From currency crisis to low-growth trap, Thailand confronts its next economic test

Thailand has spent 29 years rebuilding its economic defences after the baht was floated in 1997, but economists warn that the country’s biggest risk has shifted from a sudden currency crisis to a slower and more persistent threat: weak growth that could erode competitiveness, incomes and long-term resilience.

The anniversary of the baht float on July 2, 1997 remains one of the most important turning points in Thailand’s modern economic history. The decision to abandon the fixed exchange-rate regime and move to a managed float came after the country faced heavy pressure from currency speculation and a sharp loss of international reserves.

That decision led into the economic crisis widely known as the Tom Yum Kung crisis. However, the shock also became the starting point for major reforms in Thailand’s economic structure, financial sector and regulatory system. Those changes have helped strengthen the country’s immunity to external shocks over the past 29 years.

Three lessons from the 1997 crisis

Dr Kanjana Chockpisansin, head of research at Kasikorn Research Centre, said the 1997 crisis left three key lessons for Thailand.

The first was the need for a more flexible exchange-rate system. Under the managed float, the baht can adjust according to market mechanisms and better reflect economic fundamentals. At the same time, the Bank of Thailand can still intervene when currency movements become volatile in a way that does not match fundamentals.

This has made Thailand less dependent on using large amounts of foreign reserves to defend the currency, as it did before the 1997 crisis. Instead, reserves can now be preserved as a buffer against risks from global economic and financial volatility.

Stronger reserves give Thailand a wider buffer

The second lesson was the importance of building a strong external position. Thailand’s international reserves have risen sharply from about US$2.9 billion before the baht float to more than US$305 billion at present. That level is sufficient to cover about nine months of imports, well above the international benchmark of three months.

Thailand’s reserve position is also considered safe when compared with short-term external debt. Measured against the International Monetary Fund’s ARA Metric, which assesses reserve adequacy, Thailand’s reserves are above the level recommended by the IMF. This reflects the country’s ability to absorb volatility in capital flows and external risks, while also helping support investor confidence and reduce economic vulnerability.

Banking system less exposed to repeat crisis

The third lesson was the strengthening of the banking system. After the 1997 crisis, Thailand raised standards for financial-institution supervision, capital adequacy and credit-risk provisioning. As a result, the commercial banking system now has a much stronger financial position.

The banking sector’s BIS capital adequacy ratio stands at 20.2%, far above the minimum requirement for domestic systemically important banks, or D-SIBs. The non-performing loan ratio remains manageable, while loan-loss reserves are equivalent to 187.6% of NPLs. These buffers have increased banks’ capacity to absorb risks and reduced the likelihood of a repeat financial crisis.

Despite these stronger defences, Kanjana said Thailand’s economic challenges have changed. The country is now less vulnerable to the same external-stability crisis seen in 1997, but it faces new pressures from high household debt, an ageing society, weak competitiveness, growth below potential and global uncertainty.

External risks have also become more complicated. Tensions in the Middle East, for example, could affect Thailand’s current-account balance and increase volatility in the baht this year.

Currency stability may now be holding growth back

Dr Amonthep Chawla, executive vice-president and head of research at CIMB Thai Bank, said Thailand remains far from repeating the Tom Yum Kung crisis. However, the memory of 1997 still appears to influence policymaking, especially the strong focus on maintaining currency stability.

He said the country had been “haunted” by the baht float, creating a belief that a weaker baht could damage confidence and trigger capital outflows. Over the past decade, the baht has therefore moved within a relatively limited range and has rarely weakened sharply.

Although efforts to stabilise the baht have kept it broadly aligned with regional currencies and closely linked to the US dollar, Amonthep said this approach contrasts with some neighbouring countries that have allowed their currencies to move more flexibly.

“In terms of stability, Thailand has more than US$200 billion in international reserves and short-term external debt remains at a safe level, which is positive. But stability in an economy with low growth does not provide real support. Limited exchange-rate flexibility has gradually weakened Thailand’s export and tourism competitiveness compared with rivals,” he said.

Amonthep said Thailand had tried to close the vulnerabilities that led to the 1997 crisis, but may have unintentionally opened a new one: a low-growth crisis.

He described this as an economy expanding by only around 2% or below its true potential. The risk, he said, is similar to a “boiling frog” situation, where the economy gradually deteriorates without a dramatic moment of crisis.

Thailand, he said, should consider more flexible policy tools that allow the baht to move in a way that can support economic momentum. Policymakers should not look only at stability indicators, but also at the country’s growth potential. Otherwise, Thailand risks remaining trapped in a chronic low-growth cycle.

Slow growth deepens debt and inequality risks

Dr Pipat Luengnaruemitchai, chief economist at Kiatnakin Phatra Financial Group, said Thailand’s current problems are completely different from those of the 1997 crisis.

He said the country is becoming a slow-growth economy with limited investment opportunities. This reflects weaker growth potential and raises the risk of prolonged slow growth, or even deflation, which had been a concern earlier.

Although some new investment has begun to appear in sectors such as data centres and electronics, Pipat warned that these projects may not generate broad benefits for the domestic economy in the same way as previous waves of investment.

“Slow growth directly affects household debt and income distribution. When the overall economy does not grow well, people’s incomes cannot keep up with expenses. In a situation where equality of opportunity is already limited, slower growth makes the K-shaped recovery even clearer,” he said.

He said the lower part of the K-shaped recovery is not rising. Instead, lower-income groups are being dragged down by stagnant incomes, weak purchasing power and rising debt.

This, he said, creates a damaging cycle in which households have less spending power, debt continues to accumulate and the broader economy struggles to gain momentum.

Pipat said the most sustainable answer is to increase real wages. However, this can only happen if Thailand attracts investment that improves productivity and creates more quality jobs.

Baht volatility reflects a more complex world

Kanjana added that the baht float itself is no longer the main concern for Thailand today. The currency is now driven by a wider and more complex set of factors, especially overseas developments such as Middle East uncertainty and volatility in global financial markets.

The baht is now moving more sharply than it did before the Covid-19 pandemic. Average baht volatility was 4.2% in the three years before Covid-19, rose to 7.1% last year and has climbed to 8.3% so far this year.

She said this increase in volatility does not come from the exchange-rate system itself. Rather, it reflects the fact that the baht must move according to market forces and a more complex external environment.

New crisis risk lies in weak economic structure

The more important issue, she said, is Thailand’s structural economic fragility. Although the banking sector remains strong and external-stability indicators remain healthy, the economy continues to face weak growth and long-standing structural problems that require urgent action.

These include high household debt, which weighs on purchasing power and long-term growth; an ageing society, which affects the labour force and fiscal burden; declining competitiveness in the global arena; and economic expansion that remains below the country’s potential.

“Thailand is not worried today about a repeat of the 1997 crisis. But the other challenges ahead must be managed urgently so that these vulnerabilities do not become a new form of crisis in the future,” Kanjana said.

The lesson from the baht float, 29 years on, is therefore no longer only about exchange-rate management. It also shows that economic stability alone is not enough. Thailand must combine stability with stronger long-term growth, higher productivity and better competitiveness if it wants to withstand future shocks sustainably.

Source: Thansettakij, Bangkokbiznews