Thailand at that time had been a major recipient of the huge inflow of foreign portfolio capital, culminating in the fourth quarter of 1993 which led to the Stock Exchange of Thailand (SET) index reaching an all-time high of 1753, which remains a full 1,000 points above current levels, despite the subsequent economic revival.
That level was reached on the very first day of trading in January 1994, and my firm, JF Thanakom Securities (JFT, now JP Morgan Securities), announced on that day that "the peak has been reached". It was a dramatic call and was based on firm fundamental analysis - notably the fact that there were clear trends indicating that Thai corporations were over-investing and that profitability as measured by return on assets was in decline. The signs were there also in valuation terms - some local securities firms had market capitalisation greater than Wall Street counterparts such as Merrill Lynch.
The fact that we had picked precisely the correct day to call the top was, of course, pure luck.
Nevertheless, the markets and the economy ebbed and flowed for the next two years until the second revelation came upon us at JFT - we came to believe that the Thai banking sector was not going to make it. I still have it with me - the research report in which we claimed the end was nigh because non-performing loan (NPL) figures for the banking sector were potentially "as high as 16 per cent". We were widely condemned by those who did not want to hear bad news (we were labelled "unpatriotic"), not least by the Thai Association of Bankers. Incredible really, given that it became apparent less than a year later that real NPL figures were closer to 50 per cent.
The securities sector was no healthier. By 1996, JFT had a trading market share ranking of around first or second out of 50-plus brokerage firms. Many customers traded using "margin loans", essentially only partly paying the trading amount, using shares of listed companies as collateral to cover the difference. At our peak, JFT had a margin loan exposure of around Bt1.5 billion. However, the total margin loan outstanding in the industry was an astonishing Bt120 billion. Who was carrying all this debt, and why? The answer was clear: most of the margin loans were not being given to support trading activities (which were at least liquid) but were used to finance longer-term loans, with shares as collateral. In many cases major shareowners of listed companies were using their own shares to borrow money to support their very own share prices. It was a proverbial house of cards.
At JFT we started asking our customers to unwind their positions from the middle of 1996. We alienated many customers who moved to other firms and I was hugely surprised (and relieved!) that some of our competitors were willing to refinance our customers late into the second quarter of 1997, not long before 58 finance and securities firms were closed, 56 of them permanently, and of course, not long before the event that marked the official beginning of the crisis, the baht flotation.
Others will be writing about all that took place after that event, both in Thailand and abroad. Essentially, however, I saw events at the time being dictated by the need to prioritise objectives. Above all else, there was a consensus that stability was required in order to prevent the baht from free-falling into a bottomless hole. Unless this could be achieved, nothing else could be achieved from a policy perspective. The need to win back confidence was behind the move towards the International Monetary Fund and the asset sales, which have proven to be controversial, and remain so even 10 years on. I even recall the social pressure at the time to prevent capitalists from "falling on soft mattresses" - and any policy that could be perceived to have allowed them an easy out (at the taxpayers' expense) would at the time not have been tolerated. Today, when we analyse and criticise policymakers at the time, it is best to remember the operating environment of 1997/1998. The effect on individual businesses and shareholders not withstanding, in macro terms, Thailand's foreign reserves had recovered by 1999, allowing interest rates to fall drastically and leading to a consumer boom in the first few years of the new millennium.
In looking back, especially at the behaviour leading up to the 1997 collapse, I can highlight specific trends and weaknesses. No crisis is ever exactly the same as another but the human tussle between fear and greed will be prevalent in any financial crisis, whether in the past or yet to come. Specifically, however;
1) Excess global liquidity, encouraged by years of gains and historically low global interest rates helped to fund "dumb lending" and "irrational exuberance" in terms of investing.
2) Policy decisions, especially the creation of the Bangkok International Banking Facility opened the gates to this "wall of money". This led to over-investment, and investments which were based on a currency mismatch between debt and revenues.
3) The false security of the fixed exchange rates encouraged excessive interest-rate arbitrage (a kind of reverse form of the current day "carry trade"). This lunch proved not to be free.
4) Culture of weak risk management, poor analytical processes and an excessive herd instinct. I was lucky that JFT was a joint venture with foreign partners. Their board culture and risk management discipline forced my managers and I to break away from the herd. This was not without pain; both in terms of short-term impact on customer relationships as well as socially, whereby we were emotionally and irrationally attacked by those who thought we were alarmists.
Managers across different industries took their eyes off cash flow and were consumed with the prospect of capital gains. You are seeing this in the property markets of Western economies today where yields are below financing costs but hopes of capital gains, supported by years of upward only movements, are propping up the market. It is a stock market saying that one should always sell shares in companies about to build glittering new headquarters. Nowhere was that more true than Thailand in 1996/1997. Look who was doing exactly that during that period: Siam Commercial Bank, Thai Farmers Bank, Bank of Ayudhaya, TISCO, Finance One, Thai Military Bank. Egos were huge, irrational optimism abounded. Interestingly, when Thaksin Shinawatra opened Thai Rak Thai's new headquarters on Phetchaburi road in 2005, with an internal sports complex, 200-man call centre etc, my instinct told me the same thing: it was all but over.
I cannot say whether lessons have been learnt in such a way that a crisis can be avoided in the future. However, it can be said that specific regulations in the banking and securities sector have been beefed up so that it is unlikely that precisely the same problems would arise again. However, I am concerned about other trends and tendencies that may lead to a crisis of a different nature.
Primarily, I am concerned about issues related to competitiveness. Thai firms remain largely domestic - our exports remain assembled products or soft commodities. This is almost a direct result of the post-1997 baht devaluation which made Thai exports suddenly hugely competitive on price. Our exports rose from 20 per cent of GDP to today's 70 per cent while the current outcry by exporters regarding the effect of baht strengthening is testimony to the fact that we have not in the meantime substantially improved our product quality. We also remain protected. Today, only two out of the top 20 companies listed in the SET are companies that can be said to face free competition. The need for such a wide-ranging Foreign Business Act also speaks to our sense of insecurity.
Our infrastructure is poor, especially regarding logistics and water management - the former critical for industrial efficiency, the latter crucial for curing rural poverty. Forget the statistics regarding the low usage of rail as a mode of transport and a high reliance upon imported fossil fuels, all we urban Thais have to do is drive out in our cars - either we will be stuck in traffic for hours or, if we venture out, whether it is on the main route North (Mitraparp), East (Motorway), South (Phetkasem) you will notice the appalling road conditions.
Our education system is failing our youths. After years of talking about education reform, I challenge any five people around a table to define the reforms required in the same way. We need to agree first on what kind of end result is required and move towards overhauling the system to make it happen. We remain stuck in process tinkering, rather than being specifically goal oriented. It reminds me of the craze over the ISO standardisation of industries. How people forget that all ISO accreditation tell you is that you have a process, and that the process is clearly documented. It says nothing about market demands for your goods or about profitability. Process is important, but so are goals.
We are venturing far away from 1997 but what I am saying really is that while we do not know how the next crisis will come, one thing of which I am certain is that it is possible to immunise yourself and the system to a large degree to potential crises, and the only way to do that is through enhanced efficiency and professionalism. Unfortunately, very little evidence of this is seen. Statistics clearly indicate that the industries that have improved their productivity the most are ones where foreign investors are most active - and yet here we are amending our laws so as to make it harder for foreign investors to participate in Thailand. We have contrived to make privatisation a dirty word and still no alternatives are proposed to help increase the level of efficiency at state enterprises. Combined total assets of state enterprises is over Bt2.5 trillion and their activities touch all of our daily lives. This is a real concern.
A little then on priorities of what we need to do 10 years on from our historic crisis: we need to take seriously the need to simply be a much more efficient user of our resources, whether it is people (through education, training), energy use (as we are more reliant upon imported fuels than all of our neighbours), land through irrigation and proper use, as well, of course, as our financial capital. There remain huge excess idle funds in the system generating poor returns. All of these will need to be the priorities of our next governments.
By Korn Chatikavanij, deputy secretary-general of the Democrat Party.