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Thailand floats the baht
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July 2, 1997: 3:01 p.m. ET
Currency plunges 15-20 percent; further devaluation seen over year
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NEW YORK (CNNfn) - Thailand ended months of speculation Wednesday by devaluing its baht currency in a bid to jumpstart that country's economy.
The central Bank of Thailand allowed the baht to float against the U.S. dollar and other currencies Wednesday for the first time in 14 years.
The baht plunged between 15-20 percent in overseas currencies markets, and was trading at about 29 baht to the dollar following the announcement.
The Bank of Thailand tried to stem the tide by raising its lending rate by two percentage points to 12.5 percent.
David Roche, president of Independent Strategy, said that the Thai government is not letting go of all of the reins. "They're moving to a managed float, which means they are going to allow fundamentals drive the currency where it will but they'll try to smooth out volatility."
On top of the current devaluation amount, the baht should get an additional 10-20 percent devaluation over the next year, said Roche.
The Bank of Thailand said it would replace its previous peg for the baht, which was set against a basket of currencies, with a daily reference rate based on the previous day's trading levels.
The Bank of Thailand explained it had "an appropriate rate" in mind within which it expected the baht to move, but gave no details.
"However, if the baht goes beyond the appropriate rate the central bank will intervene in the market," central bank governor Chaiyawat Wibulsawasdi told a news conference.
The Bank of Thailand said it would use $4 billion to $5 billion of overseas reserve money to defend the currency from heavy speculation.
The government will assist Thai firms that will find it hard to repay overseas loans as exchange rates fluctuate. Thai businesses are heavily indebted to overseas lenders, with about $60 billion to $80 billion in non-domestic currency loans.
While it was a rough day for the baht, the benchmark Stock Exchange of Thailand index surged on heavy trading, rising 41.51 points, or approximately 8 percent, to close at 568.79 Wednesday.
Thailand's economy has been struggling lately with a troubled financial sector and the slowest rate of growth in a decade. Exports are the engine of the Thai economy, and export growth was at zero last year. The devalued baht may make Thai goods more desirable internationally.
Roche believes devaluation is only the first step toward solving the country's economic problems.
"The government needs to sort out the financial sector," said Roche. "Bankrupt financial (firms) need to go bust so the system kind of flushes itself out and then grows on a sustainable basis."
Interest rates also need to come down as well, Roche explained. "That's only going to happen when the currency markets are convinced the baht is not going to fall anymore." 
-- From staff and wire reports
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