It is an extremely well worn phrase, but it was 20 years ago today (well yesterday to be precise) that Thailand took the momentous decision to drop its fixed exchange rate of 25 baht to the dollar and let the currency float freely. It resulted in an instantaneous 20% devaluation and marked the official beginning of the Asian Financial Crisis.
The action was, to continue quoting the Beatles album Sgt Pepper, ‘guaranteed to raise a smile’, but mainly on the faces of the speculators who had been attacking the currency for weeks.
Initially, the Lennon and McCartney of this eponymous band were flagged as the foreign hedge fund managers George Soros and Julian Robertson.
But there was perhaps fitting tailpiece to a crisis many consider to have been created by crony capitalism. As the dust settled, it became clear a number of un-credited background musicians from Thai politics and business had also financially benefited from inside information ahead of the sudden devaluation.
Thailand’s move had a rapid domino effect across Asia. Many were soon wondering whether the export-driven Asian model, which had propelled the region’s tiger economies from agrarian to industrialised societies, had come to an end.
For the region’s borrowers, it provided a reckoning for the many companies, which had not only overleveraged themselves, but also done so in a foreign currency, that did not match their income streams.
In some countries, the crisis loosened the control of region’s largely ethnic Chinese godfathers who had exerted a political and economic stranglehold over their respective countries.
By the end of the crisis five to six years later, Asia’s faith in many Western institutions had been undermined too. A number of countries, led by Malaysia, railed against the IMF’s extremely ‘tough love’, while the rating agencies were accused of being slow to react.
Thailand was first in and first out of the Asian Financial Crisis. The IMF granted it a $17.2 billion bilateral and multilateral support package in August 1997, but the country had already begun paying off the loans in 1998 and was completely clear by 2003, ahead of schedule.
But was this swift recovery the best outcome for the country’s long-term development?
In a series of three articles, a group of Thailand’s leading business leaders and experts reflect on what happened, followed by the lessons learnt (or not) across Thailand and Asia as a whole and then finally, where the country stands today.
Korn Chatikavanij is a leading politician in the Thai Democrat party and a former finance minister who, in 2010, helped form the Chiang Mai Initiative - a multilateral currency swap agreement among Asean and the Plus Three nations (China, South Korea and Japan).
In the 1990s, he was running one of the country’s leading investment banks, JF Thanakorn Securities, which he set up with family money in a joint venture with Jardine Fleming and Finance One, then Thailand’s largest finance firm.
Montree Sornpaisarn was also working at JF Thanakorn when the crisis hit. His career has given him a front row seat to view the decline of the British broking firms, which once dominated Asia and the rise of home grown brokers such as Maybank Kim Eng, where he has been Thai CEO since 2001.
Eric Ma is a Thai national who joined Morgan Stanley in 1993 and became country head one year later. After 20-years overseeing Thailand, he now has a senior role at the bank’s investment management division.
Finally, Stephen Taran is Citi’s global head of sovereign debt advisory. He first became involved with Thailand at Moody’s and was responsible for the country’s debut credit rating in 1989. On July 2 1997, he was sitting in the office of one of the country’s leading banks in his capacity as chief Asian economist at Lehman Bros.
Fixing a hole
“The CEO was pulled out of our meeting and came back shortly after looking extremely shocked,” Taran recalls. “He felt the government had let its people down after weeks saying they would defend the baht at all costs.”
And yet, while the devaluation shocked many at the time, it was not really that surprising in retrospect. The government had exhausted its foreign exchange reserves, which had stood at $40 billion only a few months earlier.
Maybank’s Montree has heard a range of estimates over the years, but believes the rough net position was just $7 billion when the government let the currency go.
His former boss says it was abundantly clear a crisis was coming, adding that JF Thanakorn was one of the few voices to say so, receiving plenty of criticism at the time. The securities firm called the top of the equity market in January 1994 and towards the end of 1995, published research suggesting 15% of bank loans were non-performing. The real figure ended up around 50%.
Korn says JF Thanakorn’s business was starting to feel extremely distorted. “We’d noticed that our broking and margin lending activities were out of sync,” he says. “At that point, we were either the number one or number two equities broker with roughly 8% of average daily trading volume, but had less than 1% of the margin lending business.
So the question was what were our competitors up to?” he continues. “The answer was lending money to clients so they could buy their own stocks, then use those inflated valuations as collateral to borrow yet more money to speculate in the stock or property market.”
A year or so ahead of the crisis, Korn decided to increase his firm’s credit lines to provide a financial buffer in the case of a liquidity squeeze. During one board meeting to discuss the issue, he recalls a fellow director asking Finance One CEO Pin Chakkaphak how JF Thanakorn would cope if Finance One got into trouble.
“To be fair to him, he said it was a reasonable question,” Korn comments. “I remember someone else suggesting that if Finance One got into trouble, then God help everyone else given how dominant they were.”
Chakkaphak subsequently became the poster boy for all that went wrong for Thailand in the go-getting 1990’s and his firm was the first securities firm to collapse in February 1997. He fled the country and only returned earlier this decade after the statute of limitations expired.
By early 1997, foreign speculators were starting to hone in on Thailand’s overheated financial and property markets and there were plenty of foreign analysts calling the top of the market as well. One of the most famous was Morgan Stanley’s investment strategist, Barton Biggs.
Eric Ma was with him during one visit to the country a few months before the crisis. “I accompanied him to one of the colossal new bank headquarter buildings that had been built,” he remembers. “Barton went in, saw the very expensive artwork, then came back and wrote a research report about the excesses of cheap foreign currency financing.”
In the early 1990s, Thailand had attracted large foreign inflows. This peaked in 1995, when the country received net inflows of $14.239 billion, equivalent to 12.1% of GDP according to World Bank figures (double the percentage figure Malaysia received that year and nearly quadruple the figures for Korea and Indonesia).
Local businesses were using this to leverage themselves to the hilt, with property prices rising fourfold between 1990 and 1996. Sornpaisarn notes how few people thought it was that crazy at the time.
“Financing could be collateralised by up to 90% of an asset’s value,” he remarks. “It was the kind of environment where if you waited even one day to review the documents you’d lose the deal to someone else.”
Korn agrees. “Too many people thought they could arbitrage the currency by borrowing at 6% in US dollars and then lending in baht at 12%,” he states. “They thought there was no risk, but what all Thais learnt is that there is no such thing as a free lunch.”
After July 1997, foreign capital evaporated. Domestic investors started getting squeezed as brokers began calling their margin loans.
Montree recalls JF Thankorn being very disciplined about enforcing its margin loans, while other brokers held on in the hope the market would stabilise. It did not and their clients were crushed.
About 56 of Thailand’s 100 finance firms went under during the crisis.
“There was a domino effect,” Montree elaborates. “The finance companies started failing and that impacted their corporate clients who then failed putting pressure on other finance companies and so on.”
JF Thanakorn was not one of them, but it was sold alongside Jardine Fleming and its parent Robert Fleming to Chase Manhattan in 2000 shortly before the latter merged with JP Morgan. Jardine Fleming had been badly hit by the Asian Financial Crisis, while Robert Fleming, was under threat from encroaching US investment banks.
And for Ma, the Asian Financial Crisis created a boon for his employer, Morgan Stanley.
“We were busier than ever after the crisis because many banks needed recapitalising,” he says. “In retrospect, that’s how I’ve always benchmarked the crisis in my mind.
“During the first wave of recapitalisations in 1998 it was all about NPLS and provisions,” he adds. “By the time of the second wave of recaps in 2003, it was all about growth again. That’s when I thought the crisis was finally over.”
Despite the upheaval, Thailand made a remarkably fast recovery. It swung from 5% GDP growth in 1996 to -10.5% in 1998 then back to 4.4% in 1999.
“We had a manufacturing base so we could export our way out of trouble,” Korn explains.
Exports as a percentage of GDP rose from 29.9% in 1995 to 57% in 2001. The baht, meanwhile, hit a low of 55.5 to the dollar in January 1998.
“The baht’s devaluation was also a boon for our rice industry, which is priced in dollars,” Korn adds. “Farmers didn’t think it was a crisis at all.
“Unfortunately, Greece doesn’t have the same kind of adjustment mechanism, which will allow them to grow out of their crisis,” he concludes.” And in some ways, our recovery painted too rosy a picture. For in reality, it was driven by price competitiveness rather than productivity gains.”
In the second article of the series, FinanceAsia will look at the lessons Thailand and Asia as a whole learnt from the crisis.