Readers who follow my bi-weekly economic column will have no doubt that the tom yum kung I am referring to is not a traditional Thai soup dish but the financial crisis of 1997.
The Encyclopedia Britannica lists this Asian financial crisis as one of the world's top five financial crises, in the same league as the 1929-39 Great Depression and the Opec oil price shock of 1973.
Before I draw key similarities between economic conditions prior to the 1997 crisis and today's economic conditions to signal that a tom yum kung-like risk is threatening the economy, let me briefly describe the economic conditions of June 2023.
I have deep concerns in four areas of the economy. The most disturbing one is a severe liquidity shortage. Excess liquidity, an indicator of money supply surplus or shortage, is negative 829 billion baht, a shortage of almost 100 billion baht more compared to May. The main culprit is, obviously, the US$2.6 billion capital outflow in June. The drying up of liquidity caused the money supply to grow merely 1.8% which is not enough to support economic recovery.
The second area of concern is the production sector. June's manufacturing production index declined 5.4% compared to same period last year. This is a deeper decline compared to a decline of 3.1% in May.
The third point of concern is the receding imports of raw materials. Raw material imports (in volume) plunged 8.5% in June, following five consecutive months of contractions. A decline in the import of production inputs foretells a grim outlook for manufacturing activities in coming months.
I am saving the best for last. The fourth area of concern is the export of goods. The export of goods is crucial to the economy as it accounts for 60% of GDP. The export of goods index (in volume) contracted 5.7% in June -- that's nine consecutive months of contractions.
A higher level of money shortage, less production activity, fewer raw material imports, and declining exports of goods are not signs of a healthy economy. I have nothing but best wishes for the incoming government to lead the economy out of its current hardship.
If I can make one suggestion to the new economic team, it is to look at my first area of concern -- liquidity. Without rain, no plants can grow. Without money, no economy can grow. These are facts of life.
Now to our main story on the likelihood of a tom yum kung crisis. In a nutshell, the 1997 crisis was about a liquidity shortage. Most people, particularly non-economists, mistakenly believed the root cause of the crisis came from currency speculation.
At that time, the baht was pegged to a group of major currencies, known as a basket of currencies.
A fixed exchange rate regime does not allow the currency to adjust its value to market demand and supply. So, the regime is susceptible to speculation.
If a non-market exchange rate regime invites currency speculation, 19 countries and territories still adopting a fixed exchange rate regime must be in serious jeopardy. These include Hong Kong SAR, Saudi Arabia, Bulgaria (home country of the IMF's current managing director), and Denmark.
The Danish krone is pegged to the euro at a rate of 7.46 kroner to 1 euro. Why do these currencies escape the evil hands of speculators? The answer is because it is not the exchange regime that is the problem, but economic conditions behind the regime.
Three facts behind the baht attack in 1997:
Liquidity shortage. Thailand had high GDP growth, more than 10% annually, for a decade before the crisis. So, the economy could not generate money fast enough to support GDP growth.
Liquidity shortage, indicated by negative excess liquidity, rose from a harmless level of less than 60 billion baht in Q1/1992 to a crisis level of 1.2 trillion baht in Q1/1996. By June of 1997, a few days before the fixed exchange rate regime had to be abolished, the Thai liquidity shortage hit 1.6 trillion baht.
Reliance on foreign funding. Any country facing an internal liquidity shortage has two choices to fill the liquidity gap -- borrowing from abroad or having the central bank print money. Thailand opted for the former. Thailand's external debt tripled from $42 billion in 1992 to $113 billion in 1996. Unfortunately, our foreign reserves could only cover one-third of the borrowed amount. Speculators saw this as a sweet opportunity to make a killing.
Rising bad debt. This was the final nail in the coffin. Real estate loans were going sour. The Bank of Thailand (BOT) closed some finance companies, which caused panic.
Foreign creditors recalled loans from financial institutions before loans became defaults. It was time for the kill. I did not say that, but George Soros might have said that.
That happened over 25 years ago. Thailand has changed a lot since then. (Really?) For a start, we have followed the flexible exchange rate regime since July 1997. But that is only on the books, the BOT still constantly intervenes in the foreign exchange market as if the baht is pegged to something.
The BOT has already spent $37 billion defending the baht over the past two and a half years. If not, we could have seen an exchange rate of 45 baht to the dollar by now. In the first two weeks of July alone, the BOT spent another $1.1 billion to keep the currency stable around 34 baht to the dollar. But judging from yesterday's rate of 35 baht to the dollar, the BOT is not winning this time.
Owing to limited space in the article, I have to quickly wrap up with three of today's similarities with the tom yum kung events.
First similarity: liquidity shortage (again). The first month that Thailand experienced negative excess liquidity in recent times was August 2021, with -94.2 billion baht. The shortage ballooned to -829.2 billion in June 2023. The situation is likely to get worse with ongoing capital outflow.
Second similarity: reliance on foreign funding (even more). If Thailand had not been heavily borrowing from abroad, the domestic money market would have experienced a liquidity shortage at a crisis level quite a while ago.
Thailand's external debt doubled from $104.3 billion in 2011 to $203.1 billion in Q1/2023. Out of the total amount, $81.6 billion is of a short-term nature.
Third similarity: rising bad debt (much worse than 1997). The culprit was real estate debt in 1997 but it is household debt in 2023. Household debt (16 trillion baht) accounts for 53% of total private credit (30 trillion baht). What percentage of household debt has to turn bad before foreign creditors start to recall dollar loans from Thai borrowers as in 1996-7?
To my critics, today's international reserves may be able to cover 108% of total external debt which is different from 1997.
But the 2023 (or 2024) crisis will not arise from a lack of dollars in foreign reserves but from a lack of baht in the Thai money market. Please read again my comments about the domestic liquidity shortage situation.
Is anybody else smelling tom yum kung cooking in the kitchen like me?