Currency, Banking and foreign capital flows in Thailand

Thailand’s basic unit of currency is the baht. The central bank is the Bank of Thailand (established in 1942), which issues the currency. Until 1997 the Thai banking system combined private and publicly owned banks, with limited participation by foreign banks.

In the late 1980s economic policy reforms greatly facilitated foreign purchases of Thai stocks and bonds as well as international borrowing by Thai banks. Whereas private foreign capital flows had previously consisted mainly of direct investments in factories and equipment, by the early 1990s the major source of foreign capital was short-term loans to Thai banks. The boom in capital inflows placed great stresses not only on the private banking system (to which most foreign loans flowed) but also on the capacity of the Bank of Thailand to monitor and regulate the financial sector.

These institutional weaknesses formed fault lines along which the Thai financial economy fragmented when capital inflows abruptly reversed in 1997.

Beginning in the mid-1980s the baht’s exchange rate with the United States dollar was fixed at approximately 25 baht to U.S.$1. However, the 1997 capital outflow forced the abandonment of the fixed rate. Allowed to float, the baht fell as low as 60 to the dollar before stabilizing at around 36 by late 1998. The 1997 crisis also led to a number of reforms in banking and finance. Restrictions on foreign ownership of Thai banks, property, and corporations were relaxed, and measures were passed to improve the structure of the banking sector and the transparency and efficiency of financial transactions. Encarta

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