Asian markets had been running hard for years by the time of the crash in 1997. Morgan Stanley strategist Barton Biggs’s call to be “maximum bullish” on Asia in September 1993 had unleashed a stampede of foreign investment into the region. And when the US Federal Reserve raised rates in 1994, Asia paused for breath – and partied on.
Money pouring in fuelled corruption and greed, as governments, companies, banks and investors grew fat.
Banking shares dominated markets, but with little or no sharing of credit information, the quality of their loans was poor and their capital adequacy was thin.
Companies thought they were invincible: spurious acquisitions from connected parties at expensive prices were rife. Everybody bought property and most funded this wild spree with foreign debt – mainly in dollars and yen – and banks raked in the fees. But this was not just a banking crisis: ordinary people lost everything, and that is why the lessons from it have truly been learnt.
It had to stop, of course. All this consumption was starting to eat into both trade and fiscal balances. Inflation was mounting and pressure on currencies, most of which were pegged to the dollar, became intolerable. Companies knew that they had too much debt, but found it “too expensive to hedge”.
The Indian rupee was the first to crack, falling 20 per cent between August 1995 and February 1996 as inflation and fiscal deficits hit the newly internationalised currency.
The rest of Asia did not heed the warning, and when Thailand abandoned its attempt to save its distressed financial institutions on June 30, the ‘dam broke’.
Asia’s unhedged companies crumbled and retail investors lost everything, unemployment tripled and property development halted. In Indonesia, 88 banks shut between 1997 and 2000, leaving 80 per cent of the country’s banking assets in the hands of its reconstruction agency, IBRA.
The crisis toppled governments but, with the exception of Indonesia, this was mainly an economic calamity. However, most authorities responded with alacrity.
Bad loans were auctioned, book values written down and the clean banks then recapitalised, quickly allowing them to function again. Better regulation boosted capital and mandated information sharing.
Indonesian finance, once the worst in the region, is now one of the strongest. The country meets the EU fiscal prudence criteria better than most European countries, while the region’s banks are generally among the strongest in the world.
The catastrophic collapse led to wholesale reform and Asian regulators have taken charge. Foreign currency debt is now much less prevalent, with the exception of China, whose nascent stockmarkets were insulated from the worst of the crisis, and the Philippines, where family control of the whole economy persists.
Asian corporates have deleveraged entirely. South Korea, where average net corporate debt was more than 650 per cent, now has gearing below 20 per cent.
In Malaysia and South Korea, corporate reform only really began after the simultaneous collapse of oil and shipping in 2014, revealing scandals in both countries.
Last to change, China’s own anti-corruption campaign – in place since 2013 – is starting to pay sustainable dividends, as better governance is boosting cashflow. Property remains a regional obsession, but loan-to-value ratios barely exceed 50 per cent.
Cheap currencies and labour made exports to the West boom in the early 2000s, but since 2008 companies have found customers closer to home.
Although banks remain integral to regional indices, technology is bigger and other consumer stocks a close third. In the 2000s, growth in Asia depended on the fortunes of western brands: for Walmart, Nike, Apple and General Motors, read Alibaba, Anta, Samsung and Geely.
Clever commodities have replaced T-shirts and plastic flowers, but it is Asian customers dominating, not those from western nations.
Twenty years on and developed nations, with high debt and political turmoil, still label Asia as a ‘satellite’ for portfolio construction. Perhaps its time to reconsider.
Sally Macdonald is head of Asian equities at Marlborough Fund Managers
