Remember the early 90s? The time of the Asian Miracle? The emergence of the tiger economies of South East Asia? Let’s talk about that. Thailand to be specific.
In the early 1990s, the Thai Government decided to liberalize their capital accounts. Moreover, their exchange rates were fixed and fluctuated roughly between 24.91-25.59 Thai Baht per US dollar along with a very high interest rate of 13.25%. Consequently, there was an overflow of capital inflows from abroad and the Thai banking sector developed very rapidly.
More than 50 banks and non-bank financial institutions emerged and the central bank did not regulate them with much attention. Heavy foreign investments resulted in huge demands of their currency and the Bank of Thailand printed more and more Thai baht and sold them for foreign currencies to keep the exchange rate fixed.
Hence, foreign reserves also rose. The local banks and financial institutions had a wonderful idea in the meantime. They borrowed money from abroad at lower interest rates, converted the money into Baht and lent those at the existing higher interest rate in Thailand. All these capitals went to non-productive sectors like real estate mostly. Economy was booming.
But since the beginning of 1995, the real estate market started to contract and the business became unprofitable. China became a tough competitor in trade and export sector was not doing well. Imports exceeded exports and growth started to slow down.
Speculators took these events as signs of unprofitability for investment and therefore claimed back their foreign assets through sales of domestic assets. High demands for foreign currencies led to threats of devaluation of the Baht. The Bank of Thailand then sold their foreign reserves to keep the value of Baht fixed. More than 90% of the reserves were used up in the process and on July 2, 1997, Thailand was forced to come under floating exchange rate system.
The Thai Baht depreciated immediately. Local banks and non-banks who borrowed from abroad now had way more foreign debt than they initially borrowed and were unable to pay back. The country effectively went bankrupt and their currency collapsed.
Thailand became a victim of speculative attacks and started the 1997 Asian Financial Crisis which affected most of the South East Asian economies.
Bottom line: Expectations are more than enough to kill you.
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