Learning the lessons of the '97 crash
While the conditions that led Thailand to virtually go bankrupt two decades ago are mostly in the rear view, a few risk factors seen today could prove parlous if left unchecked. By Post reporters
It has been 20 years since the financial crisis engulfed Thailand, sending shock waves to other Southeast Asian peers -- including Malaysia, Indonesia and the Philippines.
Widely believed to have started with the Thai baht devaluation on July 2, 1997, the contagion also extended its reach to other Asian countries such as South Korea and Hong Kong, stoking fears of a worldwide economic meltdown.
The root causes of the debacle were myriad. As Charles W.L. Hill of the University of Washington wrote in a research paper, the financial crisis in Thailand was a "private sector failure" expressing itself partly in increasing current account problems but mainly in careless lending/borrowing and the accumulation of non-performing loans in the financial sector.
During a period when the real economy showed signs of weakening, with sluggish exports and an increase in the current account deficit, "hot money" flowed in and covered the deficit, but also led to careless investments.
Liberalisation in an uncontrolled financial sector resulted in misallocation and mismatching.
Political instability, indecisiveness and mismanagement at the political and administrative level also contributed to the financial meltdown in Thailand, according to Mr Hill.
With July 2 marking the 20th year since the crisis, the Bangkok Post looks at key Thai business sectors to evaluate just how well they've learned the lessons of those dire times to help prevent a repeat scenario amid periodic warnings from leading local economists of the rising risks from poorly managed cooperatives and an unbalanced property sector.
Financial sector: 'No repeat'
"Repeating the 1997 financial crisis is impossible, with the exception of Thailand turning back to currency-pegging," said Don Nakornthab, senior director at the Bank of Thailand's macroeconomic and monetary policy department.
For years, Thailand had pegged its currency to the greenback at a rate of around 25 baht to the dollar. A fixed rate meant there was no risk of exchange fluctuations affecting trade, investment, loans and other transactions between Thailand and other countries. Taking advantage of how easy it was to borrow from foreign entities, Thai companies embarked on a period of breakneck expansion.
In 1996, however, Thailand's current account deficit skyrocketed, and many began to view the baht as overvalued compared with the dollar. The widening deficit eventually caught the attention of speculative investors, and in 1997 they attacked the nation's currency, carrying out an aggressive bout of baht selling. The government sought to defend the currency peg with baht-buying interventions to no avail.
On July 2, the government abruptly dropped the currency peg and introduced a floating exchange rate system.
The baht immediately plunged against the dollar. Over the ensuing six months, waves of investor selling hit other currencies in the region, sending them into a downward spiral. The Asian currency crisis had arrived.
"Given that painful experience, the government, the central and financial institutions also adopted prudent measures to prevent a repeat of the economic malaise," said Mr Don. "Thailand's managed, floated currency system also makes it more difficult for speculative attacks as the rate is adjusted in line with market forces."
Thailand is today among the top 20 nations with the largest foreign reserves, which stood at US$185 billion (6.28 trillion baht) as of June 16.
Unlike the 1997 financial meltdown when the market witnessed massive capital outflows, Thailand is now experiencing strong capital inflows, while the foreign reserve buffer is large enough to handle any instances of capital flight.
Moreover, the net foreign holding in Thai equities amounts to 4 trillion baht, or 31% of total market value. The holdings of local institutions can now balance fund outflows. For the debt market, foreign holdings of Thai bonds is around 7-8% of outstanding bonds.
For current account, another external stability measurement, Thailand ran a surplus of 12% of GDP last year, compared with a deficit of more than 8% in 1996.
"Several weak points, including financial institutions' stability, reliance on foreign-denominated debt and absent or outdated information, which led to the 1997 financial crisis, have been eradicated," said Mr Don.
Thailand now releases its GDP data on a quarterly basis, compared with a yearly basis during the pre-crisis period, while the National Credit Bureau and Real Estate Information Center were incorporated.
At the end of March, commercial banks' loan quality was in good shape, with gross non-performing loans climbing to 2.94%, while loan-loss reserves amounted to 545 billion baht or 162% of the amount required, according to Bank of Thailand data.
Still, commercial banks' combined capital buffers totalled 2.31 trillion baht and the industry's capital adequacy ratio stood at 17.8% of risk-weighted assets.
A 60%-threshold for public debt has been set under the Finance Ministry's sustainable framework.
According to the Public Debt Management Policy's data, Thailand's public debt amounted to 6.27 trillion baht or 42.6% of GDP at the end of April. The government and state enterprises owed foreign-denominated debt worth 319 billion baht, accounting for 5% of public debt at the end of April.
Bangkok Bank's executive chairman Deja Tulananda said the country's 1997 financial crisis provided a crucial lesson that led Thai firms to turn to information-based operations and pay more attention to risk management.
"The banking industry has also developed business operations and strengthened risk management under the Bank of Thailand's macroprudential regulations. Such practices will help prevent the industry from falling into a new financial crisis," said Mr Deja.
And in so many other ways, the current economic situation is different to that in 1997.
Interest rates now stand at a low level and the banking industry pays attention to financial cost management amid a reasonably competitive environment.
Ahead of the 1997 crisis, Thailand had established Bangkok International Banking Facilities in 1993, prompting a large number of Thai firms to seek international financial sources through local banks to take advantage of lower interest rates there and capitalise on the explosive economic growth at that time.
Foreign-denominated debt came to to $90.5 billion at end-1996, most of which was short-term loans, from $29.3 billion in 1990. In terms of borrowers, the private sector accounted for 73.7% of foreign debt, with the public sector holding the rest.
A handful of Thai firms with foreign debt had hedged against foreign exchange risks as the baht was pegged at 25 to the dollar. The Bank of Thailand's tightening monetary policy, including interest rate rises intended to tame inflationary pressure and boost domestic savings, had exacerbated the situation, as it encouraged hot money to be invested in real estate, all while bubbles formed on the Thai bourse.
The investment-to-GDP ratio surged to 41% in 1996 from 27% in 1987, while the proportion of foreign direct investment relative to Thai economic value had decreased over time from 33.6% in 1990 to 15.9% in 1996, indicating that most of the investment was concentrated in the form of portfolios and went to the build-up of capital goods, factories, inventories and land.
The Mundell-Fleming trilemma economics concept, also called the "impossible trinity" -- which states that a fixed exchange rate, monetary policy autonomy and the free flow of capital are incompatible at the same time -- can explain Thailand's 1997 financial crisis.
With the impossible trinity and Thailand's persistent current account deficit ranging from 5.08-8.1 % of GDP, due mainly to imports exceeding exports, the baht was the target of speculative attacks, forcing the central bank to abandon pegging it to the dollar for the managed floated regime on July 2, 1997. That month, Thailand's international reserves amounted to $30.4 billion, of which $29.3 billion was locked up in forward contracts.
Imprudent and mismatched lending by Thai financial institutions, largely to non-productive sectors (especially real estate), and over-borrowing by both companies and individuals created the perfect storm for the economic collapse.
Following the change in currency regime, the baht depreciated to above 50 baht to the dollar in less than a year and Thailand's foreign-denominated debt swelled to $109 billion, of which $85.2 billion was owed by the private sector and the rest by the government. Moreover, 65% of the debt was short-term with a maturity of less than one year.
Dozens of financial institutions collapsed, a large number of companies shut down, laying off millions of workers, and non-performing loans shot up to almost 50% of outstanding loans.
Property: Bubble again?
Over the past several years, concerns have periodically been raised about the possible re-emergence of a bubble in the housing market, particularly on the back of condominium oversupply in Bangkok and a continued surge in land prices.
Supachai Panitchpakdi, a former director-general of the World Trade Organization and secretary-general of the UN Conference on Trade and Development, in May raised a red flag about a possible property bubble, as most domestic private investment has been concentrated in that sector.
Former Bank of Thailand governor Prasarn Trairatvorakul joined the chorus late last month, with a warning that cooperatives and an unbalanced property sector are possible sources that may trigger a new financial crisis if regulators fail to tighten rules and regulations to keep problems from spiralling out of control.
Prasert Taedullayasatit, president of the Thai Condominium Association, thinks otherwise. Developers learned a lot from the 1997 financial crisis and know not to be too aggressive with their investments.
"During the property boom in the pre-1997 era, developers had a debt-to-equity ratio higher than seven times despite the fact that annual interest rates were very high at over 12%," said Mr Prasert.
But developers didn't want to miss out in the booming period, when investing in land plots had an upside gain.
Currently, their debt to equity ratio is only 0.8 times on average or a maximum of no more than two times even though interest rates are very low, as they have learned that an aggressive investment and incautious business expansion can be risky, he said. "Developers now buy land plots in line with residential trends and demands."
In the pre-1997 period, many developers adopted a "me-too" strategy, jumping into sectors that were booming. After the 1997 crisis, they diversified into various property categories to reduce risks.
During the boom 20 years ago, developers did not screen customer's profiles, focusing only on selling as many units as possible. When the project was completed, there were units booked but eventually dumped by speculators.
Today developers pre-screen customers before allowing them to book a unit to make sure there is either real demand or buyers are able to do a unit transfer, said Mr Prasert, who is also managing director for premium business at Pruksa Real Estate Plc.
He said many developers today, particularly large firms, have their own market research units to monitor and analyse market conditions before making an investment decision.
"There were no information centres related to the property sector in the pre-1997 era to provide warnings about oversupply to help them adjust their business plans and strategies in time," he said.
Issara Boonyoung, honorary president of the Housing Business Association, said the Real Estate Information Center, founded in 2004, keeps a close eye on the number of residential units being launched each year.
The REIC reported that 85,600 condo units were launched in Greater Bangkok in 2013, a boom year for the property market nationwide after the great floods in 2011. But new condo supply declined from 2014 to last year with 78,800 units, 60,000 units and 57,700 units, respectively, as developers slowed the clip of new launches to stay in tune with changing conditions.
"Developers revised their business plans in line with the economic slowdown," said Mr Issara.
Within the tourism and hospitality sector, the consensus is that the industry is prepared for any future crises.
Supawan Tanomkieatpume, president of the Thai Hotels Association, said the 1997 crisis has resulted in the implementation of the best financial practices for existing operators.
"I think business owners are now well-prepared in crisis management and ready to deal with unexpected situations," she said. "They can merge or join forces with one another to survive if the situation worsens," said Ms Supawan.
As the owner of the Twin Towers Hotel in Bangkok, Ms Supawan herself also secured a big loan from a foreign bank before 1997, but she quickly negotiated with creditors for help, managing to remain in the market until this day.
She said the baht's inflation in 1997 hit the tourism and travel sectors hard, forcing many new hotels, in particular, to shut down. Many other such businesses were swallowed up by larger players.
"The tourism sector had never faced such a situation before, so it took one to three years for the industry to recover, as most operators had no idea how to manage soaring debts," said Ms Supawan.
Small and medium-sized businesses faced extreme financial difficulties too, as almost all of their investments stemmed from bank loans. Operators had to rush to creditors asking for assistance, including interest waivers, refinancing and business restructuring and rehabilitation.
Ben Taechaubol, chief executive at Country Group Development Plc, said the economy is in a much stronger position today, and although property prices have seen a rapid rise, property remains affordable.
Furthermore, Thailand's price increases are largely due to a rise in land prices, said Mr Ben. Brushing aside talk of a property bubble forming, he said banks have been cautious with lending, while the private sector is also closely monitoring risks.
"Real estate developers and financial institutions are now working together closely to manage risks," he said. "I believe businessmen have learned from that crisis. They will not invest if they are not sure about the return on investment."
Energy: Reforms to the fore
The impacts of the 1997 crisis have brought institutional issues to the fore for the energy industry. The significant debt accrued due to past infrastructure borrowing and their poor performance also induced Thailand to privatise its energy sector.
As a result, the administration of Prime Minister Thaksin Shinawatra (2001-06) focused on economic and energy industry reforms.
The government made several institutional arrangements with the principal aim of improving efficiency. Several organisations were established to centralise the formulation and implementation of policy. The Ministry of Energy was established in 2002, which unified more than 20 agencies within nine ministries and state-owned enterprises responsible.
In 2001, the National Energy Policy Office approved the partial listing of PTT. It was then privatised and became PTT Plc, which listed on the Stock Exchange of Thailand (SET). For the power industry, in 2003 the cabinet approved for the Electricity Generating Authority of Thailand (Egat) to be corporatised as a public company under the Corporation Law.
Rangsan Phuangpran, chief executive of PTG Energy Plc, said the most crucial lesson he learned from the financial crisis is to maintain cash on hand of 200-300 million baht for any sudden business disruption.
"Close monitoring of crucial economic data and important indices is also needed to be well-prepared if another crisis happens again," he said. "The major data sets range from current account data, foreign exchange rates, consumer price indices and industrial utilisation."
The SET-listed oil retailer, which incurred massive debts for almost a decade after the 1997 crisis, said the company had been forced to downsize and apply a smart cash management process to gradually chip away at its debt. It eventually managed to list on the SET in May 2013.
PTG has been aggressively expanding its business over the past three years, but continues to closely monitor its internal financial signals and balance sheet in order to prevent incurring new debt, said Mr Rangsan.
Chaiwat Kovavisarach, chief executive of Bangchak Corporation Plc (BCP), who confronted not only the crisis but also the downward trend for the oil refinery industry in Asia, said financial prudence is the fundamental for sustainable business growth.
A debt burden of more than 10 billion baht and a record low gross refinery margin (averaging less than US$2 a barrel) were tough tasks for BCP to tackle. Mr Chaiwat said if the company had not managed to convince policymakers to help revive the business, BCP could have been snatched up by a foreign energy firm.
"Do not forget prudent management and hedging against foreign accounts," said Mr Chaiwat.
Telecom: Turning point
The 1997 financial crisis left no sector unscathed, as those working in telecommunications at the time can certainly attest.
To Suphachai Chearavanont, head of Charoen Pokphand Group, the crisis ended up being the most important event of his life when it hit True Corporation, where he was a senior executive.
True had a record-breaking debt of 100 billion baht after the Thai baht depreciated by more than 50% that year. The company was virtually bankrupt.
That was a turning point for Mr Suphachai: "The day I learned I was drowning in debt, I had absolutely no idea how to get my head above water."
Mr Suphachai thought of three options for dealing with the debt burden. First, sell the company to repay the debt; second, allow creditors to seize the company, freeing himself from liability; and third, continue to fight and find ways to pay off the debt.
He decided to fight. A sense of social responsibility to True's 10,000 employers was the critical reason behind his decision.
After managing to negotiate with creditors and successfully entering a debt-restructuring programme, Mr Suphachai was chosen by the creditors to serve as president and chief executive of True Corporation.
He said in the end there was only one reason why he managed to escape from the debt crisis: the power of positive thinking. "That was very powerful, the belief that I thought I could get out of debt."
One critical lesson he gained from the crisis is that "corporate values" are the most important factor for an organisation, as they are directly tied to a firm's core value.
Dhongchai Lamsam, chairman of the executive board of Loxley Plc, one of Thailand's largest trading conglomerates, believes that any new crisis on par with the 1997 crash is unlikely.
Like many other companies in 1997 that saw their debt burdens balloon overnight after the floating exchange rate system was introduced, Loxley's debt doubled to 10 billion baht. The sudden debt surge caught its management off guard. Mr Dhongchai, Loxley Group president at that time.
Loxley used the principle of mindfulness to guide it through the difficult task ahead, citing transparency and sincerity as two key factors that helped the company pass through the storm. It was determined to not only make things right with its creditors and supplies, but its employees as well.
"The employees are Loxley's family. They acknowledged the crisis and worked closely with management to deal with the problems," said Mr Dhongchai.
Loxley spent two years grappling with the difficult debt restructuring, capital increase and sales of some overseas assets, including a hydroelectric dam project in Laos.
The management also agreed to have their salaries cut by up to 30% to create more liquidity for operational spending. Their wages return to normal in 2000, after the crisis had passed. Loxley managed to wade through the difficult times without laying off any employees.
Retail: New landscape
The 1997 crisis also dramatically altered the landscape of Thailand's retail business for years to come, notably for the two giant retailers owned by market leaders Charoen Phokphand Group and Central Group.
The industry also saw a lot of international retailers come and go during the crash. Many foreign retailers came to stock up on the cheap in Thailand thanks to the weakened baht, helping keep some local players afloat.
When the government floated the baht on July 2, retailers were no exception when it came to accruing massive debts on account of the plummeting currency.
The crisis forced CP Group to sell its stake in the Lotus supercenter to British retailer Tesco, which renamed the chain Tesco Lotus. During that time, CP also sold its shares in the cash and carry operator Makro to SHV Holdings, a Netherlands-based firm, dropping its stake from 30% to 13.4% before buying it back through its subsidiary, CP All Plc, in 2013.
CP Group's honorary chairman Dhanin Chearavanont branded the incident as his biggest challenge; it forced him to freeze several investment projects at home and in China.
The group, whose major three sectors are food, retail and telecommunications, moved to consolidate various businesses after the crisis.
CP All, the operator of the 7-Eleven convenience store chain, became a spearhead for the group to vigorously drive growth in the retail segment. At the end of 2016, the company had a total of 9,542 7-Eleven stores nationwide with sales revenue of 400 billion baht, compared with 2,100 stores and 2.4 billion in revenue in 2002.
The crisis also resulted in big changes to Central Group's shareholding structure for its Tops grocery store chain and Bic C Supercenter, a discount store.
France-based hypermarket chain Casino Group acquired a 66% stake in the Big C retail chain from Central Group a few years after the crisis while its subsidiary, Robinson Department Store, also sold off its shares in CRC Ahold Co, the operator of Tops supermarket chain, to the Dutch-based Royal Ahold Co.
The takeovers and the mergers and acquisitions of Thai retailers by huge foreign multinationals continued throughout the first decade of the century. In late 2010, Casino-controlled Big C won a bid to buy Carrefour, another French retailer, rebranding the store as Big C.
A senior executive of the Thai Retailers Association said the M&As reshaped the landscape for the country's retail industry, helping to strengthen the country's professional retail management system.
The executive said the hardship that retailers faced during the crisis did not stem from their reckless investment policies, but rather unprecedented factors. But the crisis did teach them valuable lessons -- including balancing one's investments, paying close attention to the retail market in other countries, and most importantly, staying aware at all times, especially when it comes to the currency situation, when doing business.
Media: Fall of a mogul
Manager newspaper, founded by Sondhi Limthongkul, was one of many publications hit hard by the 1997 downturn.
Its editor-in-chief Suwitcha Piarad said that before the crisis, Thailand's economy was at its peak and every business area was thriving. Sondhi had set up a publishing house called Manager Group, which eventually listed on the SET to raise funds to establish more daily and weekly publications.
Mr Suwitcha said every media company besides Manager had played a major role in Thailand, including Thansetthakij, Prachachart and Krungthepturakij (Bangkok Biz News), before the economy hit the skids in 1997. After the crash, Manager was saddled with financial difficulties due to obligations incurred during its SET listing. It was forced to offer early retirement packages, layoff staff and drastically cut back expenses to stay afloat.
Mr Suwitcha said the valuable lesson for Manager that helped the company survive was the ability to look ahead, which Sondhi did by launching an online news portal www.manager.co.th.
Mr Suwitcha said Sondhi had foreseen the internet revolution in Thailand back in 2000, prompting him to make the online transition. Sondhi had a strong belief that internet speeds would increase dramatically, exporting the expansion of news content via the worldwide media industry.
Mr Suwitcha said the decision to bring Manager online was crucial to helping the company survive until this day.
"It took more than five years for the company to come back and operate smoothly, thanks to the vision that drove Manager to go online," he said. Many other media companies went under after 1997 because they were unable to see the necessity of adapting to the changing technological environment.
Mr Suwitcha said the challenges faced by the media industry post-1997 and those being faced today are significantly different. The downturn of the media industry in 2000 was purely economic in nature, while the problems facing media operators today are tied to changing consumers behaviour, the appearance of smartphones and the growth of social media platforms like Facebook, YouTube and Line.
People took a closer look at hundreds of cars being auctioned off after they were seized from finance companies shut down during the Asian financial crisis. JETJARAS NA RANONG
An official of Siam City Bank adjusted the exchange rate of the baht on Jan 8, 1998 when the baht plunged to about 50 baht to the US dollar. APICHIT JINAKUL