DIY Investor Magazine
| August 2017
30
THE ASIAN FINANCIAL CRISIS 20 YEARS ON
By Michael Kerley
Henderson Far East Income Ltd
In the four years between 1993 and 1996 the tiger
economies of Asia led the world in terms of gross
domestic product (GDP) growth and stock market
returns as foreign and local investors piled in and
embraced the opportunity. But trouble was brewing and
Thailand was the canary in the coal mine. Strong growth
was being funded by ever increasing levels of debt
and with offshore interest rates far more attractive than
those available at home, US dollars became the funding
currency of choice.
While currencies remained pegged to the US dollar
risks were minimal but as a growing trade and current
account deficit and rising inflation led to increasing
overvaluation of the Thai Baht, speculation grew and
short-term money started to move out of the Thai
currency.
In July 1997, after a futile attempt to stem the outflow,
the Thai central bank removed the peg triggering an
immediate 25% fall in the currency - by the end of
the year it had lost half of its value. The impact on the
economy was devastating. Interest rates initially spiked
making dollar debt significantly more expensive. Loans
started defaulting, peaking at almost 50% of total
loans in 1999. The figures reflect the severity of the
downturn: GDP took five years to return to pre-crisis
levels, consumption – the use of good and services by
households - was four years, and private sector loan
growth only returned to positive territory in 2002.
THE ONLY ECONOMY THAT IS SHOWING A WORRYING TREND
IS CHINA
Although Thailand was the trigger, the ticking time bomb
of unhedged foreign currency debt and a prolonged
period of over-exuberance prevailed across all of South
East Asia.
The Philippines and Malaysia were also significantly
impacted but the most significant downturn occurred in
Indonesia, which, although running a current account
deficit only half the size of Thailand, saw its currency go
from 2000 rupiah to the US dollar to 16000, and bank
loan books fill up with defaulting loans.
Contagion and a severe lack of confidence dented the
whole region and although Hong Kong managed to hold
on to its peg to the US dollar, a prolonged period of high
interest rates and slower growth resulted in a 40% fall
in residential property prices and a deflationary period
that took many years to recover from. Even South Korea,
which was the 11th largest global economy at the time,
had to call in the International Monetary Fund (IMF) as
interest rates ballooned and the currency weakened.
The recovery, which on average took more than 5 years,
was supervised by stringent IMF requirements and has
put Asian economies on a much firmer footing. With
