What have we learnt from Tom Yam Kung crisis?

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STREETWISE
What have we learnt from Tom Yam Kung crisis?
Achara Deboonme

BANGKOK: -- Next week marks the 17th anniversary of the baht devaluation - a decision that brought the worst economic pain for Thailand in decades.

Now seems a good moment to ask what we learned from the Tom Yam Kung crisis.

I remember 1997 as the first year since I started working that no bonus was paid. I was not alone, though. Most companies suddenly became poor as the baht was devalued 100 per cent against the dollar the value of their foreign currencies-denominated debts doubled. The debt default rate was huge, leading to several financial institutions suffering 60 per cent non-performing loans. Employees at nearly all companies were faced with either pay cuts or being laid off. Many were unable to make their mortgage payments and lost their homes. Fifty-six finance companies were shuttered, while several banks needed bailing out with injections of government funds.

Hindsight, they say, is 20:20. Timothy Geithner - who in 1997 was still climbing the ladder at the Treasury Department on the way to becoming Treasury Secretary in the first Obama administration - blamed the crisis on Thailand's refusal to heed the International Monetary Fund's "warnings about the dangers of fixed exchange rates and short-term borrowing in foreign currency".

In his 2014 book "Stress Test: Reflections on Financial Crisis", Geithner recalls that Thai authorities claimed at the time to have $20 billion in foreign exchange reserves. "But we knew the real number was closer to zero; the Thai central bank had sold its dollars in the forward market to conceal the depth of its problems."

Those problems have passed.

The era prior to our current political impasse was a happier one for most Thais. Shopping centres and community malls across the country were busy. Long queues at big-name restaurants were a familiar sight. Home and vehicle sales dramatically increased, mostly financed through loans. Many of those who suffered worst when the baht crashed - mostly company employees and small business owners - are now aged over 45. But for today's young business owners and anyone who has joined the workforce in the past 17 years, spending looks far safer than it did two decades ago, either through savings or loans.

Nearly all have forgotten that excessive debt was part of the problem in 1997. The only difference is that back then, the excessive debt was built up mainly by private companies - mostly financial institutions who raised cheap foreign loans to finance unproductive investment in areas like real estate. With the baht fixed at 25 to the dollar, all assumed they could finance their debt at the same foreign exchange rate for the foreseeable future. Thailand's short-term foreign debts, which had to be repaid within 12 months, remained at 65 per cent.

It seems that the country as a whole has learned a lesson. According to the Bank of Thailand, total short-term debt at the end of 2013 had shrunk to about 42.8 per cent. Notably, our ratio of foreign debt to gross domestic product (GDP) has also diminished, from $109 billion in 1997 when Thailand's economy was worth only $5 trillion, to $140 billion in 2013 when the economy had more than doubled in size to Bt11 trillion.

Now, the problem could be excessive debt built up by individuals. The ratio of household debt to GDP rose from 55.1 per cent in 2008 to 82.3 per cent at the end of last year, or Bt9.79 trillion. According to the National Economic and Social Development Board, average household debt rose from Bt104,600 in 1997 to Bt159,490 as of June 2013.

In short, Thais have less ability to spend this year, no matter how much they want to. Even though most Thais reckon the political environment has improved, few have the ability to spend. Domestic demand is not expected to turbo-boost the economic engine, while the other two potential boosters - exports and investment - remain slow.

In 1997, foreign investors were to blame. Thailand was then an Asian Tiger, after years of dramatic economic growth. Foreign investors were eager to buy Thai companies' bonds. The sustained period of rapid growth caused investors to ignore the vulnerability of the fixed exchange rate and forget that capital inflows could become outflows in a hurry.

Today, Thais are to blame.

After years of growth, even with hiccups such as the year when our main gateway airport was closed, Thais saw no risk in spending - either through populist policies or under their own aspirational desires to become middle class.

After 17 years, that year of reckoning is apparently revisiting Thailand. Investment could slow for some time, as domestic demand and export outlook remains weak. It should serve as a lesson to all: nothing lasts, be it good or bad.

-- The Nation 2014-06-24

[jaidam]

Biggest lesson that should be learned from the '97 crisis is that if your deputy PM is a megalomaniac scumbag, you should not let him know that the currency will be suddenly de-valued on a certain date. Such insider knowledge in the wrong hands is dangerous, as it allows unlimited wealth creation that can be used in negative ways such as buying a political party to further your clans nefarious ways, and attempting to divide a nation and foment civil war when the cookie jar lid is slammed shut.

The Thai political scene has been in turmoil ever since such a scenario unfolded here.

[EricBerg]

Biggest lesson to be learned is that Thai people tend to be opportunistic and therefor vulnerable to exploitation by bad scrupellous leadership.

Thailand needs to be guarded for that and protected against it continuously. To ensure that political reform is badly needed.

[MK1]

On the contrary, It would appear very little has been learned from 1997 as a country because Thai people have had two-hands in the cookie Jar and very little show from it while “90% of the land is owned by not more than 10% of the population” ( Pareto's Principle).

Edited June 24, 2014 by MK1

[worgeordie]

No lessons learn t, ,lets do it all again,start by building a massive supply

of Condominiums ,everyone get up to their eyes in debit,which 60% of

the population most likely are, its building up nicely to another crash.

regards Worgeordie

[VegasVic]

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On the contrary, It would appear very little has been learned from 1997 as a country because Thai people have had two-hands in the cookie Jar and very little show from it while “90% of the land is owned by not more than 10% of the population” ( Pareto's Principle).

As I recall Paretos principle was more along the lines of 80/20 ratio, with that said Thailand is far from alone in this as over 80% of the wealth of the U.S. in owned by far fewer than 20% of the people

[Chang_paarp]

Most companies suddenly became poor as the baht was devalued 100 per cent against the dollar the value of their foreign currencies-denominated debts doubled.

Basic definition error here, if you devalue something 100% it has no value, if I understand what the writer is trying to say, the currency was devalued by 50%. Its value was halved against the USD.

Hindsight, they say, is 20:20. Timothy Geithner - who in 1997 was still climbing the ladder at the Treasury Department on the way to becoming Treasury Secretary in the first Obama administration - blamed the crisis on Thailand's refusal to heed the International Monetary Fund's "warnings about the dangers of fixed exchange rates and short-term borrowing in foreign currency".

It would appear that the IMF did not understand Thainess then. How dare a foreign authority tell the Thai government that they were heading in the wrong direction.

Some things don't change. It would seem that if you don't learn from the past you are doomed to repeat the same mistakes.

[englishoak]

"conceal the depth of its problems."

some things never change.

[noitom]

Thailand is headed for a crap out that's for sure. When the government, police and industry get co-opted by criminals you have what is known as a failed state. The Thai military needs to establish priorities for the reform. It can't just "selectively" purge this and change that. That is essentially repeating the same thing expecting the results to be different.

[GuestHouse]

In 1997 huge numbers of Thai people lost their jobs/businesses and took refuge back at the family farm until the economy improved.

The family farm has since been sold.

[Estrada]

Biggest lesson that should be learned from the '97 crisis is that if your deputy PM is a megalomaniac scumbag, you should not let him know that the currency will be suddenly de-valued on a certain date. Such insider knowledge in the wrong hands is dangerous, as it allows unlimited wealth creation that can be used in negative ways such as buying a political party to further your clans nefarious ways, and attempting to divide a nation and foment civil war when the cookie jar lid is slammed shut.

The Thai political scene has been in turmoil ever since such a scenario unfolded here.

The 1997 collapse of the Thai financial system was caused by politicians of all parties and bank lending to every man and his dog that had "connections" but most had no collateral. Bangkok Bank of Commerce led by Rakesh Saxena and Finance One led by Pin Chakapak got into financial difficulties and the politically connected elite pulled their money out whilst continuing to advise other investors to plough their money in. The Government poured Baht Billions into Bangkok Bank of Commerce and Finance One until the ran out of money. Everyone with connections to the political elite including myself were told a week in advance that the Baht would be severely devalued as "We have spent all the reserves defending the baht". Thaksin was only one of the many like myself, that were forewarned by Amnuay Virawan the then Finance Minister and General Chavalit. Unfortunately In my case I had no money to invest and profit by it, no doubt if you were forewarned you would have changed Baht to dollars and back after the devaluation too.

The truth is that the turmoil was started long before Thaksin came to power. Finance One was an investment company which was run by the Uncle of Korn (Democratic Government Finance Minister). Korn ran a subsidiary broking company. Finance One was run by leading Democrats nothing to do with Thaksin. Finance One conned many investors who lost their savings and it was Finance One that was a major cause of the 1997 crisis. Indeed Thaksin's flag ship company lost billions. Korn's Uncle, Pin never went to court for his part in the collapse of Finance One and the Thai economy in 1997 because he fled the country to avoid prosecution. He recently returned after the statute of limitations expired and has got away scot free for his part in precipitating the Asia Financial Crisis.

[Robert24]

I think overall Thailand is much better positioned than in 97 for the following reasons:

1) BoT acts independent from government and has proved to be independent many times. Ie interest rate decisions, Baht value fights with the former finance minuster.

2) Foreign reserves of BoT are very high and give BoT plenty of firepower to manage a crisis.

3) central bank in Thailand has a very strong leadership.

4) total government debt to gdp is still very low in Thailand. ( I think around 46%)

overall I think thailand is still better positioned for another crisis than other Asian counries.

What worries me is more that private debt has increased significantly and I worry that a crisis would hit the average person a lot harder than in 97.In 97 mainly big corporates and rich people were hit very hard, private debt amongst the middle class was very low.

[snottgoblin]

Biggest lesson that should be learned from the '97 crisis is that if your deputy PM is a megalomaniac scumbag, you should not let him know that the currency will be suddenly de-valued on a certain date. Such insider knowledge in the wrong hands is dangerous, as it allows unlimited wealth creation that can be used in negative ways such as buying a political party to further your clans nefarious ways, and attempting to divide a nation and foment civil war when the cookie jar lid is slammed shut.

The Thai political scene has been in turmoil ever since such a scenario unfolded here.

Old Fabby is not going to like that. His fingers will be twitching over the report button . How dare you insinuate his democratic god is a crook.

Sent from my GT-I9500 using Thaivisa Connect Thailand mobile app

[marko kok prong]

and there was me thinking this was an article about soup!

[BillyBobThai]

Does all of this mean that I am going to get 42 baht to the dollar next month???

[Bpuumike]

Does all of this mean that I am going to get 42 baht to the dollar next month???

Or 20?

[Sandman77]

this was before my time here I wish I had been here! a friend said to me at that time a beer at that exchange rate was more expensive than now! about 70 shillings a bottle around 5€ !

[Phil Water]

"...the baht was devalued 100 per cent against the dollar". ???? I hope this guy isn't a regular writer of financial analysis.

[ableguy]

Most companies suddenly became poor as the baht was devalued 100 per cent against the dollar the value of their foreign currencies-denominated debts doubled.

Basic definition error here, if you devalue something 100% it has no value, if I understand what the writer is trying to say, the currency was devalued by 50%. Its value was halved against the USD.

Hindsight, they say, is 20:20. Timothy Geithner - who in 1997 was still climbing the ladder at the Treasury Department on the way to becoming Treasury Secretary in the first Obama administration - blamed the crisis on Thailand's refusal to heed the International Monetary Fund's "warnings about the dangers of fixed exchange rates and short-term borrowing in foreign currency".

It would appear that the IMF did not understand Thainess then. How dare a foreign authority tell the Thai government that they were heading in the wrong direction.

Some things don't change. It would seem that if you don't learn from the past you are doomed to repeat the same mistakes.

Chang you would be amazed at the number of elite education people on this forum do not understand simple percentages.

[Bpuumike]

Most companies suddenly became poor as the baht was devalued 100 per cent against the dollar the value of their foreign currencies-denominated debts doubled.

Basic definition error here, if you devalue something 100% it has no value, if I understand what the writer is trying to say, the currency was devalued by 50%. Its value was halved against the USD.

Hindsight, they say, is 20:20. Timothy Geithner - who in 1997 was still climbing the ladder at the Treasury Department on the way to becoming Treasury Secretary in the first Obama administration - blamed the crisis on Thailand's refusal to heed the International Monetary Fund's "warnings about the dangers of fixed exchange rates and short-term borrowing in foreign currency".

It would appear that the IMF did not understand Thainess then. How dare a foreign authority tell the Thai government that they were heading in the wrong direction.

Some things don't change. It would seem that if you don't learn from the past you are doomed to repeat the same mistakes.

Chang you would be amazed at the number of elite education people on this forum do not understand simple percentages.

Especially some of the percentages presented to us by the newspaper we are allowed to mention (when favourable).