THE COLLAPSE OF THE THAI ECONOMY IN 1997

For persons understanding the basics about the laws for National Economy it is not hard to recognize why the national as well as the business and private economic systems burst here in the summer of 1997. I am often asked why that could happen and I think I should try to fill you in. It can be embarrassing now and then for me to understand that most persons know many of the basic laws about physics but completely fail to comprehend that economies, regardless of nature, have strong laws as well and when violated, you can predict the outcome with 100% accuracy.

THE VALUES GOING DOWN SOUTH

In Thailand the major part of the financial development since the end of the Second World War has been one straight line up toward the sky. Belonging to the Tiger economies every month and year presented new progress. In this part of the world LAND is the key to everything. Without land you are next to nothing. If you have land, you are rich and can borrow monies. So by putting up your land as security against loans was not a problem, not for businesses and not for private persons.

In the Western financial system, we believe in strong control. Anybody needing a loan will have to present the financial source (bank or mortgage house) some sort of very reliable budget. The more funds to be borrowed the better the budgets. In Thailand such words as future, budget and planning are not known and not accepted. It means commitment, and here in Thailand nobody makes any commitment. Not in the Government, who at that time had no clue about how to implement and control the national financial instruments. They still do not poses that knowhow and they do not want to.

So in those happy days everybody borrowed funds. In the business for new investments in projects, for which no financial plans were produced and the private persons were riding on the “Happy Wave “of increased consumer power, new and larger cars, mobile phones, larger apartments and a weekend ditto or a weekend house in the country side. All paid for by loans without proper statements or evaluations of the ability to pay back these loans.

All business, regardless of size, would expand beyond limits and without consideration to the possible pitfalls. It is normally called the borrowers gold rush. The banks were happy to provide the loans. You deposit your land, show the credit officer in charge some figures on a piece of paper, sometimes most likely blessed by the holy spirit, because the banks would not understand how to read a business plan and as a consequence has no idea of how to put question marks to the presented plans. And as a tradition in this part of the world you show your appreciation to the man, who approves your loan. I do not mention the word bribery; here it’s called tea money and who would not accept 5% cool cash in return for an approval on a loan application where the banks only looked at, how much land is now deposited against this loan?

For many businesses it worked in this way. The company would get a large loan out of which only 50% would get into the company’s bank account. The remaining balance would be used for purchases of apartments in USA, in Europe or in Australia. Some funds were used for a new and larger house for the mistress and she also got a new sports car plus jewelries. The kids, who were mostly abroad in the States for a Masters, would get a new car as well and a heavy increase in the pocket monies.

So the banks could not do their proper homework, which is to check if the borrower could meet the lending targets set by the banks. The technical term is called due diligence. We call it lenders gold rush here in the Kingdom.

The most important rule that borrowed funds must produce results high enough to meet the repayments including costs, was totally ignored.

A BUBBLE ECONOMY

When you add the fact that the productivity per head here is 1/5 of Malaysia and 1/100 of Singapore and Japan plus the normal attitude of the resistance of working instead of having fun it goes without much more arguments that heavy borrowings based on no pay back commitments becomes a very dangerous gamble.

Finally the monitoring system was not geared at that time to discover the downfalls and a result the economy ran at such a speed that any kind of control seemed next to the impossible, even if just some basic and solid methods would have revealed that this adventure could not last.

One day the Kingdom got into the well known situation. It could not honor foreign loans (mainly from Japan) the local currency was not worth the value by which it was traded and fixed and the banks were completely non liquid because the borrowers did not, or could not pay back their loans.

The bubble bust. Bang. One morning the Thais woke up to a new world. The Government declared the bath floating and it lost 50% in value within a very short time, but many highly placed governmental officers, who had known about this a few for some months (warned by the IMF and the World Bank) became multi millionaires almost overnight. The foreign experts were invited to give advice. Some were invited e.g. top-bankers from Holland and Sweden to explain the helpless government about their methods of handling these kinds of problems, which they had faced themselves some years back. The IMF experts were tough and the Ministry of Finance was “set under administration “and 58 finance companies were suspended.

After a few weeks we learned a new expression here, Non Performing Loans, for short NPL’s. After some time with heavy calculations they totaled 920 Billion THB, only for the 58 involved financial companies. Nobody has ever dared to make a final calculation of the total of all NPL’s for all banks. But we know from published figures that one bank alone, The Thai Military Bank, has NPL;s for about 500 Billions of THB only from 400 Top Ranking Generals.

When the crisis hit it came down hard. Nobody in this country had any training in how to handle crises. That goes for the government, the banks and the major part of the business. 52 years of non-broken sky-high financial development and then all of a sudden it met the sign full stop; red light all over. Not only had the country no experience, worse was that nobody seemed to take this new situation seriously. Many still do not do that.

The lenders now got busy trying to solve problems they had left until too late and were seeking methods and ways to maintain controlling the banks. The persons or businesses, the borrowers became busy operating with a negative working capital and mostly without being supported by credits from suppliers. Most business became COD based. Checks were not welcome anymore and credit cards as well.

The NPL’s were rapidly divided into two groups. The standard type for loans, which have limited chance of repayment and the Strategic NPL’s meaning loans to very rich persons, who are able to, but will not pay back their loans.

This latter attitude is due to the fact that in Thailand there is no strong law for bankruptcy. If you cannot execute your repayment schedule, it would normally take up to 7 or 8 years to produce a court case by which the ruling would mean that the banks would take over the mortgaged assets. In the meantime the owners can pocket the total income. Example; The owner of a large serviced apartment building will each month pocket the income from all leases, only pay staff and the most necessary expenses to maintain a minimum of service and then transfer the balance out of Thailand into a safe account. When after 8 years the bank finally takes over, it will get a worn down building because the owner will not maintain it properly and the owner will sit in Switzerland or London having laughed the whole way to the bank with monies stolen from his own country. So what happened to the morale?

When IMF came to rescue Thailand it implemented strong rules. And who can blame them for not trying to help out the rich sitting on all their assets, bought for stolen monies and with no access rights for the lenders to take them bake in order to turn them into hard needed cash? IMF became a bad word. But Thailand needed the support and had to give in. Among the next steps was the introduction of auctions. The assets from the suspended 58 financial companies were sold by auctions. These were divided into sales of cars, jewelries and other personal stuff plus cars. The major part of these assets was taken from middle class persons, who do not have strong connections in the society. It should be said that they were given a chance. They were offered to come up with a proposal for a new repayment schedule, which they had to prove would work, but that was very difficult at that time. More than 5 millions lost the jobs within the first 8 months after the crisis hit. Many families faced a not known situation that only few persons were having a job and since there is no social security system in this country and no financial support from your union in case of being unemployed, you look after your family first. That is here rule number one. So now funds were available to save their assets.

So their assets were sold and only to cash rich Thais, who utilized the chance to get assets at 30 to 40% of the actual value. The same auction system was then implemented for apartments and other forms of property. Thais do not envy rich people, but for some it must have been hard to understand what was happening. The poor pay and the rich escape. In other countries this would a base for a minor revolution, but not here. The Thais smile.

When the question came to auction of the very large loan certificates, involving very large properties and businesses, we suddenly faced another situation. No Thais had that amount of money, so now it became possible for foreign investors to look at investments in Thailand, which was previously not the case. Now please remember that a company would have borrowed say 1 billion from a bank, but only invested 50% of that fund in the company’s operation. It would however still owe the principal sum plus accumulated interest to the bank, so the outstanding balance of the loan was big.

The auctions were to be started, but who buys a loan with a balance due to the bank of more than 100% of the original loan, but having an internal value of maybe less than half in reality, because 50% of the assets were outside of Thailand or placed elsewhere out of reach? The tenders were called and the bids were opened. Much to the surprise to the Thais, the average bids were only around 30% of the total loan to the bank and immediately the opposition started a large campaign. The foreigner wants to buy Thailand for less than 50%! The previous government, now the opposition, and who is to blame for a major part of this situation initiated the anti- IMF campaign. The auctions were stopped and now the 14 richest families moved in. They are called the money mafia. 90% of their capital is coming from non-honest funds and now they went in and started bidding and some were successful.

But they did not have funds enough and again foreign investors were invited and they did get some assets but also have to provide a huge amount of working capital in order to turn the operation around.

The superrich were still safe; more and more emigrating to a “safe house” outside of reach to the banks to whom they owed the monies. That was not good for the newly elected government who took over late 1997 having to face all the negative music. It started to change the rules. No more reversed Robin Hood Attitude, new rules were implemented. The members of the government now had to declare all their income and financial status, which was then published in all newspapers.

In Thailand we have a funny law. A housewife pays no income tax and can have as many assets as she likes, she does not pay tax. The next few months we saw the published lists of all the present and previous members of the government. Published were the lists of all income and assets hold by all family members. The person in charge, that is then the actual governmental member had few assets only but a lot of liabilities, reducing his total financial status to be in tune with the poor suffering country, but his wife were a billionaire paying no tax. It was a laugh, but that is still the law.

In London and in Canada sit Thais who have stolen billions of THB from their country. Court cases are being tried but it seems to run at a dead end. However recently we have seen some signs of proper improvement.

The new government is stronger that many thought when elected. They have taken the long haul and are slowly getting successful in trying to get the real control of Thailand, which has been positioned by some 1400 generals for a long time, over to the people. That is a process not highly appreciated by the present and former generals. A few years ago it was unthinkable that somebody here would have the courage to go against any highly place army officer.

But a few months ago we had a new election. The Senate, which previously only consisted of army generals, was now to be replaced by a new super senate elected by the people and not the army. When the results were known a special body, the supervisory election committee,  kicked out 78 of the newly elected senators, who are being accused of having committed fraud or bribe in connection with their election and now we have a new election to replace the first one. It has caused a roar from the major part of these 78, but the people are happy.

The government also introduced a new body to the local political system called the National Commission to Counter Corruption and it first started very carefully, but a few weeks ago they published evidence forcing the deputy prime minister, a previous general, to resign immediately for having filed false information about his true assets and liabilities. This action was a blow and a clear signal that this government will try to clean up as much dirt as possible.

When the bubble burst many new scenarios entered the daily life here. There is still a lot to be done. A major part is to create a new banking system being much fairer to the middleclass persons and to medium sized companies needing funds to move on. Since the crisis entered Thailand the banks have stopped to lend out funds and nobody seems to understand that you cannot all of a sudden stop the wheels of the basic national economy. The banks are facing a total bankruptcy situation if they have to follow, what we in the Western system would call normal, namely to make a write off of non-performing debtors down to a realistic level. The banks know they cannot do that without getting into more problems and are trying to find ways out using the usual Thai methods the center of which is. We are Thais; please do not present us with reality. We do not wish to know about it. We prefer to pretend.

And this is another focus point. The Thais live in their own world with rules, we do not understand. The true Thai way of thinking and reacting will never be revealed to Farangs (foreigners). They are kept a secret only known by and shared by Thais.

That bubble will never burst.

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