Thailand's economy more than tripled in the decade after 1986, achieving approximately 9% real growth annually from 1989 to 1996, before it became an epicenter of the Asian financial crisis of 1997, a regional crisis of investor confidence flowing from Hong Kong's return to Chinese rule. Thailand's real GDP declined1.4% in 1997, and then plunged 10.5% in 1998. In early 1997, the Bank of Thailand spent about $30 billion in foreign exchange reserves trying to defend the baht's value in terms of a basket of currencies against speculation against it, and then on 2 July 1997 abandoned the peg, and allowed the currency to float. The subsequent rapid fall in the baht's value—from 25 bahts to 1 US dollar down to 32 bahts to 1 US dollar before the end of the month, and to a low of about 53 bahts to 1 US dollar by January 1998—was the proximate cause of the financial crisis that left most business in Thailand technically bankrupt. A $17.2 billion international bailout package was quickly arranged through the IMF, which seeded the loans with a stand-by line of credit running from 20 August 1997 to 19 June 2000 of SDR 2.9 billion (about $2 billion) subject to a program of economic reform conditionals. Moderate growth returned in 1999 and 2000 (4.4% and 4.6%, respectively), but then dropped to an anemic 1.8% in 2001 in the face of the global economic slowdown and the halving of foreign direct investment worldwide following the 11 September 2001 terrorist attacks on the United States. Nevertheless, according to IMF staff estimates, by 2001 the economy had recovered to its pre-crisis level, and was projected to grow 3.5% in 2002.
The main legacies of the crisis are a low industrial capacity utilization rate (at 53.3% in 2001 down from 56% in 2000), a massive load of non-performing loans (NPLs) on the financial system, and a high, though declining, external debt and debt service ratios. External debt as a percent of GNP was projected at 47.8% in 2002 down from the high of 93.9% in 1998, and debt service was projected at 17.5% of export earnings in 2002, up from the pre-crisis level of 6.4%, but down from 20.8% in 2001.
Structurally the economy has continued to mature. From 1986 to 1996, agriculture employed about 57% of the labor force while agriculture's contribution to the GDP dropped from 16.7% to about 10%. In 2001, agriculture employed a reported 38% of the labor force while accounting for 11% of the GDP. Thailand has evolved a mobile labor market in which many workers migrate between agricultural jobs in the country and self-employment and/or light industry jobs in the cities and industrialized zones. Official unemployment was at a low of1.5% in the last boom years, 1996 and 1997, and then peaked at4.4% in 1998. Post-crisis, unemployment rates have slowly declined to 4.2% in 1999, 3.6% in 2000, 3.3% in 2001 and a projected 3.2% in 2002. The government's decision not to forcibly repatriate a large number of foreign workers, implementing instead its first "amnesty" program in September 2001 (which gave work permits to about 360,000 foreign migrants employed mostly in semi-skilled jobs in the fisheries and construction}, has helped slow the decline of the unemployment rate. Official figures, moreover, do not adequately reflect the seasonal unemployment of about 2 million agricultural workers during one third of the year. Overall, the shift of workers out of agriculture continues particularly in the northeast where agriculture is less productive, providing a steady inflow of workers to Bangkok and other industrialized areas who contribute to Thailand's expanding and diversified manufacturing and construction sectors. Manufacturing grew by 17% in 1995 and accounted for 33% of GDP, up from 22% in 1992. In 2002, manufacturing's share of GDP was up to 36.5%. In all, industrial production in 2002 was at 22% above the level attained in 1995 according to the country's industrial production index.
The Thai manufacturing sector is notable for its wide diversity, with rapid growth the production of computers and electronics, automobiles, garments, footwear and synthetic fibers, furniture and wood products. In its efforts to recover economic momentum, Thailand faces strong competition from China, Indonesia, Vietnam, Pakistan and Bangladesh, where cheap labor cheap labor diminishes the competitiveness of Thailand's labor-intensive industries. According to Bank of Thailand data, total trade fell in 2001 for $130.3 billion to $124 billion, with exports showing a 6.9% drop and imports down 2.5%, reducing the annual trade surplus from $5.5 billion to $2.5 billion. Besides intense export competition in the context of a global economic slowdown of 2001, many analysts have attributed the sluggishness of Thailand's recovery to the reluctance of many companies, a high percentage of which are still family-owned conglomerates, to cut excess capacity, divest non-core operations, or declare bankruptcy. Financial institutions have shown a similar reluctance to rid themselves of NPLs. NPLs reached a height of 48% of total banking assets in May 1999. Officially, NPLs were at 10.75% of financial system assets in 2002 but the true figure is considered closer to 30% when the whole range of asset management corporations is taken into account.
Several years of post-crisis deficit spending by the government in addition to the liabilities incurred in the international bailout program also weigh down the economy. Inflation, however, appears to be under control. In the last years of the 1986–1996 boom, the annual inflation rate averaged between 5 and 6% as measured by the consumer price index (CPI). The rate increased to 8% in 1998, but in 1999 had fallen to a negligible 0.3%. In 2000 and 2001, inflation was less than 2% (1.6% and 1.7%), and was projected to be only 1% for 2002. Initial estimates of the economic effects of the US-Iraq war begun 20 March 2003 are that it would be minimal, costing about $2 billion in foreign reserves due to higher oil costs and reduced trade.