Were lessons ever learned from 1997 financial crisis?
When talking about the 1997 economic crisis, people often think of July 2, 1997, when the Bank of Thailand unpegged the baht and adopted a floating exchange rate. As a result, the baht was severely devalued, from Bt25/US dollar to Bt56/dollar by January 1998.
Thailand had a reputation as the world’s fastest-growing country between 1987 and 1996, with an average of 9.5 per cent growth per annum. In that same decade , investment by financial institutions, especially financing companies, underestimated their proficiency and potential. Although their portfolios were focused on lending on investments, many loans inevitably involved speculative investment like real estate, and individual consumption like car leasing and stocks. The value of these loans increased 17 times and accounted for 54 per cent of total loans in 1996.
There was a trendy towards hasty lending in the real estate and stock sectors. These were growing on building prices rather than on creating productivity. Investors crowded in, mainly buying property for short-term speculation, not as long-term investments, causing huge artificial demand and creating a bubble economy.
Housing, land and share prices were spun much higher without a good foundation to support their actual value. When investors were faced with the economic downturn, their prices fell sharply. So borrowing money to invest in such assets led to severe damage and enormous capital losses. The debts could not be repaid financial institutions were crippled.
This reckless lending was not thoroughly analysed in accordance with the code of credit ethics. Finance companies competed over profitable loan opportunities.
Most finance companies failed to heed their own plans for dealing with the inevitable impact of lending too much, whether reserving for non-performing loans, reducing capital to cope with financial damage or increasing capital to strengthen their financial liquidity.
Amid low interest rates on foreign loans and relatively constant exchange rates (pegged with the global basket of currencies) at that time, investors were absolutely confident in borrowing from abroad, believing they were facing only low risk.
The baht crisis was significantly prompted by the financial liberalisation to conform to globalisation. A flexible exchange rate really is preferable to a constant exchange rate because it allows better control over huge loans from overseas. But the floating exchange rate was adopted too late after the bubble economy collapsed. This impacted on the baht, causing more unprecedented depreciation and spreading the detrimental effect across Asia.
Without a sufficient economic basis, efforts to bolster Thailand’s high economic growth rate or that of any economic sector were bound to be unprofitable and ultimately ruinous, as demonstrated by the 1997 economic crisis.
Sutipunt Bongsununt
