was due mainly to investments by Japanese companies in the manufacturing sector from 1985. (Thai Embassy in Japan, 2003).
2.4.3
THE JULY 1997 CRISIS
The economy continued to grow, but at a slower pace from 1996, when exports began to slow down. The biggest decline centered on low wages as well as on 2.4.2 THE INFLUX OF FUNDS INTO labour intensive exports, which were the THE MARKET (1991-1996) main sources of export growth since the Aggressive foreign direct investment in the Japanese investment influx of the mid manufacturing sector by Japan continued 1980s (Doner and Ramsay, 1999: 176). The until the Gulf War in 1990. However, the reasons behind the slowdown in exports influx of foreign money continued even were varied: a worldwide export downturn after that period. There were three main (Kittiprapas, 2000: 7)’ a recession in Japan reasons for this: and the depreciation of the Yen; exports to i. the Japanese bubble burst; investors Japan (Thailand’s ibggest export destinawere looking for alternative invest- tion) became expensive; US/European trade ment destinations; and Bangkok was protectionism; competition with other one of those investment destinations. emerging economies (particularly China); The Yen was strong, resulting in regu- and a strong Baht pegged to the US Dollar lar inflows of money from Japan. (Suppakulkittiwattana, 1998: 35). As a ii. Low interest rates in the USA and result, the economy weakened, with an overvaluation of the Baht. Eventually, the Europe. currency was attacked and on July 2, 1997 iii. High interest rates in Thailand and it was floated. other countries in the region. In 1992, the inflow of funds was facilitated by the liberalization of money: the Bangkok International Banking Facility was created as a commercial bank authorised to provide offshore and onshore ending facilities and other international banking business services. In addition, the Baht was more or less fixed to the US Dollar. This gave foreign investors confidence. However, a lot of funds went into the stock market, which fueled the boom. The SET index, 388.7 in 1988, reached its highest level of 1,682.9 in 1993 (Kritayanavaj, 2003: 97).
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One question that arose was whether the slump in the economy could have been predicted. The decline in exports indicated a weak economy and was the crux of the crisis. Some might say agreeing with Sideri (1998: 29), that the crisis was unforeseeable or unexpected. However, it was not. There were warning signs, especially the scale of non-performing loans in the financial sector, rapidly increasing short-term capital flows, and expanding the depth of the external debt (Hill and Arndt: 2000: 8). Krugman (2003).