What I learned from the 1997 Asian Financial Crisis

Lessons I learned from the 1997 Asian Financial Crisis
What happened in the 1997 Asian Financial Crisis
Thailand was the epicenter of the 1997 Asian Financial Crisis (AFC)
I had moved to Thailand in 1992, become a bank analyst in 1993 so I lived through the boom of that time
Not only was I working as an analyst in an investment bank
I was also working on my “side hustle” of setting up our CoffeeWORKS coffee roasting factory in Bangkok with my best friend, Dale Lee
20 years ago, Dale and Andrew in the CoffeeWORKS factory
The 1997 Asian Financial Crisis was triply painful for me:
I lost my job at Peregrine when the company went bust,
We nearly lost our coffee business, and
I lost my older sister in 1998
Definitely one of the lowest periods of my life
1985 to 1995 was ten years of unstoppable growth
On 2 July 1997 the Thai government admitted that it ran out of reserves and that the baht would flow freely from its Bt25/US$ level
By the end of 1997 it was at Bt56.7/US$
In 1998 the Thai economy collapsed 11%
By 2001 the Stock Exchange of Thailand had fallen 88% to 211 (from its 1,789 peak in Jan 1993)
Non-performing loans of the banking sector rose to a high of 55%
Lessons from the 1997 Asian Financial Crisis
What follows are my random musings on what I learned from that experience
The downturn in the economy can last longer than you think
Accept this reality first
Working harder may not bring in any additional revenue
People just don't have the money to spend
Not understanding this can lead to unproductive stress for you and your team
The repayment of debt by overleveraged businesses and individuals takes years, decades
The tax payer ultimately pays:
In a debt driven crisis such as the 1997 AFC, indebted individuals and businesses inevitably default;
this shifts the problem to the banks, which start going bust
The tax payer ultimately pays:
Governments try to get the private sector to bear this, but this is usually not going to happen
(Ask yourself, why did the US Gov’t double its total debt to US$20bn after the 2008 financial crisis)
Almost all financial crises start with the property sector, its boom and eventual bust
Why?
Because property is the ultimate collateral for loans
As a side note, continually rising property prices is a key element as to how China can, in the mid-term, avoid a financial crisis
Despite limits on deposit guarantees, political pressure usually demands that the government repays depositors of these bust banks or the whole social system collapses
Governments step in to deal with these bad debts (either through direct purchase or other methods).
Spending and losses by the government mount and then eventually the money is recovered through tax payers (either directly, through slower economic growth, or through extremely low deposit rates for decades)
Here is some examples of ways that bad debts to be worked out:
The government sets up a “bad bank” and moves bad assets of the banks there, allowing the banks to get on with their business of lending
This is usually done only with government-owned banks and was done it Thailand with the state-owned banks, such as Krung Thai Bank
Here are some examples of ways that bad debts to be worked out:
Government encouragement of foreign banks to come and buy struggling banks
In Thailand two examples were DBS’ purchase of Thai Danu Bank and Standard Chartered Bank’s (SCB) purchase of Nakornthon Bank Assist the private banks to offload their bad debts
Here is some examples of ways that bad debts to be worked out:
In the case of DBS’ purchase of TDB the government did not take responsibility for the NPLs since TDB did not yet collapse,
For SCB’s acquisition of NTB the government gave some guarantees on the NPLs since NTB had already done to the government for help
The tax payer pays through these general methods:
Direct taxes,
Allowing the banks to have exceptionally low deposits rates for a long time to recover their profits,
Charging surviving banks higher insurance fees (which the banks pass on to the tax payer bundled with higher lending rates)
In your own business, the ONLY thing you can immediately control are costs
Cut them deeper than you thought possible
Then cut them again!

The accounting office at CoffeeWORKS were we bunked
Trust is the foundation of business
Companies trust each other that they will pay their bills,
Banks trust companies that they will repay their borrowings
Equity investors trust boards and management that they will do their best job to make the most out of the money they invest
That trust is truly tested when things go bad



Continue reading at Andrew Stotz (A. Stotz Investment Research via YouTube) →