An aerial view of Bangkok’s central business district on June 2, 2022. (Photo: Bloomberg)
Twenty-five years ago, this month marked the beginning of an economic, political and financial crisis known as the Asian Financial Crisis. Currencies and stock markets fell. Governments have been overthrown. Poverty rates have skyrocketed.
The crisis has raised serious doubts about the Asian miracle, a period of rapid growth that saw the Tiger economies become the envy of the world. The firestorm was sparked by Thailand’s decision to devalue the baht on July 2, a shock wave that quickly rippled through emerging markets across the region and beyond as the fallout spread far and wide. ‘in 1998.
A quarter of a century later, Asian economies have transformed. China is the world’s second largest economy and the region is a major source of global growth even as it recovers from the pandemic.
Here, in the words of some of the key players in the crisis, is the story of what happened, how the region recovered and what the outlook is for economies facing a new economic crisis. Interviews have been edited for clarity and brevity.
– The casting –
Korn Chatikavanij, founder Jardine Fleming Thanakom Securities and Thai Minister of Finance (December 2008 – August 2011)
Piti Sithi-Amnuai, Chairman of the Board of Bangkok Bank
Mark Mobius, co-founder of Mobius Capital Partners
Tarrin Nimmanahaeminda, Thai Minister of Finance (November 1997 – February 2001)
Joseph Yam, former chief executive of the Hong Kong Monetary Authority
Zeti Akhtar Aziz, former Governor of Bank Negara Malaysia
Shan Weijian, Hong Kong-based PAG Chairman and CEO
Carmen Reinhart, former Chief Economist of the World Bank Group
– A threatening storm –
The story begins on January 4, 1994, at the height of the boom in Southeast Asia, as Korn Chatikavanij prepares to give a television interview to mark the first trading day of the new year.
Korn: I knew I was going to be asked to predict what the stock market would do that year. So, I spoke to my team, and we agreed that I would say the peak of 1994 was already today – and it was exactly that day.
At the beginning of 1997, the SET index was less than half of the 1994 peak.
Korn: I received death threats for years.
Korn Chatikananij (Photo: Wichan Charoenkiatpakul)
Piti: Thailand had nearly 100 finance companies. Everyone thought making money was easy. They thought they could just take deposits or borrow money overseas and lend it to nonsense projects.
Korn: The return on investment in the economy was declining rapidly. There was excessive and unnecessary management. People thought there was a free lunch. Thai businesses borrow dollars at 4% to deposit in Thai banks at 12% or 10% thinking it’s free money because the baht would never be devalued. It’s hard to believe that the whole country believed in it. Funny what people were willing to bet on.
Mobius: We knew that Thailand had problems with its heavy dependence on the dollar. We had a pretty good idea that traders were betting against the Thai Baht. We heard that Thailand’s central bank was running out of currency because it proudly protected the exchange rate, and we began to suspect that it might be running out of ammunition.
– Crisis management –
On July 2, 1997, Thailand abandoned the dollar peg and devalued the baht.
Yam: Small open economies with reasonably liquid markets, beware! Financial globalization, if it allows the international diversification of investments, has its bad side. Free markets are not markets to be manipulated freely. Financial authorities must be well prepared to deal with predatory behavior that disregards the national interests of host jurisdictions.
Tarrin: The two biggest challenges I faced were financial institutions’ balance sheets clogged with non-performing loans and a near total loss of foreign exchange reserves. And it was kept secret.
Mobius: When the crisis hit, we thought it would be pretty much limited to Thailand. We didn’t expect the crisis to spread, but then traders started betting against other countries’ currencies as well. These countries also had large foreign borrowings because dollar rates were so low at that time. This is where we went wrong. It spread throughout the region.
Zeti: After more than a year of volatile and destabilizing capital flows, including bouts of speculative attacks on the currency, Malaysia was at a tipping point. By then, the market had become fundamentally dysfunctional. The conventional prescription of higher interest rates would not stabilize the market. Any intervention to defend the currency was equally futile as it would only deplete international reserves.
Piti: I remember how busy things were and I had piles and piles of papers and I brought them home on the weekends. I had no free time even on weekends.
Piti Sithi-Amnuai (Photo: Bank of Bangkok)
Zeti: The most remarkable experience in policy-making during the crisis was convincing political leaders to accept difficult policy prescriptions. In the management of a crisis, there are usually high-profile demands from different backgrounds. There will also be no lack of proposed solutions. At the outset, there must be great clarity about the results to be achieved.
Mobius: We tend to like bear markets and this crisis has given us the opportunity to buy good companies at a bargain price. We know from history that bear markets, although often surprising and shocking, are short-lived, normally lasting no longer than 1 or 1 1/2 years. We knew it was the right time to invest. It worked out well for us in the end.
On September 1, 1998, Malaysia introduced capital controls and fixed the exchange rate to the dollar.
Zeti: An important lesson in relying on capital flow management is that it should be targeted and temporary. In Malaysia, it targeted speculators. The challenge was how to get out of these unconventional measures. Malaysia exited these measures after 12 months and transitioned to a flexible exchange rate regime after seven years.
– Lessons learned –
Mobius: In the end, a lot of Asian countries learned a lesson in 1997 by not taking on too much foreign currency debt. Of course, there are those who have ignored the lesson. Sri Lanka is at an impasse now. Generally speaking, however, the situation is much better.
Zeti: Probably the most important lesson is the need to build resilience. The world is likely to continue to experience crises. Following the Asian financial crisis, much of our region implemented financial reforms. The reward can be seen during the Great Financial Crisis of 2008-09. While Asia has been affected, our financial systems and economies have not experienced a crisis.
Shan: Western banks failed during the so-called global financial crisis, but to my knowledge none of the Asian banks. Systemic reforms of banking systems across Asia had made them resilient, healthy and strong even in the face of a financial tsunami.
Korn: It’s quite amazing that the same thing happened in Iceland, New York and elsewhere 10 years later, except that the IMF realized that raising interest rates was not a good idea. Tighter policy as the IMF mandated for bailouts in Asia was not the solution.
Shan: The changes over the past 25 years in Asian economies and financial markets have been enormous. It is not only quantitative, but also qualitative.
Piti: The biggest change in banking in the last 25 years is technology. It changed almost everything. The other big change has been the rise of China as an economic powerhouse. China really wasn’t that important during the Asian crisis, but now it’s everywhere.
Mobius: There is more use of the internet to reach people, especially in the low income group. Per capita income has increased. Countries like South Korea should probably be considered a developed country rather than an emerging market. In 1997, Vietnam wasn’t even mentioned, but now it’s one of the Asian Tigers.
Mark Mobius (Photo: Bloomberg)
– A new crisis? –
Reinhart: It won’t be an Asian-style financial crisis. The Asian financial crisis came after a big windfall, rapid growth, a surge in capital flows, large current account deficits. Were not there. The kinds of problems we face on the debt front are related to stagflation, the lack of recovery. This recovery has been exceptionally uneven – very different from the recovery from the global financial crisis, during which emerging markets recovered much faster than advanced economies because China provided an engine of growth, which it did not. not currently provide.
Mobius: There is no way these countries can escape the impact of rising US interest rates. A number of Asian countries still have a loose tie to the US dollar. So it’s a challenge. But I don’t think they’re going to have another full-scale financial crisis like they did in 1997.
Tarrin: The next crisis could be related to geopolitics, or energy and food security. The rise of China and the tensions between it and the United States and Japan are to be watched. We do not know what the end of the Russian-Ukrainian war is. In the meantime, this problem can still lead to supply disruptions, food and energy shortages and higher prices. Corruption and the lack of good public governance will only make it more difficult for some countries to face this challenge.
Tarrin Nimmanahaeminda (File Photo)
Mobius: It is difficult to achieve good corporate governance where there is corruption. Some progress is underway. President Jokowi of Indonesia has done a lot to move Indonesia towards good governance. But corruption and poor governance remain problems in Asia. This is precisely why we are very careful when investing in some of these countries.
Yam: We have all learned our lessons and generally maintained rather cautious fiscal and monetary discipline over the past 25 years. I hope this will help deal with the next financial tsunami. It’s likely to be a bad one.
Piti: Human nature hasn’t changed, that’s why there are always crises. People are greedy.