By Maxmilian Wechsler
ALMOST exactly 20 years ago Thailand was the point of departure for a devastating financial crisis that began in July 1997 and rapidly spread to other countries in the region before spilling over into Latin America, Russia and Eastern Europe.
Two decades later you can see the remnants of the ‘Tom Yum Kung’ crisis in unfinished high-rise office buildings like the 49-storey Unique Tower on Sathorn Road, now known as the Ghost Tower, and several megaliths intended to be residential complexes in Muang Thong Thani, a satellite city of Bangkok. Demolition of the colossal towers of the planned SV Gardens project on Rama III Road began years ago, but only recently did the tower cores disappear altogether.
Thailand was one of the fiercest Asian Tigers going into the turn of the millennium. From 1985-1996 the Thai economy grew at a rate of about nine percent per year. Then ‘Tom Yum Kung’ knocked the economy off the rails, and it has never fully recovered. What happened?
Castles made of sand
The first indication of an Asian currency crisis appeared in Thailand in the summer of 1996 when it was revealed that the Bangkok Bank of Commerce (BBC) had lent billions upon billions of baht in highly questionable loans. The loans included a very large sum to a convicted swindler known locally as the “Biscuit King.”
Before the news of these transactions surfaced, Thailand’s banking and bank regulatory system was globally praised and highly regarded. That changed with the revelation that BBC officials were accepting property they knew to be overvalued as collateral. It soon came out that corruption and laxity in regulation weren’t limited to BBC, but was prevalent at other financial institutions as well. The scandal rocked investors’ confidence.
The origins of the crisis go back to the early 1990s when Thailand opened up its financial markets. Money started to pour in from abroad from foreign investment and also because Thai banks offered high-interest rates on deposits. Loaded with foreign money, the banks loaned big and carelessly.
Eventually, the mountains of bad debt wrought by illegal lending practices exposed corrupt politicians and business practices that had been hidden by rapid economic growth, not only in Thailand but also in other Asian countries. By the end of 1997 bankrupt corporations and failed financial institutions were spread across the continent. The list of countries affected, some more, others less, included Indonesia, Malaysia, the Philippines, Laos, Hong Kong, China, Brunei, Taiwan, Singapore, Vietnam and South Korea, then the world’s 11th largest economy.
The meltdown of banking systems that were previously considered sound created havoc. The bubble of confidence that allowed Asia to prosper had suddenly and unexpectedly burst, threatening to destroy the global economy. The International Monetary Fund (IMF) came to the rescue, lending tens of billions of US dollars with the stipulation that countries accepting the loans must follow strict conditions.
Unemployment rose to dangerous levels across the region as factories and other enterprises closed their doors because they were unable to borrow money. The crisis cut across all social classes. Thai bankers and other white-collar workers were pawning their valuables. Many second-hand Rolexes and other expensive watches were offered for sale at shops around Bangkok. People who had held high-paying jobs were selling food on footpaths to survive. For them and many others, it was a shocking end to the decade of unparalleled economic growth that was dubbed the ‘Asian Miracle’.
The Thai meltdown
In May 1996 the Ministry of Finance took over the BBC to save it from total collapse after depositors began withdrawing large amounts of money. By the beginning of 1997 non-performing loans exceeded 16 percent.
Trading in the banking and finance sectors of the Stock Exchange of Thailand (SET) was suspended by the government on March 3 - the first time in SET’s 20-year history - after the Bank of Thailand (BOT) called for an increase in reserve requirements for all financial institutions to re-establish a confidence in the financial sector.
A week later the BOT together with the Ministry of Finance ordered ten financial institutions facing insolvency to raise additional capital within ten days. This only accelerated withdrawals from the financial institutions already in progress. In the two days after the order, more than 21 billion baht was withdrawn.
International hedge funds and speculators attacked the Thai baht from May 8-15. The central bank fought back by selling billions of US dollars to defend the baht against the attacks.
On May 15, now referred to as the day of the Blood Bath, the BOT ordered Thai banks to stop lending to foreign speculators, causing massive losses to hedge funds abroad. As a result, by mid-July 1997 more than 90 percent of Thai foreign reserves had left the country.
In June Prime Minister Chavalit Yongchaiyudh announced that he would not devalue the Thai currency after the baht was massively attacked by foreign speculators. The Thai baht remained pegged to the US dollar. Meanwhile, the SET closed below 500 points; it had lost 40 percent of its value since the beginning of the year.
Mounting international pressure forced the Thai government to let the baht float freely on July 2, 1997. The date is regarded as the beginning of the Asian financial crisis, although it was already well underway. The baht’s value dropped as much as 20% as the Thai government requested “technical assistance” from the IMF. On August 11, the IMF unveiled a US$17 billion rescue package for Thailand that imposed some tough conditions. The Thai government initiated tax hikes as part of the IMF’s insistence on austerity. This led to a run on commercial banks. Depositors were taking their money out of Thai banks. On August 20, the IMF approved another bailout package of US$2.9 billion.
By the end of 1996, the Thai government had closed 64 local finance companies, leaving just 27 in operation, along with 13 local banks. The Thai economic boom came to an abrupt end. The failure of financial firms, a large ratio of non-performing loans and widespread foreclosures resulted in massive layoffs in the finance, property and construction sectors. Construction of hundreds of big office, housing and retail projects came to a halt, as did infrastructure projects. Thai workers left the cities in droves to return to their home villages, and approximately 600,000 foreign workers returned to their respective countries.
By October the effects of the damage to the financial sector were showing across society as a whole. People stopped spending for anything not considered necessary and saved wherever possible. Bangkok taxis were empty as people switched to buses for transportation. Taxi drivers were unable to pay the rent on their vehicles and joined the mass migration back to the provinces. Abandoned cabs could be seen all over the city.
Under attack from the public and the media, Chavalit Yongchaiyudh resigned on November 4 after only 11 months in office. Democrat Party leader Chuan Leekpai became the new prime minister on November 9.
By late 1997 the IMF had committed about $110 billion in short-term loans to Thailand, Indonesia and South Korea to stabilise their economies.
On January 12, 1998, the Thai baht dropped to an all-time low of 56.67 per one US dollar. In January 1997 the exchange rate was about 25 baht per dollar. The Thai stock market had fallen 75 percent since the start of the crisis.
In April 1998, a report commissioned by the central bank laid blame on its former governor, Rerngchai Marakanond, former finance minister Amnuay Viravan and other top banking for failing to defend the Thai baht against speculators in 1997. The report was drafted by the Nukul Commission chaired by Nukul Prachuabmoh, another former central bank governor.
It was reported on June 8, 1998, that the jobless rate in Thailand was at 8.8 percent, meaning 2.8 million people were unemployed. During that year the Thai economy shrank by 11 percent.
However, by 2001 there were strong indicators of a recovery. An increase in tax revenues allowed the government to balance the budget and in 2003 all IMF loans were paid off, four years ahead of schedule. In October 2010 the Thai baht was close to its pre-crisis value, at 29 per dollar.
Following are excerpts from a timeline published by the US-based Public Broadcasting Service showing how the financial crisis that began in Thailand affected other countries.
July 8: Malaysia’s central bank intervenes to defend its currency, the ringgit.
July 11: The Philippine peso is devalued.
July 18: The IMF announces that it will make more than a billion dollars available to the Philippines to help relieve pressure on the peso.
July 24: The Singapore dollar starts a gradual decline.
August 14: Indonesia allows the rupiah to float freely, triggering a plunge in the currency.
October 8: Indonesia asks the IMF and World Bank for help after the rupiah falls more than 30% in two months.
October 23: Hong Kong’s stock index falls 10.4% after it raises bank lending rates to 300%. The plunge on the Hong Kong Stock Exchange wipes US$29.3 billion off the value of stock shares. The South Korean won begins to weaken.
October 27: Rattled by Asia’s currency crisis, the Dow Jones Industrial Average plummets 554 points for its biggest point loss ever. Trading on US stock markets is suspended.
October 31: The IMF agrees to a loan package for Indonesia that eventually swells to US$40 billion. In return, the government closes 16 financially insolvent banks and promises other wide-ranging reforms. The IMF announces that it will delay a US$700 million quarterly disbursement to Russia due to the country’s lax tax collection.
November 3: Sanyo Securities Co. Ltd., one of Japan’s top 10 brokerage firms, goes bankrupt with liabilities of more than US$3 billion.
November 17: Hokkaido Takushoku Bank Ltd., one of Japan’s top 10 banks, collapses under a pile of bad loans.
November 21: South Korea requests IMF aid.
December 3: The IMF approves a US$57 billion bailout package to South Korea, the largest in history.
December 23: In an unprecedented move, the World Bank releases an emergency loan of US$3 billion, part of a US$10 billion support package, to South Korea to help salvage its economy.
January 8-9: The Indonesian rupiah nosedives to an all-time low after President Suharto unveils his state budget plan. Indonesians clear store shelves of food and staple goods fearing that further currency declines will lead to food shortages.
January 10: Pressured by the IMF to take strong measures against Indonesia's ongoing economic decline, Suharto postpones 15 major government-subsidised projects to help cut expenditures and foreign debt.
January 12: Asia’s largest private investment bank, the Hong Kong-based Peregrine Investments, files for liquidation.
January 14: South Korean labour unions agree to discuss layoffs with businesses and government leaders. Layoffs are a key condition insisted upon by the IMF in exchange for the fund’s record US$57 billion aid package.
January 15: Prices for basic food staples increase in Indonesia as much as 80%. The IMF signing follows a week of the rupiah’s free-fall ‒ 10,000 to the dollar ‒ which prompts waves of panic buying in Indonesia.
January 22: Indonesia’s currency plunges to a new all-time low ‒ 12,000 rupiahs against the dollar.
March 24: The US announces that it will spend $70 million in food and medical emergency aid to Indonesia, despite the fact that the IMF had suspended its loan package.
May 4, 1998: The IMF resumes a stalled lending program to Indonesia, approving a payment of US$1 billion.
May 21: Suharto resigns after 32 years in power.
May 27: Russia's financial system is stretched to the breaking point as panic-stricken stock and bond markets continue to plunge, forcing the central bank to triple interest rates to 150% to avert a collapse of the ruble.
May 27-28: A two-day, nation-wide strike is held in South Korea by union workers to protest the growing wave of unemployment. Since February, South Korean companies have been laying off 10,000 workers per day.
June 1: Russia’s stock market crashes and Moscow’s cash reserves dwindle to US$14 billion amid unsuccessful attempts to prop up the ruble and pay off burgeoning debts.
June 12: Japan announces that its economy is in a recession for the first time in 23 years.
June 17: The yen’s fall to levels near 144 to the dollar rattles Wall Street, prompting the US Treasury and Federal Reserve to intervene to prop up the yen.
June 25: Indonesia and the IMF announce a fourth agreement to rescue an economy quickly sinking into chaos. The IMF agrees to restore subsidies for food and fuel and provide another US$4 billion to US$6 billion for necessities.