There are some extent that we should know...
What was the Thai financial situation before 1997 ?
1. The accelerating Bangkok International Banking Facility (BIBF)
ฺBIBF is established on 1993. The aim of this bank is to borrow money from foreign countries, espeacially in dollars, and then use these amount of loans for lending inside and outside of Thailand.
90% of money that is short term loans, was borrowed by the private sector for a long period. In 1997, BIBF borrowed money 70,000 million Baht ( $2,330 million) when the exchange rate was the fixed exchange rate.
Moreover, due to the BIBF, the firms that were in the Thai stock exchange market borrowed heavily in order to meet their need for capital
Source: FRED® Economic Data
As you can see from this graph, the debt to GDP ratio increases significantly from 80% in 1996 to 168% in 1998.
2. In that period, the banking system in Thailand lacked of efficient control, especially the risk management and the corporate governance . Thus, it created lots of non performance loans (NPL) that means that the borrowers cannot repay the loan. Furthermore, people borrowed money in order to invest in land which drove the price overvalued and it could impact on the burst of the real assets. The government force the 58 financial situations and 3 commercial banks to shut down
In 1997, Thai government had to spent money more than 600 billion baht ($20 billion) to support the banking system. Hence, Thai people distrusted in financial system.
3. The imbalance of the balance of Trade
Thai economy had suffered from the unbalance current account from $-7 million in 1992 to approximately $-16 million in 1996 because the expansion in import and export. Hence, the government needed to borrow the money from foreign countries to compensate those gaps.
4. The financial system of Thailand is not stable and the exchange rate was not flexible enough to show the real value of the fundamental economy. Thus, it could be a chance for the investor to do some arbitrages.
George Soros who is the foreign investor found the hedge fund ( Quantum Fund) to hit the Thai baht value. Thus, Bank of Thailand had to use the reserves, 24,000 million baht ($800 million), to protect the value of Thai baht. Moreover, the Malaysian Prime Minister accused him of ruining Malaysia's economic by buying the ringgit while it fell and selling in short term.
Overall, Thai government had lots of foreign debts when the exchange rate was the pegged exchange rate.
What happened when they change the exchange rate system ??