What Was the 1997 Financial Crisis?

The 1997 financial crisis was a period of severe economic downturn in Asia, with effects felt throughout the world. The crisis has the largest impact in countries like Indonesia, Thailand, and Malaysia, though other countries throughout Asia also suffered negatively during this period. While the economies of these countries appeared in good shape prior to the 1997 financial crisis, below the surface, many were left vulnerable to the currency devaluations and rampant unemployment that followed this event.

While the 1997 financial crisis was caused by a variety of factors that are difficult to pinpoint, some cite poor financial oversight in Thailand as one of the contributing causes. Throughout the early 1990s and into early 1997, the Thai economy grew tremendously. While a new upper class devoted record spending to luxury goods and real estate, the growing gap between rich and poor suggested trouble to come.

This period in Thailand was marked by rampant spending, high levels of debt, and escalating real estate prices. At the same time, competition from nearby China was lowering the demand for Thai goods. This meant that factories faced smaller demand, and were forced to cut jobs and purchases. Incomes fell throughout the country and people were unable to pay back loans or even keep up with real estate prices. This left many without jobs, homes, and even basic necessities.

Unable to afford even basic goods, citizens began to default on loans and other investments. In response, the Thai authorities continuously raised interest rates to attract foreign investors in an attempt to shore up the country's economy. Eventually, the Thai economic system was unable to keep up with cash demands from foreign investors and the government was forced to devalue the local currency.

Rather than fixing the Thai Baht to United States (US) dollar, the government was forced to float the currency starting in July 1997. This meant that other local currencies that depended on the Baht were also devalued, which was the catalyst for the 1997 financial crisis throughout the rest of the region. This had a ripple effect on the Asian economy, leading to stock market crashes and job loss throughout Indonesia, South Korea, Malaysia, and the Philippines.

In August 1997, the International Monetary Fund (IMF) stepped in to help the people in these countries recover from the 1997 financial crisis. The IMF committed to $17 billion US Dollars (USD) in aid to Thailand, as well as significant aid to other countries in need. Based on this loan and added economic oversight within the local economy, Thailand was able to repay this loan in full by 2003.