(1) Main factors that lead to the collapse of Thai Baht:
Between 1990 and 1995, Thailand was one of the fastest growing economies in the world clocking a growth of almost 10% year on year. ... Also the Baht was pegged to a basket of currencies with a large weight attached to the dollar. But along with these positive factors there were also others which were leading Thailand towards a crisis. ...
(2) Export dependence and Pegged exchange rate: Along with the balance of payment situation faced by Thailand which was discussed above, the country also faced problems because of the Baht being pegged more or less to the Dollar. ... Both these factors contributed to the exports being hurt to a large extent. ...
The combination of the factors mentioned above led to the crisis. ... Because of the factors mentioned above, a lot of investments became non-performing and there was a slew of defaults, on the international loans as well, starting with Somprasong Land in February 1995. ... Also speculators expecting a devaluation of the Baht put further pressure on it by shorting it in the market. The Central bank did not have enough Forex reserves to defend its position and hence the Baht had to finally be devalued.
(2) Purchasing power Parity Theorem and the Baht:
Purchasing power parity theorem states that the exchange rates between two countries should be determined by the ability of each of the currencies to buy a basket of goods in their local markets. ...
So once a basket of goods has been established, its price can be determined in Baht and in dollars for a period of time and the ratio can be computed to find the implied exchange rate. ... PPP calculations have shown that in the period 1990 – 1996, the Baht has been consistently over valued against the dollar. ... So in a sense we can say that the PPP was able to predict an imminent devaluation of the Baht, but there were other macroeconomic and structural problems which ultimately led to the currency crisis. ... They had an equally nasty role to play in the Baht crisis. The increasing current account deficit and the international debt, which were discussed in detail earlier, led speculators to believe that the Baht will eventually have to be devalued. This was further confirmed when the Yuan was devalued and the Thai exports began to suffer as a consequence of a strong dollar and hence a strong Baht because of the pegging being followed. ... This further strengthened the stand of the speculators and they started to short the Baht and convert their holdings to the dollar anticipating a huge fall in the Baht upon which they could reconvert the dollars back to Baht and profit in a big way.
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