(Bloomberg)-This month, 25 years ago, marked the beginning of economic, political and financial market turmoil that became known as the Asian financial crisis. Currency and stock markets have plummeted. The government has overthrown. The poverty rate has skyrocketed.
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The crisis cast serious doubts on the miracle of Asia, a period of rapid growth that saw the Tiger economy become the envy of the world. The fire was triggered by a Thai decision to devaluate the baht on July 2. The shockwave quickly reverberated throughout the region’s emerging markets as fallout expanded in 1998.
After a quarter of a century, the Asian economy has undergone a transformation. China is the world’s second-largest economy, and while recovering from a pandemic, the region is a major source of growth in the world.
Here, in the words of the main players during the crisis, what happened, how the region recovered, and what is the economic outlook facing the new economic crisis. The interview has been edited for clarity and brevity.
Korn Chatikavanij, Founder Jardine Fleming Thanakom Securities and Minister of Finance of Thailand (December 2008-August 2011)
Bangkok Bank Board Chairman Piti Sithi-Amnuai
Mark Mobius, co-founder of Mobius Capital Partners
Tallinn Nimana Heminda, Minister of Finance of Thailand (November 1997-February 2001)
Joseph Yam, Former Director of Financial Management, Hong Kong
Zeti Akhtar Aziz, Former Governor of Central Bank of Malaysia
Shan Weijian, Chairman and Chief Executive Officer of PAG based in Hong Kong
Carmen Reinhart, Former Chief Economist of World Bank Group
The story begins on January 4, 1994, in the midst of a boom in Southeast Asia. KornChatikavanij is preparing for a television interview to commemorate the first day of the New Year’s deal.
Korn: I knew I was asked to predict what the stock market would look like that year. So I talked to my team and agreed to say that the peak of 1994 was already today and that was exactly the day.
By early 1997, the SET index was less than half of its 1994 peak.
Korn: I’ve been threatened with murder for years.
PITI: There were nearly 100 financial companies in Thailand. Everyone thought it was easy to make money. They thought they could borrow deposits and money from abroad and lend it to meaningless projects.
Korn: The rate of return on investment in the economy was declining rapidly. There was excessive and useless management. People believed that there was a free lunch. Thai companies borrowing dollars at 4% to deposit at 12% or 10% in Thai banks consider the baht to be free money as it will never be devalued. It’s hard to believe that the whole country believed it. It’s funny that people are willing to bet.
MOBIUS: I knew that Thailand had a problem with its high reliance on the dollar. It was a pretty good idea for traders to bet on Thai baht. The central bank of Thailand was proud to keep the exchange rate, so when they heard that there was a shortage of foreign exchange, they began to suspect that there was a shortage of ammunition.
On July 2, 1997, Thailand abandoned the dollar peg and devalued the baht.
Yam: Be careful, a small open economy with a moderately fluid market! While financial globalization enables the international diversification of investment, it has an ugly side. The free market is not a freely manipulated market. Financial authorities need to be well prepared to deal with predatory behavior that does not consider the interests of the host country. Tallinn: The two biggest challenges I had to deal with were the balance sheet of financial institutions clogged with bad debts and the loss of nearly total foreign exchange reserves. And this was kept secret.
MOBIUS: When the crisis broke out, we thought it would be pretty limited to Thailand. I didn’t expect the crisis to spread, but then traders began betting on other currencies. The dollar interest rates were so low at the time that these countries also had large external debt. That’s where we were wrong. It spread throughout the region.
ZETI: Malaysia was at a turning point after more than a year of volatile and volatile capital flows, including attacks of speculative attacks on currencies. By that time, the market was fundamentally dysfunctional. The traditional prescription of raising interest rates does not stabilize the market. Interventions to protect the currency were just as wasteful, as it only depleted foreign exchange reserves.
PITI: I remember being busy. I piled up a lot of paper and took those piles home over the weekend. I didn’t have time even on weekends.
ZETI: The most notable experience of setting policies during the crisis was persuading political leaders to accept difficult policy prescriptions. Crisis management usually has a wide range of demands from different quarters. There is no shortage of proposed solutions. First, we need to be very clear about the results we need to achieve.
MOBIUS: We tend to love the bear market and the crisis has given us the opportunity to bargain for a good company. History has shown that the bear market is often surprisingly shocking, but short-lived and usually does not last for more than a year or a year and a half. We knew it was a good time to invest. In the end it worked.
On September 1, 1998, Malaysia introduced capital restrictions and fixed the exchange rate to the dollar.
ZETI: An important lesson for relying on capital flow management is that it needs to be targeted and temporary. In Malaysia, it was aimed at speculators. The challenge was how to get out of such unconventional measures. Malaysia’s withdrawal from such measures was 12 months later, and the transition to a flexible exchange rate system was 7 years later.
MOBIUS: After all, in 1997, I learned the lesson that many Asian countries do not bear too much debt in foreign currencies. Of course, some people aren’t paying attention to the lessons. Sri Lanka is currently detained. Generally speaking, the situation is much better.
ZETI: Perhaps the most important lesson is the need to build resilience. The world may continue to experience a crisis. After the Asian currency crisis, most of our region has implemented financial reforms. The rewards can be seen during the 2008-09 financial crisis. Asia was affected, but our financial system and economy did not experience a crisis.
Shan: Banks went bankrupt in the West during the so-called global financial crisis, but as far as I know, there were no banks in Asia. The systematic reforms of the banking system across Asia have made the banking system resilient, healthy and powerful in the face of the financial crisis.
Korn: It’s very surprising that the same thing happened 10 years later, such as in Iceland and New York. However, I realized that it was not a good idea for the IMF to raise interest rates. Tightening policies as mandated by the IMF for bailouts in Asia has not been a long way off.
Shan: The changes to the Asian economy and financial markets over the last 25 years have been enormous. It is not only quantitative, but also qualitative.
PITI: The biggest change in the banking industry over the last 25 years has been technology. It changed almost everything. Another major change is the rise of China as an economic power. China wasn’t that important during the Asian crisis, but it’s now everywhere.
MOBIUS: Especially in the low-income group, the use of the Internet is increasing to reach out to people. Income per capita is increasing. A country like South Korea should probably be considered a developed country rather than an emerging market. Vietnam was not mentioned in 1997, but it is now one of the Asian tigers.
A new crisis?
Reinhardt: It won’t be an Asian financial crisis. The Asian financial crisis came after a great success, rapid growth, a surge in capital flow and a large current account deficit. We are not there. The type of problem we face on the debt side is related to stagflation and to the lack of recovery. This recovery is so uneven that it is very different from the recovery of the global financial crisis, where emerging markets recovered much faster than developed countries, as they provided the driving force for growth that China does not currently offer.
MOBIUS: There is no way these countries can escape the effects of rising US interest rates. Many Asian countries still have loose pegs against the US dollar. So it’s a challenge. However, I don’t think there will be a full-scale financial crisis like in 1997.
Tallinn: The next crisis could be related to geopolitics, or energy and food security. The rise of China and the tension between China and Japan and the United States are noteworthy. I don’t know what the end of the Russian-Ukraine War is. Meanwhile, this problem can further lead to supply disruptions, food and energy shortages, and rising prices. Corruption and lack of good public governance only make it difficult for some countries to address this challenge.
MOBIUS: Where there is corruption, it is difficult to get good corporate governance. Some progress has been made. Indonesian President Jokowi has done a lot to move Indonesia towards good governance. However, corruption and inadequate governance remain a problem in Asia. Therefore, we are very cautious about investing in some of these countries.
Yam: We have all learned lessons and have generally maintained fairly cautious fiscal and financial discipline for the past 25 years. We hope this will help you cope with the next financial crisis. It can be bad.
PITI: Human nature hasn’t changed. Therefore, there is always a crisis. People are greedy.
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