Thailand Case

On 18 June 1997, as Thailand’s balance-of-payments position worsened sharply and currency speculators threatened the country’s long-standing pegged exchange rate, the prime minister, Chavalit Yongchaiyudh declared, “We will never devalue the baht.”1 One day later, Thailand’s finance minister, Dr Amnuay Viravan, a staunch supporter of the pegged exchange rate, resigned and the Thai stock market plunged to its lowest level in eight years as investors feared that currency devaluation was imminent. On 20 June, Chavalit appointed Thanong Bidaya, former president of the Thai Military Bank, as Amnuay’s successor. Five days later, Thanong discovered a closely guarded secret: the Bank of Thailand, the country’s central bank, had virtually no liquid foreign exchange reserves.

In the absence of sufficient foreign exchange reserves, Thailand’s ability to maintain its pegged exchange rate would be called into question even in good times. But in June 1997, the former Asian “tiger” economy was facing critical problems. Companies were having difficulties repaying their loans, the banking sector was under pressure and the balance of payments was undergoing a sharp deterioration, threatening the country’s ability to defend the currency from further speculative attacks.

This represented a massive turnaround from years of spectacular economic growth. For 10 years starting in the mid-1980s, Thailand had been the world’s fastest-growing economy, and in 1995, The Economist had predicted that the country would become the world’s eighth- largest economy by 2020.2

Many in Thailand believed that currency stability had played a part in Thailand’s economic success. Linking the baht to an external standard of value, such as gold, sterling and the US dollar, had been a central policy principle since the country was first opened up to international trade in the 1800s.3