Asia Recalls Crisis that Brought Region to its Knees

When Thailand floated its currency on July 2, 1997, it meant to ease the immediate pressure on its faltering economy.

Instead, it set off a chain reaction that destroyed many of the gains of Asia’s “economic miracle” years as currencies, stocks, commodities and property prices went into freefall and governments scrambled to limit the damage.

A decade on, most analysts believe the seismic shock changed the region’s economy for the good and that a repeat is unlikely – most markets are back up to 1997 levels, the underlying fundamentals are in better shape and lessons have been learned in terms of better international cooperation.

But memories of the bad times linger.

“It was a very traumatic time. Our (economy contracted) by almost eight percent in 1998 after a very extended period of robust expansion,” said Lee Heng Guie, chief economist at CIMB Investment Bank in Kuala Lumpur.

“It resulted in a significant loss of wealth and capital flight … There were a lot of corporate problems … high (bad debts), rising unemployment, deflation and investments which collapsed,” Lee said.

For years, Thailand and its regional peers – the Asian Tiger economies – had built their growth on exports to the United States and Europe. Flush with cash, everything looked possible.

Fortunes were made as flamboyant businessmen became celebrities overnight, hawking their wares and rags to riches stories. The Bangkok stock market was a hotbed of speculation and manipulation.

“There was too much investment, too much consumption. It was excessive in every way,” Thai Finance Minister Chalongphob Sussangkarn said.

Then global demand slowed and China, with a massive 50-percent devaluation of its currency in 1994, emerged as a major competitor for the export markets in its own drive for progress.

Pressure built. Through 1995 and 1996, Thailand’s export growth slowed and its balance of payments deteriorated, sparking warnings the baht was overvalued at 25 to the US dollar and should be allowed to weaken.

Reluctant or unable to work out any other policy, the Thai government dug its heels in, raising interest rates and spending billions of dollars trying to maintain the status quo.

Finally, in the early hours of July 2, with the reserves spent, the central bank announced it would no longer support the baht, opening the floodgates to speculators making a one-way bet the currency would fall sharply.

The baht lost 18 percent overnight, tumbling to 56 to the dollar by early 1998. The stock market plunged 75 percent over the balance of the year.

The impact on the region was immediate because many countries – Indonesia, Malaysia, the Philippines and South Korea – had followed the same policy on growth and ran into similar problems.

Humiliation was heaped on disaster when they had to accept help from the International Monetary Fund (IMF) along with its free-market philosophy and an uncomfortable opening up to foreign businesses.

South Korea felt the pain worst. Its state-directed economy was prised open under the terms of an IMF rescue package that included a record $57 billion.

Overseas investors were able to buy distressed assets cheaply, a fact that still rankles in a strongly nationalist country.

Nevertheless, many feel the outcome was positive even if the immediate pain was great.

“It was bitter medicine that South Korea had to swallow. It created a lot of pain … but I think the upside was that the economy, especially the financial system, has become more stable,” said Tariq Hussain, a business consultant and writer on South Korea’s economy.

Indonesia was both traumatized and transformed, with then-president Suharto forced from office after 32 years amid massive protests against heavy-handed rule and soaring prices.

“Suharto’s fall brought about a democratic political system – from president down to the district chief, all must be elected directly by the people now, an important power shift,” said Fauzi Ikhsan, an economist at Standard Chartered Bank.

IMF-mandated reforms also saw vast state monopolies dismantled and the role of national, favored conglomerates reduced, Ikhsan said.

While Japan and China were not immediately at risk as the crisis unfolded, they were not immune either.

Japan was already mired in its own crisis caused by the bursting of the asset bubble in the early 1990s, ushering in a decade of economic stagnation, deflation and bad loans that crippled the country’s banks.

“Even without Japan’s financial and economic difficulties, the Southeast Asian crisis and the Korean crisis would have happened,” said Masahiro Kawai, a prominent economist and former deputy vice finance minister.

For China, now the world’s undisputed factory floor, the crisis made the leadership both cautious and determined to press on with reforms.

“China became very prudent in opening its financial market. The defensive mentality was on the rise. That prudent attitude is still in play today,” said Andy Xie, an independent economist based in Shanghai.

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