Still not recovered

"Nobody wanted it to happen. Everybody had good intentions," said Supavud Saichuea, managing director of Phatra Securities, as he recalled the crisis 10 years ago.

Like many economists, Supavud agreed that the drama had begun in 1993 with the liberalisation that allowed the establishment of Bangkok International Banking Facilities in Thailand under the Chuan 1 government.

Preceding the BIBFs were the collapse of the communist regimes in many countries, particularly in the Soviet Union and Eastern Europe, as well as China's opening to the world. Those countries' emergence highlighted the need for Thailand to move away from labour-intensive manufacturing. BIBFs were born to help fund local manufacturers' moves toward heavy industry.

Intended to turn Thailand into a financial centre, they led to the crisis, as short-term and long-term debt sky-rocketed. Encouraging over-borrowing and over-investment was the fixed-exchange-rate regime, which provided a blanket safety net for all who sought foreign-currency-denominated loans.

In 1992, the external debt stood at around US$40 billion (Bt1 trillion in 1992). This had increased to $80 billion by March 1997. This debt, overwhelmingly from the private sector, increased from 34 to 51 per cent of GDP over the period 1990-1996. Much of the debt, around 36 per cent in 1996, was short-term (ie maturing in one year or less). The ratio of short-term debt to foreign reserves rose from 0.6 in 1990 to around one in 1995 and 1996. Awash with cash, Thailand misallocated the funds. Bank of Thailand figures show that total loans to the property sector increased from Bt264 billion in 1993 to Bt767 billion in March 1996.

However, most of the foreign-currency loans were not hedged against possible currency movements, and many were financing long-term projects with short-term borrowing. The export plunge in 1996 triggered a drop in confidence among creditors, and the slowing economy convinced currency speculators that the baht was overvalued. They started to attack the currency. After the Bank of Thailand drained all foreign reserves in the fight, Thailand gave in: the baht was devalued on July 2, 1997. It lost 18 per cent overnight, tumbling to 56 to the dollar by early 1998. The stock market plunged 75 per cent over the balance of the year.

In Thailand 56 finance companies were shut down, and the government intervened in the operations of six banks. Assets were auctioned off cheaply.

The impact on the region was immediate because many countries - Indonesia, Malaysia, the Philippines and South Korea - had followed the same policy on growth and run into similar problems. Surprisingly, they also resorted to similar solutions. All the affected countries flocked to the International Monetary Fund for assistance.

Ten years have passed, and all have tried to return to the pre-crisis level. To date, South Korea has shown the most impressive recovery.

Receiving a humiliating $58-billion bail-out package from the IMF, South Korea quickly cleaned up its banking system and started reforming its heavily indebted family-owned conglomerates. The economy shrank and the jobless rate soared, but by 1999 it was robustly growing again. Still, when the earlier miracle turned into a nightmare, much of the FDI tidal wave had flowed elsewhere, especially to China.

Indonesia, however, continues to struggle. The crisis helped bring about the downfall of former dictator Suharto and greater political freedom, but the economy remains beset by rampant corruption, a weak legal system and lacklustre foreign investment. Economic growth has been ticking along at about 5.5 per cent in the last two years, but unemployment is rising.

Thailand hovers somewhere in between. Bangkok, where hundreds of skyscrapers froze in mid-construction when the crisis erupted, now has an elevated Skytrain, a subway, a brand-new airport and dozens of glitzy malls. Japanese investment has made Thailand a major auto and electronics exporting hub. The auto sector reached the one-million-vehicle mark last year.

In the wake of the crisis, Thai authorities shut down the 56 insolvent financial firms, vastly improved banking supervision and updated archaic bankruptcy laws. However, it can still take years for creditors to pursue claims, and further reforms of laws governing bankruptcy and repossession of assets from recalcitrant debtors have not gone beyond the drafting stage.

"Korea restructured its financial sector, but the problem in Thailand has been the inconsistency of reforms," Sompop Manarangsan, a professor of economics at Bangkok's Chulalongkorn University, said. "This is not good for the longer term."

Thailand decided not to close any banks. The government's initial intervention in the six banks and its subsequent injection of billions of baht into the system left the economy in peril for years.

Supporting Sompop's comment could be the unimpressive recovery of the Thai stock market. While stock markets in the rest of Asia have more than recovered from the 1997 financial crisis, with several reaching new highs, the Thai bourse remains mired at less than half of its pre-crash peak.

Blame it on the disappearance of foreign investors following tumultuous politics. The Thai exchange was the worst performer in Southeast Asia last year, losing 4.75 per cent. So far this year it is up 9.5 per cent, compared to 23.4 per cent in the Philippines, which recently hit a record high. Notably, the SET index as of June 29 at 776.79 points, though up from 207.31 points on September 4, 1998, is still well short of the all-time high of 1,753.73 reached on January 4, 1994.

The index could have been higher but for the political instability over the past two years.

A recent survey by the American Chamber of Commerce showed that while committed to investment in Thailand, half of the American companies doing business here wanted to see a clearer economic picture before investing in new projects.

"Thailand continues to be a good place for US businesses, but it needs to ensure that its policies and economic direction remain competitive with its regional neighbours," said AmCham executive director Judy Benn.

As a result, Thailand is still lagging behind several Southeast Asian countries in attracting foreign direct investment. During the period from 1992 to 1997, the region as a whole attracted 7.7 per cent of the world's FDI. That share dropped to 2.9 per cent from 1999 through 2005, according to the United Nations Conference on Trade and Development (Unctad).

While least-affected Singapore reaped FDI inflows of $66.8 billion during 2004-2006, Malaysia drew $12 billion during the period. Indonesia drew $1.9 billion in 2004, followed by $5.3 billion in 2005 and $2 billion last year. The Philippines' FDI in 2006 rose 27 per cent to reach $2.4 billion and during the first quarter of this year had already hit $710 million, up 19 per cent from the same period in 2006.

Last year FDI inflows to Thailand amounted to $7.9 billion. Due to political instability that led to lower consumption, inflows are likely to fall in 2007.

"Perversely, now we're the politically stable country in the region, and Thailand and the Philippines are the unstable ones from an investor's point of view," said James Castle, an investment consultant in Jakarta with more than three decades of experience in Indonesia.

The World Bank's country economist for Thailand, Kirida Bhaopichitr, said: "The reason investors are in Thailand now is because we still have some advantages over China and Vietnam in terms of producing things that require more skills, but the government should be aware of the fact that if it is more profitable for them to go elsewhere, they will."

According to Supavud of Phatra Securities, what will determine Thailand's economic future in the world economy is foreign investment. At present, holding Thailand back is political instability as well as the current government's signals of fears of foreign funds through plans to revise several laws. He also noted that the government had yet to cut red tape, a crucial factor for any country wanting to draw more foreign investment.

Like others in the business sector, they are hopeful an elected government will be formed as soon as possible. Then, they hope, the economy will prosper at full speed, to finally mark an end to the crisis.