Thailand – now stereotypically known for backpacking travellers and military coups – found itself centre stage in the world of finance 20 years ago as the birthplace of what became known as the Asian financial crisis.
In July 1997 the country announced it would de-peg the baht from the US dollar, allowing it to float freely, since the government had almost run out of the foreign exchange reserves it was using to prop up its currency. This decision led to a severe and sudden devaluation of the baht, which rippled into equity losses across the world. Currency weakness then spread to other East Asian nations, including Malaysia, South Korea and Indonesia.
Together the group was known as the ‘Asian tigers’, having previously witnessed significant economic growth at an annual rate of 8 per cent. This had led to a significant increase in foreign direct investment, causing currency valuations to rise.
Governments had allowed their current account deficits to grow, with South Korea and Thailand posting deficits of 24 and 14 per cent respectively by 1996, according to the International Monetary Fund (IMF). Corporates and banks used strong currencies to borrow foreign debt at lower interest rates, and the subsequent collapse of those currencies made foreign debt even harder to service.
Highly indebted domestic companies and banks were hit hard as financial institutions went to the brink of ruin. A resulting loss of confidence saw a reversal in capital flows, with the region suffering $11bn (£8.4bn) in redemptions in the aftermath of the crisis compared with $110bn of inflows in 1996.
Schroders fund manager Matthew Dobbs explains: “These countries had become very reliant on foreign debt borrowed over short time frames and mostly denominated in dollars. As soon as the music stopped, the money that had been pouring in simply stopped and reversed – credit was withdrawn and currencies collapsed.”
Several IMF bailouts and a global financial crisis later, views on the region are much more positive. But the question that lingers beyond the 20th anniversary is can it happen again?
Current account deficits are now surpluses, and debt-to-currency reserve ratios are down to 29 per cent for South Korea and 32 per cent for Thailand, compared with 286 and 142 per cent respectively at the time of the crisis. Liontrust Asia Income fund manager Carolyn Chan says the region is now far less reliant on foreign capital, and even its over-reliance on the US is changing.
Others suggest there is little room for complacency. No two crises are the same, notes Capital Economics’ senior Asia economist Gareth Leather. Private sector debt-to-GDP levels are vulnerable in several Asian countries, including China, he says.
It is China where most are looking towards for signs of a future crisis. The country’s somewhat protectionist nature shielded it in 1997. The former tigers have remained somewhat hesitant on foreign debt, bearing the scars of 20 years ago, but China has seen its debt-to-GDP ratio rise to 280 per cent, though much of this borrowing is domestic.
Either way, Jupiter Asian Income fund manager Jason Pidcock says such a debt level is unsustainable. “Did China escape the crisis or simply defer it? Every economy eventually has to go through a recession at some stage, and a period of high growth cannot simply transition to a period of low growth,” he says.
“A significant difference between the crisis 20 years ago and a potential one now, is that it would stem from economically very different-sized regions. A downturn of a major player like China would have vast implications for Asia and the rest of the world.”
Taha Lokhandwala is deputy editor at Investment Adviser
