against the dollar? Any malinvestment explanation?
Hi. I think you are refering to the devaluation of the Thai baht against the US dollar which happened in July 1997, right?
If so we need to first look at the roots of the problem.
In the early '90s Thailand had pegged the baht to a basket of foreign currencies (US dollar, Japanese yen, Deutsche mark etc) which kept it at an exchange rate of around 25 baht per US dollar. The country was also in apparently sound financial conditions: high interest rates (13,25%) incentivated savings to a very healthy 33% of GDP. CPI growth was around 3,5% and government often run budget surpluses.
This made Thailand very attractive to foreign investors, especially in light of a recent catastrophic financial event which is sending ripples to this very day: the burst of the Japanese bubble-economy in 1989-1990. The Bank of Japan (BoJ) had lowered the cost of money to near zero and injected immense amounts of liquidity into the big keiretsu banks. What happened in short is foreign investors could borrow for next to nothing in Japan to invest in Thailand, whose healthy economy and high interest rates promised huge returns. These investments were largely speculative in nature: Foreign Direct Investments (FDI), meaning money foreigners use to build factories, purchase plantations and open new mines (in short non-speculative real investments), dropped from 33,5% in 1991 to 15,9% in 1996 in face of immensely increased foreign investments.
To compound the problem, as Jeffrey Sachs noted in 1997 "[Thai] banks borrow abroad and invest domestically with reckless abandon". Low interest rates in Japan and high interest rates in Thailand meant Thai banks became mere intermediaries for channeling foreing credit into the domestic economy. The recklessness Sachs speaked about was given by the fact most bank owners had very little capital tied up in the bank: if the investment worked out, they made money, if it failed they stood to lose little or nothing of their own.
As is usual the case, this frantic economical activity was accompanied by a housing bubble. The Thai housing bubble was relatively short lived, going from 1991 to early 1996. But it was enough to initiate a cascade of events.As buildings sat unused, bad loans started to pile up: in 1996 they were already 13% of bank and semi-banks (financial institution) accounting sheets. In the same year demand for semiconductors (Thailand's premium export at the time) dropped dramatically, worsening an already precarious import/export balance, madde worse by the pegged currency. Foreign investors started to liquidate their assets in baht and flee the country. In June 1997 the new finance minister "discovered" the Central Bank of Thailand had already used up 28 billions of its 30 billion US dollars worth of foreign currency reserves to artificially prop up the baht from what at the time was called "a massive speculative attack" which had taken place in May of the same year. This was not idle talk: foreign speculators had realized a devalued baht would make their foreign-currency denominated assets worth so much more. The names "George Soros" "British pound" and "Italian lira" all spring into mind (a story for another time). In July 1997 the Thai government finally threw the towel in: with foreign reserves reduced to next to nothing, financial institutions on the brink of oblivion and a burst bubble on their hands there was nothing more they could do to defend the pegged baht: a flexible exchange rate was instituted. The baht dropped steadily, almost halving in value against the US dollar by the year's end.