On July 2 1997, the Bank of Thailand (BoT) was forced to float the Thai baht after it could no longer defend the currency and maintain its narrow peg to the $US. The baht depreciated by 16 per cent that day, heralding the start of the AFC.
As contagion spread across the region and foreign investors withdrew their capital economic activity contracted sharply.
The economies of Thailand, Indonesia, South Korea, and Malaysia were the most adversely impacted, with all barring the latter requiring assistance from the International Monetary Fund (IMF).
Prior to the crisis, strong economic growth prior to the AFC helped mask growing vulnerabilities which ultimately led to trouble.
The combination of strong economic growth and stable exchange rates saw rapid capital inflows. This led to strong credit expansion and pushed asset prices higher initially, including a rise in the real effective exchange rates as local currencies kept pace with a stronger $US.
Local corporates increased their overseas borrowing denominated in foreign currency – the so-called ‘original sin’. Expectations currencies would remain stable against the dollar resulted in a large build-up in unhedged foreign currency exposures.