Case Discussion and Internet Exploration Questions

Closing Case The Collapse of the Thai Baht in 1997

Website — http://www.tat.or.th/index-shock.htm

Case Discussion Questions

Identify the main factors that led to the collapse of the Thai baht in 1997?
Do you think the sudden collapse of the Thai baht can be explained by the purchasing power parity theorem?
What role did speculators play in the fall of the Thai baht? Did they cause its fall?
What steps might the Thai government have taken to preempt the financial crisis that swept the nation in 1997?
How will the collapse of the Thai baht affect businesses in Thailand, particularly those that purchase inputs from abroad or export finished products?
Do you notice any similarities between the collapse of the Thai baht in 1997 and the collapse of the Korean won around the same time (see the Country Focus in this chapter)? What are these similarities? Do you think these two events were related? How?

Internet Exploration Question

This case focuses on the collapse of Thailand's currency, the Thai Baht, in 1997. During the 1980s and early 1990s, Thailand was one of the strongest nations in Asia. As a result of strong exports, the Thai economy was strong, interest rates were low, and the country was experiencing an unprecedented investment and building boom. Unfortunately, the frenzy in building resulted in an oversupply of residential and commercial capacity in Thailand by early 1997. Much of the construction was heavily debt financed, which lead to instability in the country's financial integrity. In addition, the heavy building had resulted in a large inflow of foreign imports to Thailand. By the mid-1990s, the country was running a current account deficit equivalent to 8.1 percent of its GDP.

All of these adverse activities imposed a strain on the country's currency, the Thai bath. By May of 1997, short sellers were swarming over the Thai bath, speculating that the currency would continue its downward trend. After taking dramatic action to defend the bath, on July 2, 1997, the Thai government bowed to the inevitable and announced that it would allow the bath to float freely against the dollar. The bath immediately lost 18 percent of its value and entered into a downward slide. In the following days and months, the baht continued to decline, more bankruptcies were announced in Thailand, and the Thailand Set stock market index ultimately declined from 787 in January of 1997 to a low of 337 in December of that year.

This case illustrates the adverse consequences that can result from overspending and heavy indebtedness, and the effect that these factors can have on a country's currency.

Business in Thailand is an online English magazine that gives essential information about Thai politics, economic issues, and business issues, and has an extensive archive of past issues. Visit the magazine's website at {http://www.business-in-thailand.com/}. Locate an article that deals with an economic, banking, or currency issue in Thailand (if there is not an article in the current issue, check the archives for past issues). Write a short summary of the article, and comment on how the article relates to the material in the case. Also, check the current exchange rate of the Thai bath and the U.S. dollar (buying rate) (this information is easily accessed from the front page of the magazine). What is the current exchange rate? Is the Thai bath stronger or weaker against the dollar then it was at the conclusion of the case? Why do you think that the currency has moved in the direction that it has?

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