Comparing Financial Crashes in Thailand & Ireland

This week Marcus and I look at the original tiger economies of Southeast Asia of the 1990s. After a decade of strong export growth, Thailand, South Korea, Indonesia and the Philippines began to focus on domestic property investment as money poured in from overseas. Then in 1997, starting with Thailand, cash was sucked out of these economies off the back of grim economic news and a staggering descent began. It's a shame Irish policymakers couldn't learn these lesson in time for our own crash in 2008-2009 as the Asian tigers would have shown the Celtic tiger what happens when you go all in on property development. Hope you enjoy!

Warning: This podcast does not constitute financial or tax advice.  Please contact a financial advisor or tax advisor to discuss your own individual circumstances, taking into account your needs and objectives, knowledge and experience and financial situation.

Transcript

SPEAKER_01 0:01

Welcome to CashLads. My name is Paul Malloy from BoxcoverTacks.au and this is Marcus Doyle from Clear Financial. We're here to take the mystery out of money and finance with some history, some stories, and plenty of humour too. Marcus, how are you? I'm good.

SPEAKER_02 0:23

Good to see you.

SPEAKER_00 0:24

Great to see you, Paul. Always a great, great to see you.

SPEAKER_02 0:27

So today we um we're going to talk about Thailand in 1997. These were the original uh Tigers, and so it these were uh South Korea, Malaysia, Singapore, Indonesia. And what had happened was that in the 1980s, uh, as the Japanese economy, which people might be surprised to learn, some some some people might be surprised to learn, was was almost as big as America by the end of the 80s. Um, their wages, because property and all kinds of stuff, the wages in China in Japan got very, very high, manufacturing wages, and so it just became too expensive to um make your Sony's and to make exactly in your walkmans and your disc player C D players, all that stuff, all that stuff. Our younger folk won't remember the C D players, they won't, the younger folk won't, they won't. I I think even saying younger folk makes it sound very, very old markets, but anyway, geez, yeah. Um so so so so production started moving from China or to Japan, sorry, moving from Japan to these countries and in Southeast Asia, and they they they they were christened the like tiger tiger economies. And uh, if anyone's wondering where the Celtic Tiger came from, well uh a chap called Kevin Gardner in 1994, um a chap from uh with Morgan Stanley christened Ireland at that time as the Celtic Tiger. Uh and this was very much interesting.

SPEAKER_00 1:58

Well, do we have should have been the Celtic elk or something, a bit more native?

SPEAKER_02 2:03

Well, we could he probably could have been a bit more creative, but he was he was just you know using off the back of the the success story, and it was a huge success story in in Southeast Asia, and what these countries were were doing was they were um manufacturing at lower wages, much lower wages than Japan, and um export that was their you know, so maybe the there's certain parts of the job, or say like a TV or you know, a car, something like that, certain parts of it had to be done in Japan, but a lot of the the more I suppose more basic, easy work could be done in Malaysia, in Singapore, in Thailand, and then shipped, obviously, because they're all you know, you can you've got the they're all on the east, east, east Asian side, just in a boat all the way up to to uh to Japan. Um so so that's where they West that's where they were, and and that's what they were doing very well. And and what happens, what always happens is that suddenly in The Economist or the Wall Street Journal or one of these kind of uh respected newspapers, the Financial Times, people start talking about these countries, saying they're flying. You know, they're their exports, they're you know, they have an enormous, you know, uh favorable trade balance and um wages are low and they're just they're just doing really, really well. And so money starts to money starts to starts to come in. Um can make some money here. And it nearly always goes to the same places. We can normally tell exactly where it's going to go. It's going to go from Wall Street banks or Wall Street investment funds to the the Thai uh banking system, uh, and from the Thai banking system to uh property developers, and they start making things and they start you know hiring people to to work in construction. And um uh you know the the tie had always been um the Thai bat, uh but the Thai currency had always been tied to some other country. And is this it's something that we're that we're gonna spend some time talking about today, this idea of a fixed exchange rate and whether whether it's a good idea or not. And the the tie bat was fixed to the US dollar. And when you're a you know a current a small country, um, like these countries were um tying your currency to the dollar gives you a bit of, I suppose, credibility or respect that you're committed to doing what needs to be done to maintain that uh that exchange rate, uh particularly when things get difficult.

SPEAKER_00 4:49

So the loan is at the same price, then it's at the dollar price.

SPEAKER_02 4:53

So well, yeah, it is, it is. So so so very often these loans now could be it could be the government borrowing money for infrastructure and and stuff like that, um, or it could be you know um Thai Thai banks, or and it wasn't just of course it wasn't just Thailand, you know, it was it was South Korea, it was Singapore, it was Indonesia. Um the the loan is typically in dollars, and and that'll become important. Um so you know, one of the things that I I I saw was that house prices uh doubled, uh I think from about 1990 to 1995, something like that, in Thailand, you know, and this is all familiar stuff for us.

SPEAKER_00 5:39

Yeah, back back the same thing happened in Ireland, house prices went through the roof.

SPEAKER_02 5:43

There's so much similarities to what happened in Thailand in 1997 and Ireland in 2008, because you you you start off as an exporter, you start off as a cur as a country that starts starts from kind of a low cost base um to doing more advanced manufacturing, and then as the money comes in, you uh start focusing more on the domestic on the domestic economy. And one of the things, and again, we shouldn't probably be overly surprised because you know this was all quite new to to Thailand, was that the banking and financial system wasn't it wasn't strong. You know, it wasn't it wasn't strong. Regulation levels just weren't at the level that they they they needed to be. There was probably a lack of knowledge, uh lack of understanding of what of some of the risks that the the current the the the economy was beginning to face. But I I think one of the challenges that that uh regulators have is they're they're almost like the parents coming coming into the house at the end of the night when the party's in full swing, you know, like their buzzkills. And I think we saw that as well with with Bertie Hearn, you know, some public comments he made when people um you know made, you know, I think Ward Kelly quite famously was was very concerned about the the the Irish uh property sector or the banks. So um they're they're poo-pooed, you know. They're they're like, well, listen, we're all having a great time here. Um everything is going. Don't be don't be stopping the party. We're all having a great time. No, we're having an absolutely great time. So so this is you know, this is what happens. And and and you know, had if they weren't doing well in the first place, none of this would happen because it this only starts happening because you're doing well, and then the money comes in. More money is into the economy, more money comes into the economy, and banks start to lend it out, and a bit like I suppose, you know, managers of football clubs, sometimes you buy a good player and sometimes you don't. You know, I was watching Stephen Girard talking the other day with uh interview at Rio Ferdinand saying that at Liverpool they almost had Nicholas and Elka, but then they got Elhaj Jeff, who was you know, there was a total gap, you know, totally the wrong thing. So so naturally enough, the the Thai banks start to lend money to some of the wrong to some of the wrong people. Um the whole thing is all so new. The they're there's the this the scale of the projects, you know, 10,000 houses, the population of Tha Thailand. I don't know, have it right in front of me, but I know it's you know tens of tens of millions. And you know, and obviously Bangkok is is you know big city, but it's the pattern is so similar, it's so it's it's so so constant, and we'll we'll we'll be touching on on Ireland now in a short while. But um, in July 1997, um there became a focus on the current count. And the the current count is your exports versus your imports. So in Thailand's case, that had been very favorable for a long time. The exports were much higher than the imports, and then it starts, and this is what happens in advanced economy. Like American imports are higher than their exports, it's not necessarily a huge problem, like um, but they were still a small country, and you know, we talked about Bill Clinton having the kind of the two years of pain, but by 1997, the American economy was really, really rock and white. And if you're an investor on Wall Street, and this is how this stuff kind of naturally kind of happens, you're thinking, well, I've got money in Thailand that I'm a bit worried about, and I've got an American economy here that's doing great. Well, what else would you do? You know, so the problem is it's not just one person or one fund, the it's it's it's it's it's it's so many. And before before this had happened, the speculators had realized that the Thai bat was going to find it very, very difficult to keep the keep the um the peg with the with the US dollar. Uh it was 33 batt to uh to one US dollar. And what a speculation a short seller is, and I I we have talked about this before, but I I think it's no harm just just just reminding people, um, is that they they look ahead, right? They look ahead and they see the Thai currency is going to fall, surely, against the dollar. The one thing that won't happen is the dollar will get weaker against the buy, the bat. That's not gonna happen. And if they stay the same, if they if the ties manage the pegs in the way that Sweden somehow miraculously uh did so in the 90s, um chances are that the worst that can happen is we break kind of break even now. So they decide to to to to sell the bat in in the future, three months, six months, whatever it happens to be. And um an enormous amount of pressure then comes on the financial the the foreign exchange reserves of of Thailand. They see that the bat is losing popularity, they have to support the currency by spending US dollars or you know, Japanese yen or uh you know Deutsche Market. And this the stock of foreign exchange starts going down and down and down, and it just becomes inevitable. And it all just happened, July, August. This all happened quite quickly, and there was there was great concern. I remember an economics lecturer of mine, um Kevin O'Rourke, and I remember at the time he was really worried, like you know, about what's what's happening, a little bit like what's happening in Iran now, you know, you you can tell when people you really respect start getting worried, you yeah, you kind of know that something is up. You're you're you're worried, and you know, naturally enough, in the offices of the IMF, the only channel they're looking at is back up, you know, and uh the the trouble spreads because it's no longer just this is a tie problem.

SPEAKER_00 12:10

So all the other ones are in the same boat, all the other countries are doing the same thing.

SPEAKER_02 12:14

So they're they're all like so so people you know who've invested in South Korea, Indonesia, Singapore, uh Malaysia, they they start taking their loans out as well. And it's just just imagine a massive hoover in the sky starts pulling money out, and you know, all of those uh building sites uh in in around Bangkok um or in Business or in you know um Jakarta, all of these places, these building sites that aren't finished. We talked about before, like the the pro the developers need the money.

SPEAKER_00 12:58

Yeah.

SPEAKER_02 12:59

To finish getting to finish the weight, to penish, to pay the construction staff, to pay all those kinds. And now suddenly the loans that they had been relying on, they're now gone because the Thai banks they're screwed. Yeah, they need to call them in. They so and you can't call in a loan from a developer, but but what you can do is you can stop lending to them. Yeah, you know, so so that so the loans were were were cut off, and um it was a horrendously rough period because the IMF then come in. What the IMF will do is they'll say, Well, we'll cover your debts. We'll cover them, we'll pay for them. So instead of you owing the Americans this or the Europeans this, now you owe it to us. Yeah, but we give you breathing space, we give you your ATMs will work if people want to take money out. Yeah. But then they they they sit down, the government, and the government probably know what's coming.

SPEAKER_00 13:56

And it's like, well, you need to pay us back for this.

SPEAKER_02 14:00

And how are you gonna do that? Well, I tell you what you're gonna do. You're going to cut the number of teachers by a quarter, you're going to um reduce the number of nurses by a third, um, going to stop spending on fixed, you know, roads. That's just you won't be doing that for five years. Yeah. And it's really, really, really rough. And I think there's a there's been a lot of criticism of the IMF because they have multiple stakeholders when they come in here. They're trying to prop up a country. There nobody wants a scenario where the ATMs don't work, and you get something like The Simpsons, where you know the lights suddenly go off and people start smashing shops, right? So so that kind of stuff has happened. So I mean it's it's kind of funny when you see it on Simpsons, but that kind of stuff is a real risk. So the IMF get in there and stop the the really, really, really bad consequences. But the um the the measures that they propose are really, really very rough. And um they're also trying to help the people who've lent money. And there's there's there's this accusation that they they look after the bankers more than the individual countries, you know. So there's certainly been a bit out the banks rather than letting the banks fail. And known to and also being known to be kind of rougher to people from brown people compared to white people. Now, I don't know if that's a legitimate complaint, but I I do know I've heard that complaint. Yeah, so um, so is this just something that happened in Thailand? Well, I don't know if they were with us um for our our chat about Black Wednesday in in Britain in 1992, but as a reminder and as a contrast, this this whole thing is what this happened quite a quite similar thing happened in uh in Britain in 1992. So during the 1980s, particularly late 1980s, inflation was stubbornly high in Britain, as I fear it may become um for us all, but it that's was certainly the case. And there was a feeling that if we could just in Britain, if we could just track the Germans, if we could just the Deutsche Mark, track the yeah, the pound sterling to the Deutsche Mark, we'll get lower inflation, and that's a good idea. Uh Margaret Thatcher was quite opposed, quite opposed to this, but she had lost her finance minister, uh Nigel Lawson, and John Major, who was ultimately going to replace her. Very funny guy, John. He was uh he was uh yes, he was considered quite a quite a quite a dull man. Very cardboard, but he was very, very enthusiastic on this, and he was the finance minister at the time, and she wasn't in a position to lose two finance ministers, so she kind of had to go along with this against her better judgment. And um, they entered the uh what was known as the European uh exchange rate mechanism, and we all went filed filed a fine for a very, very brief period of time because what was happening then as well was the wall in Berlin. The Berlin Wall had come down, German unification happened in 1991, and Germany had decided to get the east of Germany up to scratch, and this was going to require an awful lot of spending, and it didn't take too long before the Germans saw prices start to creep up. The Germans don't do inflation, they had it in the 20s with the wheelbarrows, the 1920s. You'll actually, if you if you want to Google this, um there's literally stories of people to taking wheelbarrows full of cash. Inflation is so out of control. So that they're just never gonna go there again. And they decided to increase interest rates. And of course, now Britain now, you know, it's just like uh if you're a 400-meter runner and you know your opponent starts up the pace, so do you. You have to go with them. You've got to go with them, and they started to increase interest rates, and that's when George Source came along, um uh kind of a a fund manager, you know, a hedge fund manager in in New York, realizing Britain will probably leave the euro. They certainly their currency won't get stronger than the Germans. So he had a free bet on Britain and he started to short sell the British currency. And the British had to use all their foreign exchange reserves to defend the pound, and just imagine that room full of dollars slowly starts turning into sterling, and eventually you've run out of road. And uh on Black Wednesday, they increased interest rates from 10% to 12%, and had almost no impact. No impact. There was still no demand for the British pound. Then they increased them to 15%, and and there's a you know, a funny scene of some guys on you know on in uh in the city in London just laughing their asses off. 15%, you know. Who you know, it's not gonna happen. So they had to give it up, you know. So this is fixed exchange rates, and you know, right now the UAE, Qatar, Saudi Arabia, they're fixed to fix the US dollar, but they're kind of strong enough economies, and they've got, you know, particularly the UAE, uh, is very, very diversified now at this stage. Saudi Arabia has just unlimited amounts of oil, and Qatar has all that natural gas. So they might be okay, but then you've got Eritrea, Lebanon, and Oman, I had discovered, also uh pin uh fixed exchange rate to the dollar.

SPEAKER_00 19:47

And you never really notice till all it starts happening.

SPEAKER_02 19:49

And the truth is, fixed exchange rates are fine until there's a crisis, yeah, and then you can't defend your currency, and then your your loans double in size and the IMAF are there. So, really, a very a variable or floating rate exchange rate mix may actually be the way to go. Yeah, but anyway, uh thanks for your time today, Marcus. No problem, and um, and everyone else, thanks for listening. I'll see you next time. Thank you. See you next time.