FinanceAsia has been marking the 20th anniversary of the Asian Financial Crisis with a series of three articles examining it through the prism of the country, which triggered it all: Thailand.
Yesterday, a group of four leading Thai politicians, bankers and experts recalled their feelings in the run up to and immediate aftermath of the fateful day when Thailand let its currency float freely on July 2 1997.
As they concluded in part one of the series, Thailand's swift recovery from the devastating upheaval, which rocked the region, was not necessarily the best outcome for the country's long-term development.
Here in part two, they examine the many positive lessons Thailand and Asia as a whole learnt through painful experience. Later in part three, they will give their views on the challenges the country still faces if it is to escape the middle-income trap it has been stuck in for the past two decades.
Contributing are: Korn Chatikavanij, former finance minister and leading Democrat Party politician; Montree Sornpaisarn, CEO of Maybank Kim Eng’s Thai arm; Eric Ma, Morgan Stanley's long-standing Thai investment banking head and Stephen Taran, who runs Citi's sovereign rating advisory team in New York.
Taran has been travelling to Thailand since the 1980s when he assigned the country's debut A2 rating for Moody's in the summer of 1989.
Today, Thailand is rated two notches lower at Baa1 with stable outlook. The country joins Pakistan and Malaysia as the only other Asian nations which have lower Moody’s ratings than they did just before Asian Financial Crisis struck.
Thailand’s stock market has fared even worse over the interim period and is the only benchmark Asian index, which has never regained its pre-crisis peak. This Monday, the country’s SET Index closed at 1,579.41, 11.35% lower than its 1,789 peak in January 1994.
Most economists blame politics. Battling red shirts and yellow shirts do nothing to encourage the domestic and foreign investment the country’s hinterlands desperately need if they are to come anywhere close to catching up with Bangkok and reducing income inequality. Nor do the dozen or so military coups the country has been subjected to since direct rule by kings ended in 1932.
Thailand has subsequently recorded lower average GDP rates than many of its neighbours over the past 20 years. After wild swings at the turn of the decade, the country has struggled to pierce 3% since 2013.
A single-A rated country?
It is the main reason why its rating remains stuck in a rut even though Taran believes Thailand’s credit metrics put the country in the single-A category.
“The sovereign has a very strong balance sheet and a pristine debt servicing record,” he explains. “But the rating agencies’ methodology has changed since my day; the stone age of ratings. There’s a lot more emphasis on GDP growth rates now.”
Taran’s belief in Thailand’s underlying credit metrics is founded on the lessons the country and wider region as a whole learnt from the Asian Financial Crisis.
“Thailand had the unholy trinity of an open capital account, independent monetary policy and a fixed exchange rate,” he explains. “The crisis highlighted that no country can have all three at any one time.”
Over the past two decades, Asian governments have worked hard to protect themselves from the effects of sudden changes in foreign capital flows. They have nurtured domestic bond markets and directed Asia’s high savings rates into local institutional investors, which can support them.
They have also prioritised high levels of foreign exchange reserves to act as better buffers. “Reserves management has changed completely since the crisis,” Sompaisarn notes. “Our reserves are now $184.5 billion, 26 times the level they were when the baht was devalued.”
Taran believes these are the main reasons why Asia coped so well during the global financial crisis and more recent taper tantrum in 2013.
“Indonesia was considered one of the ‘fragile five’ and yet there was very strong co-ordination across monetary policy, fiscal policy and banking supervision,” he says. “The government there managed the situation very well and investors’ expectations changed.
“The region didn’t suffer the mass capital outflows it experienced during the Asian Financial Crisis,” he notes.
The godfathers hang on
Thailand has also adopted a very different business ethos over the past decade-and-a-half compared to the hyper speculation, which characterised the early 1990’s.
“The country is now following King Rama IX’s philosophy about sufficiency economics,” Montree comments. “We created a bubble because we over-borrowed, over-spent and over-speculated.
“The King said being a tiger is not important,” he adds. “He said the important thing is to have a sufficient economy by acting in moderation, being self-sufficient and resilient.”
Morgan Stanley’s Ma agrees. “Thailand is very prudent these days,” he says. “Both the government and the private sector learnt their lessons from the crisis. No one talks about collateralised lending these days. It’s all based on cash flows.”
The banks, which lend this money, are by and large still Thai-owned. Many powerful Sino-Thai families fell as the result of the Asian Financial Crisis, but in contrast to Indonesia, a number managed to survive and eventually prosper.
They include the Sophonpanich family at Bangkok Bank, Lamsams at Kasikorn and Ratanaraks at Bank of Ayudhya.
The families were able to avoid extinction thanks to the Bank of Thailand’s decision to allow them to raise money through hybrid securities known as SLIPS (Staple Limited Interest Preference Securities) and CAPS (Capital Augmented Preference Securities).
The structures were accorded extremely favourable capital treatment and in 1999, the top five privately owned banks raised a combined total of Bt132 billion using them. Morgan Stanley’s Ma believes this was a positive long-term development.
“The families weren’t wiped out, but many did see their shareholdings reduced to around 10% to 15%,” he comments. "Since then, I’d argue they’ve been a positive force, provided continuity and stability as different foreign players entered and exited the Thai banking sector.”
IMF loses its lustre
One institution which did not emerge from the Asian Financial Crisis with its reputation intact was the International Monetary Fund (IMF).
“The IMF’s view had always been let the exchange rate fall, let the market clear and then pick up the pieces afterwards,” Taran says. “When Malaysia successfully imposed capital controls in 1998 they proved there was at least one alternative approach.”
Malaysia’s success in ignoring the IMF’s advice gave Asian governments the confidence to believe they could do the same. This new attitude also coincided with China’s rise on the world stage and its desire to re-forge its ancient Asian trading links through the internationalisation of the renminbi.
As Thailand’s former finance minister, Korn, explains: “Since 1997, Asians have turned their attention to creating new institutions. I was one of the forces behind the Chiang Mai Initiative, which created a more robust framework by establishing a multilateral swap arrangement between the Asean [Association of Southeast Asian Nations] countries plus three [China, South Korea and Japan].”
Taran adds: “At the time a number of economists were very dismissive. They thought Asian governments had set it up because they quote unquote don’t like the kind of discipline imposed by the IMF. But the fact is it has given the region’s governments additional flexibility.”
Korn has also been very vocal in calling for an Asian head of the IMF to reflect the shifting balance of world economic power from West to East.
“I made my position loud and clear when I was Finance Minister,” he states. “The era of Europeans running the IMF should be over, although at least now a woman has got the top job and is a very able one at that.”
He is not optimistic it will happen over the short-term.
“It’s hard to see it happening given the geopolitical reality of what’s happening in Europe, but it needs to happen sooner rather than later,” he argues.
Yet, while Thailand has signed up to the Asian Infrastructure Investment Bank (AIIB), Korn believes it should complement rather than supplant Western “rivals.”
“Ideally, I’d still like to see more Asian leadership in global institutions like the IMF and World Bank. We’ve all invested so much time, effort and money in them, not to mention the fact that they are the only ones which can be truly representative of the global economy,” he concludes.
In our third and final article of the series, FinanceAsia will look at the lessons Thailand did not learn from the Asian Financial Crisis and the challenges it faces to lift its economy to the next level.