Thailand: Where Are We Now?

Before we got into the mess we are currently in, and before the tech bubble at the turn of the millennium, the financial crisis that generated the most worldwide fear was the Asian Financial Crisis. At the heart and center of it all, was Thailand and its currency, the baht.

Prior to the crisis, Asia, particularly Southeast Asia, attracted nearly half of the total capital flows to developing countries. From the start of 1996 to July 1997, the S&P 500 gained nearly 50 percent. Not surprisingly, investors were willing to seek higher-risk, higher-yielding assets and the high interest rates maintained in the economies Southeast Asia made it incredibly attractive. Simultaneously, Thailand experienced a tremendous growth in its economy. Between the late 1980s to the early 1990s, its annual GDP growth rate was consistently around 10 percent, dubbing it and its neighbors as economic miracles and standards for other emerging economies to follow.

However, when the Federal Reserve chairman, Alan Greenspan, raised interest rates, it had the dual effect of making the Asian economies less attractive in comparison as well as raising the value of the pegged Asian currencies, making their exports weaker. Asian currencies, especially the baht, began to experience the first waves of speculative attacks. The Thai government extensively tried to support the baht through buying back its currency, but was eventually forced to break its peg to the U.S. dollar in July 1997, sparking off the financial crisis.

Needless to say, the effect of the crisis on Thailand and its neighbors were devastating. Numerous businesses collapsed and millions of people saw their wealth wiped away as the asset markets plunged. In just one year, the Thai economy shrank an estimated 40 percent.

A decade after its exit from the crisis, the Thai economy today has shifted predominately to agriculture from a labor perspective, and industrial production from a GDP perspective. While 49 percent of its labor is in agriculture, it only contributes 8.4 percent to its GDP. Exactly opposite is its industrial and manufacturing sectors which only employs 14 percent of its total labor but contributes nearly 44 percent to its GDP. Leading the charge is automobile manufacturing, with Toyota and Ford as the key drivers.

As an economist or an investor, just looking at the large imbalance of labor and production shows the huge potential for the Thai economy to grow. If only a small proportion of its agricultural labor shifted to manufacturing, there would most likely be a significant jump in its economy. However, the biggest long-lasting consequence of the financial crisis was its impact on Thailand's banking sector. The vast amounts of underperforming investments at Thai banks was a catalyst that triggered the speculative attacks of the baht. Currently, the banking sector is still struggling with most banks struggling to hold enough capital. A strong banking sector provides the grease in the economy that allows movement in markets. In terms of the Thai economy, a stronger banking sector could lead to a larger manufacturing sector or other areas that would draw from the lesser-producing agricultural industry.

It may seem ironic that an expansion and strengthening of Thailand's banking sector is needed considering what the current mess spawned from. However, it is important not to overlook the value a strong, domestic banking sector provides. The need for liquidity is always there, just as there are constantly movements within the economy. For Thailand, the current banking sector needs work, but signs are there of a recovery, a full decade after the financial crisis. If it succeeds, it may very well steal some of the world's attention away from China.