Learning from the Asian Currency Crisis—An Insider view from Thailand – by Surasak
Nananukool…….. Page 1
Learning from the Asian Currency Crisis – An
Insider View from Thailand
by Mr. Surasak Nananukool*
The Logics of the Asian Currency Crisis
If I were to explain the causes of the Asian currency crisis, I would narrow them down to three causes; namely, the bubble economy, the excessive overseas borrowing, and the rigid (fixed or non-flexible) exchange rate policy. These three mechanisms fed on to the mis-allocation of resources in Asia for over a time span of 10 years, and brought these countries to the brink of the crisis.
During this period, two other external factors also contributed to the on-set of the crisis. First, it was Japan who made available large sums of money to lend, at very low interest rate. But, should we blame Japan for providing cheap money to the world? I would not. Secondly, it was Presented at the Carnegie Mellon University, Graduate School of Industrial Administration, March 13,
1998
Learning from the Asian Currency Crisis—An Insider view from Thailand – by Surasak
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the US Dollar, which stayed undervalued during 1988 - mid1995, that gave the Asian countries, whose currencies were mostly tied to the dollars, an easy task of exporting their goods and services, which again provided a fault, but comforting feeling to these countries that they were very competitive in the world market. Since mid-1995, however, the value of the
*Mr. Surasak Nananukool is an adjunct professor at Thammasat University, Bangkok, Thailand. He is Chairman of the Master in Finance Program of Thammasat, and Director of the MBA Program of Sripratum University. He was former Deputy Finance Minister of Thailand and former Board Chairman, Communications Authority of Thailand. He graduated with a B.Sc. from the School of Industrial Management at Carnegie Mellon University in 1967, and a M.S. in Management Presented at the Carnegie Mellon University, Graduate School of Industrial Administration, March 13,
1998
Learning from the Asian Currency Crisis—An Insider view from Thailand – by Surasak
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from the Sloan School of Management at MIT in 1969.
dollar has appreciated greatly. Most Asian currencies were caught off guarded, and failed to dissociate themselves from the dollar. As a result, Asian currencies became over-valued, exports from these countries became less competitive, and these factors set up their currencies for speculative attacks. Can we blame the world currency market, and the G7’s central banks for
coming up with such values for the dollar? I would think not. I would think that it was the responsibility of other currencies that decided to be tied to the dollar, to make their own judgment as to when the dollar was over- or under-valued, and it was their responsibility to make adjustment to the degree of rigidity that their currencies were tied to the dollar. This is the main duty of a currency board of a country. If a currency board can not learn from the environment of the currency market, and make Presented at the Carnegie Mellon University, Graduate School of Industrial Administration, March 13,
1998
Learning from the Asian Currency Crisis—An Insider view from Thailand – by Surasak
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appropriate adjustments, then it should abdicate such function to the market mechanism, i.e., to float the currency.
The Economics of the Bubble economy
The bubble economy is a term used to
describe the process of gaining weight - as applied to the economy of a country. In management term, bubbles are inefficiencies. Bursting or reducing the bubbles is the mission of productivity.
A bubble is born when someone is able to sell something at a price well beyond the realm of making a reasonable profit. In Asia, and not exclusively, bubbles are abundance in land speculation, in the prices of housing,
condominiums, office spaces, real estate, and golf courses. Bubbles are not evident in the salary and benefits of faculty members in finance and management in Asia, as so apparent in the USA, Presented at the Carnegie Mellon University, Graduate School of Industrial Administration, March 13,
1998
Learning from the Asian Currency Crisis—An Insider view from Thailand – by Surasak
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but bubbles are full blown in the pay scale of graduates who became executives in finance and securities firms. They, in turn, use their excessive purchasing power to create bubbles in the prices of automobiles and houses. As a well known fact, Asian are paying for the highest prices of these two necessities of good life.
Financial institutions in Asia have their own bubbles. They can borrow money from
overseas at low interest rates, with an automatic protection from the rigid exchange rate policy of their governments, and lend at an unreasonable high rate in the domestic market.
Some types of industries with inherent high risk were able to borrow money only at a high interest rate in the domestic market, thereby were dictated by the market mechanism to limit their investments. But when the IPO markets were occasionally booming with funds from overseas, it was easy and attractive to seek equity funds at Presented at the Carnegie Mellon University, Graduate School of Industrial Administration, March 13,
1998
Learning from the Asian Currency Crisis—An Insider view from Thailand – by Surasak
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high share prices. As a result, several industries, such as telecommunications, energy sectors, and infrastructure projects were able to expand well beyond the means of the countries. Also, when the international money market were occasionally flooded with liquidity, the criteria for lending money would be slackened, and thus real estate companies were able to borrow overseas easily so as to invest in projects that were excessive.
The government also has its own bubbles. When the economy was booming due to
excessive investments, the government would be collecting windfall value-added taxes and corporate and personal income taxes.
Government infrastructure projects were
privatized to the private sectors by collecting high concession fees for the government, which is another form of taxes. With all these excessive tax income, and even with a balanced budget scheme in place, the Thai government was Presented at the Carnegie Mellon University, Graduate School of Industrial Administration, March 13,
1998
Learning from the Asian Currency Crisis—An Insider view from Thailand – by Surasak
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spending more than its should. The concession taxes would be adding to the cost of utilities such as the gas price, the oil price, the electricity price, and the telecommunication price.
The rule of the game in a bubble economy is to pass on the bubbles, at an unreasonable higher profit, to the next person or the next buyer at the right time. The game is played both at the national and international levels. The end game is arrived when the last buyer get caught with the largest bubble imaginable – when the inefficiency
is manifest, and the competitiveness is gone, then the bubble bursts. The game plan is not new, it is classic. In Thailand, there is a children game called “Morn Sorn Par”, and all over the world
know the game called “Musical Chairs”.
Can We Manage the Bubble economy?
Can we prevent inefficiency? Can we
prevent the bubble economy to form the next time Presented at the Carnegie Mellon University, Graduate School of Industrial Administration, March 13,
1998
Learning from the Asian Currency Crisis—An Insider view from Thailand – by Surasak
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around? Hardly. The process of gaining weight is very enjoyable, and the process of accumulating inefficiency is very rewarding to everyone involved – except the last one. Yes, the competition and the market mechanism will burst the bubbles eventually, but maybe too late to prevent a disaster.
Similarly, the process of borrowing money easily and/or gaining capital through IPO are very rewarding. And the subsequent processes of investing and buying capital goods are as enjoyable as going shopping. Can effective securities analysis for IPO purpose prevent these from recurring? I doubt it. When the capital markets are booming, all that investment bankers think about are fees and easy money.
One thing can stop the excessive
borrowing from abroad though, it is the “floating exchange rate” scheme. When an industrialist borrowed dollars from abroad, he had to sell Presented at the Carnegie Mellon University, Graduate School of Industrial Administration, March 13,
1998
Learning from the Asian Currency Crisis—An Insider view from Thailand – by Surasak
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dollars for baht at a domestic commercial bank at a fixed rate of exchange, the bank would, in turn, sell dollars for baht to the central bank, again at a fixed rate. When many people were borrowing dollars from abroad, the central bank would be flooded with dollars. International reserve of a country would increase by this borrowed dollars, and they called it “borrowed reserve”. Over the last ten years, and especially over the last five years, Thailand has an exponential growth in this “borrowed reserve”. The Bank of Thailand should have questioned the rational of this “borrowed reserve”, and it should have refused to exchange baht for dollars at the fixed rate, i.e. , it should have floated the exchange rate and thereby discouraged further borrowings since five years ago.
On hind-sight, in addition to the floatation of the baht, the financial authority should have done many things, such as, slow down borrowings, Presented at the Carnegie Mellon University, Graduate School of Industrial Administration, March 13,
1998
Learning from the Asian Currency Crisis—An Insider view from Thailand – by Surasak
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restructure all borrowings to longer terms, and these have to be done for both public and private sectors. Thailand’s problem with the investment-
saving gap had been known for a long time, the solution would be to slow down investment or slow down borrowing, and increase or extend the terms of savings.
A floatation of the baht would have slowed down investment and borrowing, but was not implemented by the Bank of Thailand.
On the Ministry of Finance - MOF’s side,
over the past 5 years, tax revenues were abundant due to the bubble economy, therefore the Thai Government was able to reduce its own borrowings greatly. It had stopped issuing new bonds, and continued to redeem old bonds to the extent that the banking sector was short of government bonds all the time. The MOF put a cap on Government and state enterprise
borrowing, and instructed all state enterprises to Presented at the Carnegie Mellon University, Graduate School of Industrial Administration, March 13,
1998