The 1997 Tom Yam Kung crisis was triggered by excessive loan extension by financial institutions and the liberalisation of the country's financial market, allowing Thai commercial banks to borrow money from foreign financial institutions to provide loans to businesses, says Sanan Angubolkul, chairman of the Thai Chamber of Commerce.
This led to Thai investors rushing to borrow money to purchase assets or speculate, notably in the real estate sector, disregarding their income base and repayment ability.
The accumulated economic problems resulted in an attack on the baht, especially the portion of loans tied to foreign currencies, causing non-performing loans (NPLs) to spike to 47% of total loans.
Eventually the Bank of Thailand announced the currency would be floated, resulting in the collapse of several financial institutions.
"This marked the origin of the Tom Yam Kung economic crisis," said Mr Sanan.
According to an online article titled "Lessons learnt from the Tom Yam Kung crisis" by the central bank, the downward spiral began on July 2, 1997 -- the day Thailand announced the baht would be floated and requested financial assistance from the International Monetary Fund.
The crisis impaired the Thai economy and spread throughout Southeast Asia as well as to other Asian nations, turning into a regional outbreak.
The article lists the reasons a fixed exchange rate was abandoned as: a persistent current account deficit, increasing foreign debt, excessive investment, a real estate bubble, inefficient financial institutions, policy inefficiencies and attacks on the baht.
For years, Thailand pegged its currency to the greenback at a rate of around 25 baht to the dollar. A fixed rate meant there was no risk of exchange fluctuations affecting trade, investment, loans and other transactions between Thailand and other countries.
Taking advantage of this relative ease to borrow from foreign entities, Thai companies embarked on a period of breakneck expansion.
Strong economic growth contributed to the banking sector's inability to adequately assess risk and credit regulations lacked robust considerations of various risks, noted the central bank paper.
However, in 1996 Thailand's current account deficit skyrocketed and many began to view the baht as overvalued compared with the dollar. The widening deficit eventually caught the attention of speculators and in 1997 they attacked the currency, carrying out an aggressive bout of selling the baht.
On July 2, 1997, the government abruptly dropped the currency peg and introduced a floating exchange rate system. The baht immediately plunged against the dollar. Over the next six months, waves of investor selling hit other currencies in the region, leading to the worst crisis in Thailand's modern economic history.
VICIOUS CYCLE
In 1993, Thailand resolved to establish the Bangkok International Banking Facility to permit the free flow of capital. However, preparations and regulations were inefficient, especially as the country was still under a fixed exchange rate system.
In order to maintain the exchange rate, the central bank kept absorbing excess liquidity in the market stemming from capital inflow by issuing bonds. However, this only pushed up interest rates, which were already high, and attracted further capital inflow, leading to a vicious cycle.
Uthai Uthaisangsuk, chief operating officer of developer Sansiri Plc, said the current outlook in the property sector differs greatly from the 1997 financial crisis.
"The 1997 crisis originated from financial institutions. Developers had a debt-to-equity [D/E] ratio of more than 10 times and relied on short-term loans for long-term business, although demand for homes was unaffected," he said.
Today the housing market slowdown is driven by weak demand based on elevated interest rates, stricter mortgage criteria and decreased purchasing power, said Mr Uthai.
Developers' current D/E ratio is relatively low as they adopted a cautious approach since last year.
"We observed the impact of rising interest rates on homebuyers in the third quarter last year, with fewer customers visiting project sites. Sales per project have declined since then," he said.
For every 1% increase in interest rates, home purchasing power decreases by 8%. With a 2% increase, it declines by 15%, said Mr Uthai.
As a result, homebuyers may need to consider units priced at 8.5 million baht instead of the 10 million they originally sought, he said.
Stimulus measures are needed to revive the economy and home purchasing power, with electric vehicles and the Land Bridge project potentially serving as long-term economic drivers, said Mr Uthai.
"As banks posted higher profits last year, we should apply a windfall tax on banks' profits gained from higher interest rates and use it to increase consumer purchasing power," he said.