BANGKOK -- Sunday is the 20th anniversary of the start of the 1997 Asian financial crisis, when it became clear that the region's "tiger" economies had been snagged by the tail. That day was marked by a battle between Thailand's monetary authorities and speculators. In the end, the Bank of Thailand ran out of reserves with which to buy the baht; the currency would go on to lose more than half its value.
The flu spread, and a handful of once-roaring economies would remain in a funk for years to come.
In a recent interview with the Nikkei Asian Review, Tarrin Nimmanahaeminda, who became Thailand's finance minister four months after the crisis hit, spoke about the cause of the economic debacle and how he navigated the nation out of it.
The interview was edited for clarity.
Q: What was the situation like in Thailand's financial market when the currency crisis hit?
A: Before 1997, troubles were already brewing at some finance companies, and later on because of the contagion effect domestically, it also crept into the banking sector. Essentially we had a systemic problem in terms of depositors' loss of confidence in the financial system. That was the beginning.
At the same time, there was really a big mistake in monetary policy. The monetary authority, together with the government, for no real reason, was very firm in trying to maintain the baht's exchange rate [which for years had been mostly hovering just above 25 to the dollar]. It is difficult to identify the reason. We lost reserves worth $40 billion in eight to nine months. By mid-1997, when all the facts and figures were known publicly ... there was a huge loss of confidence in our economy.
Q: How did the sharp decrease in foreign reserves affect the country?
A: When you have a huge loss of nearly 100% of your foreign reserves, you have to be able to let the public understand what happened. I explained this to the public in a very simple way: "First of all, there would be no oil in Thailand because we need U.S. dollars to buy oil. Secondly, there would be no way to buy necessary machinery not produced in Thailand. Thirdly, there would be no fertilizer for the agricultural sector. Fourthly, there would be no modern medicine for the public. Finally, there would be no foreign-sourced domestic assembly industries due to the loss of ability to import."
Another factor -- the loss of confidence in foreign trade -- was hidden in the financial factor. In Indonesia, the central bank and the government had to guarantee private banks' lines of credit from foreign correspondent banks in order to open letters of credit. We were very mindful that this problem cannot and should not happen in Thailand because it would make things worse. We had no reserves left. We could only borrow from the IMF [International Monetary Fund].
Q: How did the crisis spread in the domestic financial market?
A: Imagine if you are a loan customer of a financial institution, you are a perfectly a good customer, you like to repay and you want to borrow. The financial company must be able to service you according to your business cycle. But when you start repaying, they don't have the ability to re-loan. It means your business comes to a stop. This is what happened immediately after the systemic loss of confidence on the deposit side spilling into the asset side. Non-performing Loans quickly rose. Eventually, this NPL problem and depositors' loss of confidence wiped out all the finance companies in Thailand during my time [Tarrin was then serving in the Chuan Leekpai administration, which would leave office in February 2001]. At the peak after the crisis, nearly 50% of the banking system's loan portfolio was made up of NPLs.
Q: You became finance minister for a second time in November 1997, after the crisis was already in full swing. How did you go about addressing it?
A: We did something special. We renegotiated terms and conditions with the IMF, which basically required the country to [severely tighten monetary policy to] combat possible runaway inflation, as happened in Latin American countries after they had runs on their reserves. Also, the IMF became very restrictive on government spending, requiring the country to hold a 1% budget surplus.
In my first couple months back on the job, I spent a lot of time trying to renegotiate with the IMF. Finally, after a lot of discussions, we were able to convince the IMF of our needs. This even required support from the U.S. Congress and Treasury Department. They were very supportive of the Thai situation. The 1% budget surplus requirement was changed to a no more than 2% budget deficit requirement. We made a very sound argument.
Q: So you argued for an expansionary fiscal policy to get Thailand out of the crisis, exactly the opposite of what the IMF had prescribed.
A: We explained that if there were no growth prospects, it would be very difficult for us to get out of the crisis. Basically if you become very restrictive in both monetary policy and fiscal policy, there is no growth. Let's go back to the basic macroeconomic equation -- Y=C+I+G+NX [meaning GDP is the sum of consumption, investment, government expenditures and net exports]. C was in panic; nobody was spending any money. I -- there was no investment. Net exports looked good because of the sharp devaluation of the currency [the baht nosedived to almost 55 to the dollar], but it wouldn't begin to expand immediately. When you have a sharp devaluation, your exporters have a difficult time selling products. Why? Because importing countries start bargaining, price adjustments. It took us at least three quarters of a year before net exports came in to help.
I was explaining [to the IMF], "Look, it's like I am flying a four-engine plane and three engines are already shut down. One engine will be re-ignited in the future, automatically, but not now. If government spending is restricted, all four engines are shut down, and there is no chance of escaping the crisis." I think I was able to make the point with the board of the IMF. The re-negotiations took about four months. We had to go quickly. Timing was everything.
Q: What measures did you introduce to reconstruct the domestic financial system?
A: According to the IMF program, we were committed to exercising strong measures in trying to resolve bad assets, mainly through the sale of NPLs through public auctions. We carried out this process throughout the period of our government and we were able to resolve the assets. There were a lot of complaints, of course, but we had to do it; there was no other solution. Secondly, we needed to encourage new entries into our banking system ... two foreign banks came in.
Q: How did you prioritize your policies in addressing the crisis?
A: All of it was hard work because we were going against time. We had to rebuild our reserves. We needed to fly a plane which had three engines shut down. We needed to build up confidence abroad and with ratings agencies. We could not do this without the bankruptcy court's support. Before the crisis, during my previous term [as finance minister from 1992 to 1995], I had proposed in a paper the establishment of a bankruptcy court. But nothing had been done during the two and a half years before we came in again. I had to very quickly pass a law establishing the bankruptcy court. It became a big help in restructuring the assets.
All these measures were taken. Confidence returned. And every aspect I have explained to you had to be done simultaneously. You could not say which would come first. What is the first priority? What is the second priority? Everything had to be done simultaneously.
Q: What is your view on Thailand's current market and economic situations?
A: Thailand's financial system is now considered one of the best in Asia in terms of supervision, acceptance of international standards and governance. Thailand's financial system is very strong now. Macroeconomic management was a bit dampened by the Thaksin Shinawatra government [2001 to 2006], but we got that corrected. Our international reserves are among the highest in the World. Our monetary institutions, stock market and capital markets now run very well.
Thailand at that time was enjoying a very high growth rate. The country was moving at very high speed with a lot of risks. By the end of our [first] term, I had laid out a plan and made it government policy to be mindful of the current account deficit. My plan called for a seven-year slowdown in order to readdress the disequilibrium in the structure of the economy -- basically to try to achieve no deficit within seven years. The plan was abandoned by the successor government; they didn't care.
Tarrin Nimmanahaeminda is currently an independent director of Siam Cement Group. He has twice been Thailand's finance chief. Before his first stint, he had served as president and chief executive officer of Siam Commercial Bank, from 1984 to 1992. Tarrin earned a bachelor's degree from Harvard University in 1968 and an MBA from Stanford Graduate School of Business in 1970.