The Asian Financial Crisis (AFC), Part One. Thailand

It has been 20 years since the Asian Financial Crisis (AFC), uniformly reckoned as having started with the devaluation of the Thai baht on July 2, 1997. The period immediately following this date was turbulent to Asian currencies and economies, the Philippines included.  It was most stressful to central bankers, and likewise to businessmen and, of course, to governments.

In the relative safety of hindsight, but never completely safe from a repetition, I suggest a review of the past, to try to understand what happened and be cautioned, and be instructed.

The common story is that Thailand had overborrowed US dollars short term and, through its financial system, relent to domestic companies long term in baht. There was a double
mismatch, in maturities and in currencies, so that when the baht was devalued, the borrowers were squeezed to pay more baht for dollar obligations, causing tremendous losses and bankruptcies. Those who suffered were banks and finance companies (there was a proliferation). And, well, most everybody else.

Let’s recall what was happening in the 1980s. The Asian economies of Singapore, Hong Kong, Korea and Taiwan were described as the “tiger economies” for their impressive growth rates. But Thailand, Indonesia and Malaysia were also in that pack.

The average GDP growth rate from 1981 to 1990 for selected countries shows:

Korea           12.7 percent

Taiwan           8.0 percent

Thailand          7.9 percent

Hong Kong        6.9 percent

Singapore         6.5 percent

Indonesia          6.0 percent

Malaysia          5.2 percent

Philippines         1.0 percent

The Philippines could only aspire with envy to be a tiger, too. Thailand’s GDP growth was about 8 percent on average in the years before the AFC. There was a lot of money flowing into the Thai economy, evident in the rapid expansion of property development, manufacturing and, in parallel, employment. Finance companies, alongside banks, thrived as lenders.

GDP had hit 11.2 percent in 1990, but then dropped to 8.5 percent in 1991 and then to 8.1 percent in 1992. Should these figures have raised red flags? Yet, GDP recovered to 8.3 percent in 1993, 8.9 percent in 1994, then down to 6.9 percent in 1995. Was there any cause to worry?

In the meantime, the government reported a budget deficit for the first time in so many years. There was a severe drop in exports caused in part by the appreciation of the US dollar to which the Baht was pegged at 25 baht to $1. The macroeconomic indicators, indeed, looked good for Thailand with such GDP growth performance. Exports growth was robust, averaging 18.8 percent from 1990 to 1995, hitting 24.7 percent in 1995. Thailand’s budget was recording surpluses, and the country was being recognized as one of the fastest-growing economies, in league with the so-called high-performing Asian (export) economies—Japan, Korea, Hong Kong, Singapore, Taiwan, China, Malaysia—and, of course, Thailand.

Consider this comparison: in 1994 exports of the Philippines totaled a mere $13,434 million, vs. $44,478 million for Thailand; $40,223 million for Indonesia; $56,906 million for Malaysia; $93,676 million for Korea; and $98,689 for Singapore.  In other words, kulelat ang Pilipinas.

But there were quick developments in Thailand in 1996. The country’s exports actually took a nosedive—that year exports grew just 0.1 percent vs. 22.2 percent -24.5 percent in 1994 and 1995.  In that year, the country’s foreign debt had bloated to $80 billion, its current account deficit had also widened, and so the pressure to service external debt had grown to be a heavy imminent burden.

There was a lot of foreign money flowing into Thailand, which was experiencing a government-encouraged spree in local investments, a major part in the real-estate and property-development sector. But, alas, there was overlending and overinvestment in, it was soon discovered, unprofitable ventures. There soon developed an oversupply of residential and office space.

Not that these developments were not noticed as warning signals. Although Thailand’s GDP growth looked okay, GDP figures never tell the full true story we want to know. The Bangkok Bank of Commerce, Thailand’s fifth-largest bank, was discovered in May 1996 to have almost half of its assets in bad loans (78 billion Thai baht or $3 billion), loaned out to the bank president’s cronies. The government took over the bank.  In February 1997 Finance One, a prominent financial institution, fell into trouble and was declared bankrupt.  These two were evidences of a Thai property market already gone sour—very sour.

In that same year 1996 it was determined by regulators that 14 percent of total finance company loans totaling around Thai baht 155 billion were nonperforming.

Meantime, currency speculators started to attack the baht. The Bank of Thailand fought back, but it had reportedly only $37.2 billion in reserves in December 1996 as against $10 billion, which a group of speculators had reportedly accumulated to “bet” against the baht.  (See, Lawrence Au, “Asia’s Financial Industry 1986-2016”, Youcaxton Publications, 2016. p.69)

Thailand had a heavy external debt in US dollars, and was vulnerable to have its reserves depleted if it decided to stubbornly defend the Baht-USD currency peg.

On June 30, 1997, the Thai prime minister boldly (and bravely?) announced that the baht would not be devalued.  Two days later, however, on July 2, 1997, the Bank of Thailand devalues the baht, which promptly depreciates by 18 percent, to 30 baht to $1.

Ayun, naloko na!


The opinions expressed here are the views of the writer and do not necessarily reflect the views and opinions of Finex.

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He is the current Secretary-General of (ACRAA) Association of Credit Rating Agencies in Asia. FINEX past president.


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