EARLY CALL HERALDS FINANCIAL MELTDOWN
Devaluation of the baht in 1997 sparked a crisis that ravaged the Thai economy and sent shockwaves as far as Brazil, writes Oranan Paweewun
Before dawn on July 2, 1997, about 70 top Thai and foreign bankers were awakened by the Bank of Thailand’s phone calls for an urgent meeting at 6am. All were curious to know what was going on but some thought that the months-long speculation about the baht’s devaluation might come true.
After a one-hour meeting, the central bank shocked people by announcing that it had abandoned the 13-year-old peg to a basket of currencies to adopt a “managed float regime” that allowed market forces to largely determine the baht’s value, even though Chavalit Yongchaiyudh, the prime minister, had insisted only the previous day that the baht would not be floated.
The baht’s value sank 20% on the first day of the new regime from 25 to the dollar, and it hit an all-time low of 56 baht to the dollar in January 1998.
The baht’s potential devaluation had loomed large since late 1996 when rumours circulated in the market due to Thailand’s persistent and large current account deficit since 1988, the deterioration of financial institutions’ and banks’ balance sheets, massive withdrawals of offshore capital, and depleted foreign reserves.
From 1991-95, Thailand attracted floods of capital inflows, many resulting from Mexico’s financial crisis and Japan’s stagnation, and most were bank credits to fund an investment boom. Then policymakers liberalised Thailand’s financial market through the launch of the Bangkok International Banking Facility and a capital account to facilitate more inflows without a strengthening of the institutional and regulatory framework.
The ratio of capital inflows to gross domestic product escalated to 10.5% in 1996 from 8.5% in 1992, while the current account deficit widened substantially to $14.7 billion in 1996 from $6.3 billion in 1992.
The liberalisation led to a lending boom. Onethird of loans were put in non-productive real estate, while Thai companies ran up foreign-denominated debt to take advantage of far lower interest rates abroad.
A mismatch in loan maturity built up. Moreover, financial institutions also provided loans without enough prudent practices.
These factors made Thailand vulnerable to a reversal of capital flows. Speculators then bet that the country would have to devalue the baht, prompting heavy speculative attacks. The closure of more than a dozen cash-strapped financial institutions also put greater pressure on the currency.
The baht was attacked by speculators several times in early 1997. It came under heavy pressure in mid-May when the Bank of Thailand reportedly spent at least 100 billion baht to counter speculation.
The Bangkok Post quoted a local trader on May 10, 1997, as saying that the central bank had intervened in the Singapore foreign exchange market to defend the baht from speculators and a sell-off by investors.
The central bank l ater reportedly used about $28 billion of its international reserves for forward market interventions to defend the baht’s value, leaving only $2.85 billion in net foreign reserves — a level far below its one-year foreign-denominated liabilities — on July 2, 1997.
Just six days after Thanong Bidaya, former president of the Thai Military Bank, later renamed TMB Bank, was sworn in as the new finance minister on June 21, 1997, he shut down 16 troubled finance companies. They included Finance One Plc, the country’s largest financial house, due to a liquidity squeeze and high bad loans.
Even though the government had appealed to the public to refrain from pulling deposits out of banks and finance companies that remained open, the run accelerated. Moreover, July 2’s devaluation significantly raised Thai companies’ burden of foreign-denominated debt, which resulted in many defaults.
At the time, two quotes summed up the severity of the financial meltdown. “I don’t have it, I’m not paying and I’m not running,” said Nakornthai Strip Mill founder Sawasdi Horrungruang after losing his business empire worth tens of billions of baht. Bangkok Bank chairman Chatri Sophonpanich described himself as a “former billionaire”.
With the run on deposits, collapse of the property market and high bad loans, another 42 companies were suspended from operations in August 1997. In the same month, Thailand sought an International Monetary Fund-led back-up facility of $17.2 billion.
Financial institutions’ non-performing loans peaked at 47% in 1998, while unemployment rose as many companies closed down.
The crisis spread to other Asean countries including Malaysia, the Philippines and Indonesia, with the contagion even extending its lengthy reach to South Korea, Hong Kong, Russia and Brazil.