Thailand was experiencing phenomenal growth in the post-World War II global economy, it doubled its GDP every 5 years from 1960 to 1996. Thailand was not exceptional in this, many of the eastern Asian economies grew at extraordinary rates after World War II due to rapid industrialisation. The nickname “Asian tigers” was given to Singapore, Taiwan, Hong Kong and South Korea, (which is where the term Celtic Tiger is derived from). Thailand was a member of the Asian Tiger Cub economies, along with Indonesia, Malaysia and the Philippines.

From the late 70s to 1997 investors were taking advantage of the high interest rates offered by Thai banks, investors would convert their money into the local currency (the Thai Baht) and received interest rates of around 8%, for simply leaving money in a bank account. Converting money into a foreign currency usually bears some risk. For an extreme example, suppose you had converted €1,000 into Venezuelan Bolívar in 2009, you would have gotten around 3000 Bolívar for your €1,000. If we assume you get a 10% return on that 3,000 Bolívar every year for the last 10 years, then at the end of those 10 years you would have 7,781 Bolívar. Great! You have more than doubled your money, right? Unfortunately, no. While you earned interest, the Venezuelan Bolívar got significantly weaker and converting 7,781 Bolívar back to euro would result in €683.50, a net loss of 31.65%. Investors in Thailand were not at all concerned with the currency devaluing, as the Thai government had pegged the currency to the US dollar. $1 was allowed to vary between 26 Thai Baht and 24 Thai Baht. This gave investors piece of mind as their investment was no longer at risk of currency fluctuations.


“By December of that year, 1 USD bought 56 THB, a colossal 44.64% loss in value. Investors took their money out of Thailand as quickly as they could and the Thai stock market dropped 75%.”

Currencies, like everything else are subject to the laws of supply and demand. When there is a fixed amount of anything, and demand increases for that thing then basic economics tells us that the price will increase. In relation to interest rates, specifically if interest rates increased in the US, investors will buy US dollars to put in US bank accounts. This increase in interest rates will increase the price of US dollars. A change in a country’s currency will also affects its balance of trade, how much it imports compared with how much it exports.

For the Thai government to guarantee its currency would be around 25 Thai Baht to 1 US dollar, they would have to engage in large scale foreign exchange trading. For example, when the exchange rate went north of 26 THB to 1 USD, the Thai government (or more accurately the Thai central bank) would sell large amounts of Thai Baht to decrease the price, similarly they had to buy vast amounts of Thai Baht when the exchange rate went below 24 THB for every 1 USD. Central banks have huge reserves of foreign currency but eventually, Thailand’s central bank ran out of foreign reserves. Meaning they could no longer buy Thai Baht anymore. If the exchange rate were to go above to 26 THB to 1 USD, they would be unable to stop it.

On the 2ndJuly 1997, the Thai government announced it was going to allow its currency to float. By December of that year, 1 USD bought 56 THB, a colossal 44.64% loss in value. Investors took their money out of Thailand as quickly as they could and the Thai stock market dropped 75%. With this extreme devaluation, investors perceived the entire region of South East Asia to be high risk, they took their money out of South East Asia in search of safer returns. This caused large economic crashes across South East Asia. Political instability increased in the region and there were riots in the streets of Jakarta, which ultimately ended President Suharto’s 31-year reign over Indonesia.

However, there are positive effects of currency devaluation: A devaluation generally has positive effects on the balance of trade. When Australia, one of Thailand’s main trading partners, is buying goods from Thailand, they must exchange their Australian Dollars for Thai Baht. As the Thai Baht suffered a large decrease in its value, it effectively makes buying goods from Thailand cheaper. Thus, Thailand increases its exports which grows the economy.

Somewhat paradoxically, an increase in exports has the side effect of making the Thai Baht more valuable. As more countries want to import goods from Thailand, there is an increased demand for the Thai Baht, this will gradually increase the value of the currency. As a result, Thailand’s economy recovered quite quickly, and by 2005, Thailand’s economy was back at the same size it had been before the 1997 crash. Furthermore, between 2001 and 2011 Thailand tripled its GDP.

On the 12th December 1991, the Russian Federation declared independence from the Soviet Union. It was the second last country to declare independence. Russia’s economy performed poorly. Unemployment was at 6% at independence and rose to 14% in 8 years. GDP fell by an average of 8.5% for 6 years in a row. As the economies in South East Asia were in decline over 1998, production of goods declined. Naturally as production decreased, the demand for oil decreased. At the time; Russia was the largest exporter of energy in the world. After the Asian financial crisis of 1997, the price of oil fell to the lowest it had been in 25 years. The Russian economy went bankrupt. The country’s President Boris Yeltsin (who infamously refused to get off his plane on a state visit to Ireland in 1994, leaving the then-Taoiseach Albert Reynolds standing on the tarmac at Shannon airport) was faced with an economy entirely dependent on oil, he decided to default on Russian debt and devalued Russia’s currency. The Russian Rubel lost 70% of its value in 10 days and sovereign bond markets became erratic. This became relevant in the Long Term Capital Management, the biggest hedge fund failure of all time.