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.