Is this 1997 all over again?

Over the past few months, the spread of Covid-19 has led to immense implementation of fiscal and monetary policies around the world, with the US leading an $11-trillion debt surge to combat the effects of the pandemic. Thailand, according to several institutions, is among countries that are most vulnerable to negative impacts of the outbreak. In fact, it is expected to be the most exposed nation in Southeast Asia. That said, some economists estimate that the country could exceed a 10% contraction for 2020. This is partly due to the country relying greatly on external sectors like tourism (20% of GDP in 2019). Several have been asking if this is going to be the 1997 Asian financial crisis again; many things are telling us: “No, it is not.”

Here are some reasons why. First, in 1997, when the IMF stepped in after the government announced the devaluation of the baht and “all hell broke loose”, one of the first mandates was to urge the government to immediately control its fiscal balance to a surplus of 1%. This undoubtedly limited the government’s ability to use fiscal stimulus as it should have been able to do. This time, however, the fiscal and monetary policy responses are cogent and timely. Thailand has managed to authorise a 1.9-trillion-baht stimulus package in response to the pandemic. The package varies from a direct cash handout to loan programmes. These policies so far have proved effective in alleviating the liquidity shortage and preventing households and businesses from going bankrupt.

Second, the banking system is strong. The loan-to-deposit ratio, which represents commercial banks’ liquidity, is at 92%. The ratio of non-performing loans (NPLs) to total loans is a mere 3% or so. In 1997, the former was around 140%; the latter reached 46% by 1999. Since that time, the Bank of Thailand has heavily weighted its interest towards financial stability and taken up many measures to prevent a repeat of such a crisis, ranging from obliging commercial banks to report their liquidity coverage ratio (LCR) to implementing micro- and macroprudential policies.

Third, the key difference between now and the 1997 crisis is that the latter was from a financial crisis led by a currency crisis, whereas this time the trigger is a health crisis. We are not saying that this time is going to be less severe than last time. In 1997, the group most affected by the crisis was the rich. This time, the effects are widespread. The draconian measures put in place by the government to contain the virus hurt a lot of businesses.

All in all, the outlook for the Thai economy remains gloomy. The large amount of fiscal stimulus raises concern about the growing public debt. According to the IMF, the ratio of public debt to GDP is expected to reach 48.1% by year-end. Furthermore, though the banking system remains strong and the ratio of NPLs to total loans is nowhere near the 1997 level, special mention loans (SMLs) are up 183% from January. This could become a problem in the coming months if they turn into NPLs and defaults. The situation seems manageable so far, but Thailand still needs to reopen the economy and tourism for everything to return to normal.