The Tom Yum Kung Crisis Twenty-seven years have passed since the 1997 Tom Yum Kung Crisis, and its impact continues to serve as a reminder and a historical lesson for the Thai economy. It highlights the need to avoid similar economic pitfalls in the future.
Looking back at the crisis, which occurred on July 2, 1997, its repercussions were far-reaching, ultimately culminating in a full-blown financial crisis. Thailand’s economic vulnerabilities, including a substantial foreign debt burden, financial liberalization, and a fixed exchange rate policy, left it susceptible to currency attacks.
Other contributing factors included overinvestment, resulting in a real estate bubble, and mismanagement within financial institutions, leading to the closure of 58 financial institutions and commercial banks.
Krungthep Turakij’s Deep Talk program interviewed five prominent figures, including economists, former governors of the Bank of Thailand, high-ranking real estate executives, and senior executives from leading Thai financial institutions. These individuals, who played key roles during the crisis, will shed light on the 1997 crisis and the current state of the Thai economy.
In the 1997 crisis, non-performing loans (NPLs) surged to 42%, primarily stemming from balance sheet issues and problematic assets of large companies. The economic downturn left these companies unable to meet their debt obligations, creating a significant challenge for banks, which were forced to increase their capital reserves.
Today’s crisis is a crisis of the poor.
The Tom Yum Kung crisis is a stark contrast to the current economic situation, where “villagers” are disproportionately affected, not the wealthy. The current crisis is not rooted in the debt of the wealthy or foreign debt, but rather a crisis of the poor, reflecting the debt burden that weighs heavily on the majority of the population.
While the current economic situation could be considered a crisis, it is more accurately described as a gradual, slow-burning illness, unlike the acute crisis of 1997.
Currently, people’s incomes are declining. Although this may not be a repeat of the Tom Yum Kung crisis, it is a crisis impacting the poor. The plight of ordinary citizens is evident in the precipitous drop in car prices by over 30%, stagnant housing prices, and a general sense of economic decline.
In the short term, a global economic recovery is crucial, as relying solely on internal recovery will be challenging for other countries. A key strategy for reducing debt is to increase people’s incomes.
“I believe we will not see a repeat of the Tom Yum Kung crisis. In the past, only a handful of large companies faced issues, maybe a couple of dozen. Managing those challenges was easier compared to today’s situation, where nearly 30 million people are grappling with problems, and many of these challenges are extremely difficult to address.”
Concerns over Thailand’s high inequality escalating into a social crisis
Mr. Banyong Pongpanich, Chairman of the Executive Board of Kiatnakin Phatra Financial Group, distinguishes the current Thai economy from the Tom Yum Kung era, characterized by 8 consecutive years of 8-9% annual growth. This growth was fueled by a large influx of capital due to an open monetary policy allowing free capital flow alongside a fixed exchange rate. This enabled low-cost foreign capital to flow freely into the country, often directed towards investments with limited returns. This ultimately led to the formation of an economic bubble.
While Mr. Pongpanich believes a repeat of the 1997 crisis is unlikely, he anticipates slow growth. He cites inefficiency as a major hurdle for the Thai economic system, making resource allocation within the financial market system extremely costly.
The most pressing challenge for the Thai economy is income inequality, which poses the risk of a social crisis rather than an economic one, unlike the Tom Yum Kung crisis. The root cause of this potential societal upheaval is inequality.
This inequality manifests in both income disparities and property ownership disparities. These inequality issues are of paramount importance. The slow economic growth exacerbates the problem, leaving those with fewer opportunities facing even slower or even negative growth. This creates social pressure, which poses the most concerning issue.
Veerathai Santiprabhob, former governor of the Bank of Thailand (BOT), stresses the importance of the Tom Yum Kung crisis as a lesson. He emphasizes the need to prevent the recurrence of such economic circumstances, marked by macroeconomic mismanagement, a fixed exchange rate system that limited economic control, and a highly competitive financial sector with nearly 100 financial companies, contributing to excessive risk.
However, he highlights that financial institution management and supervision have significantly strengthened since that time. This enhanced oversight has helped Thailand weather numerous crises, including the 2008-2009 global financial crisis (often referred to as the “Hamburger Crisis”) and the more recent Covid-19 pandemic.
The current Thai economy is worse than in 1997.
Nevertheless, Mr. Santiprabhob views the current Thai economy as being in a “worse” state than in 1997; particularly concerning are the future challenges looming on the horizon. Beyond the high level of government debt, household debt is a pressing concern; household debt has steadily increased, leading to rapid debt accumulation, high levels of bad debt, and low savings. This indicates a worrying level of household vulnerability.
The Covid-19 pandemic dealt a significant blow to the financial well-being of households throughout the world, including Thailand. Economic activity came to a standstill, severely impacting household finances. Without strong financial resilience, future risks will undoubtedly increase.
The Thai financial sector is stronger than in 1997.
Mr. Kris Chantanotok, Chief Executive Officer of Siam Commercial Bank, outlines several key differences between the current Thai economy and the 1997 crisis. Notably, the BOT has played a crucial role in stabilizing the Thai financial system and strengthening the financial sector. This contrasts with the situation over two decades ago, where mechanisms to enhance financial stability, such as loan provisioning and lending criteria, were significantly less stringent.
The 1997 crisis was rooted in unsustainable economic expansion, leading to a bubble bursting due to overoptimistic investment and excessive foreign borrowing in pursuit of rapid wealth accumulation. Today, however, economic growth is not a primary concern, but rather a lagging factor compared to neighboring countries.
“I believe we will not see a repeat of the 1997 crisis. We are not in a high-growth phase, but rather grappling with the issue of how to return to growth potential. Our current concern is achieving future growth, a more challenging prospect. Therefore, addressing the problem necessitates a multi-pronged approach, tackling challenges in the short, medium, and long term, as the underlying issues stem from interconnected complexities across various dimensions.”
The 2014 crisis affected the foundations differently from the ‘Tom Yum Kung’ crisis.
Mr. Prasert Taedulyasatit, President of the Thai Condominium Association and Chief Executive Officer of Ananda Development Public Company Limited’s Real Estate Business Line, draws a distinction between the economic issues in 2024 and those in 2007. He notes that large businesses and banks are currently profitable.
However, ordinary people, particularly the lower middle market and low-to-middle-income groups, are severely affected. Unemployment has persisted for 3-4 years, wages have stagnated, and most importantly, these groups have depleted their savings and are resorting to informal debt.
Another major challenge is the issue of high interest rates, compounding the financial strain for the middle and lower market. Their lack of savings and dependence on informal debt leave them vulnerable to high interest burdens. Housing payments have nearly doubled, with rates soaring from the typical 3% to 6%.
Loan rejection rates have reached a record high of 70%, an unprecedented figure in Mr. Taedulyasatit’s 30 years in the real estate industry.
“This crisis is more difficult to resolve than the Tom Yum Kung crisis, as the public sector throughout the world, including Thailand, is facing the brunt of the impact. Homelessness is a global issue. In Thailand, the middle-to-lower market is burdened by informal debt and unable to purchase new homes, leading to a dramatic decrease in demand.”
Rising land prices, living expenses, and supply costs, including land, construction materials, and labor, are exacerbating the problem. This “K-shaped” recovery further contributes to the 70% rejection rate for loans on properties priced under 3 million baht, significantly higher than the normal 20-30% rate.
First-quarter data reveals a concerning trend: the overall market exhibited a “negative” performance for all products and price levels, with the exception of homes priced over 50 million baht. This decline in sales has a ripple effect on transfers, leading to a parallel decrease in transfer figures.
Proofreading….Suri Silawong
The Tom Yum Kung Crisis: Lessons for the Thai Economy
The Tom Yum Kung crisis, which struck Thailand in July 1997, continues to serve as a stark reminder of the fragility of economies and the importance of prudent financial management. While 27 years have passed since this economic storm, its impact remains etched in the memory of the Thai people, providing valuable lessons for navigating future challenges.
A Crisis of Excess and Vulnerability
The Tom Yum Kung crisis was triggered by a confluence of factors: a significant amount of foreign debt, financial liberalization, and a fixed exchange rate policy. These vulnerabilities made the Thai baht vulnerable to speculative attacks, ultimately triggering a currency crisis.
Other contributing factors included:
- Over-investment, leading to a real estate bubble
- Weak financial institution management, resulting in the closure of 58 financial institutions and commercial banks
Key Differences: From Crisis of the Rich to Crisis of the Poor
While the Tom Yum Kung crisis was characterized as a crisis of the wealthy, due to their heavy reliance on foreign debt, the current economic challenges are described as “a crisis of the poor”.
The current crisis is a crisis of the poor.
This shift is attributed to a gradual, slow-burning economic illness, as opposed to the acute, sudden crisis of 1997.
Experts point to:
- Decreasing income for most people
- Lower car prices, reflecting a decline in consumer confidence
- Stagnant or declining housing prices
- High levels of household debt
Inequality: The Looming Social Crisis
While Thailand has diversified its economy and has learned valuable lessons from the Tom Yum Kung crisis, a new threat looms: inequality.
Worried that Thailand’s high inequality will escalate into a social crisis
Income and property inequality, coupled with slow economic growth, are creating social pressure that could potentially escalate into a social crisis.
Key Takeaways from the Tom Yum Kung Crisis
The Tom Yum Kung crisis serves as a valuable reminder for Thailand:
- **Prudent debt management:** The importance of responsible borrowing and minimizing foreign debt exposure cannot be overstated.
- **Financial sector stability:** Stronger regulation and supervision of financial institutions are crucial to prevent future crises.
- **Diversification:** Investing in diverse sectors can mitigate risks.
- **Addressing inequality:** Tackling income and property inequality is crucial for sustainable economic growth and social stability.
Lessons Learned: A Stronger Financial Base, But Challenges Remain
While Thailand has addressed some of its weaknesses, challenges remain:
The current Thai economy is worse than in 1997.
The Thai financial sector is undeniably stronger than it was in 1997. However, high levels of government debt, and alarming household debt levels indicate that the country’s economic resilience remains a concern.
A Shifting Landscape: The 2014 Crisis
The economic difficulties experienced in 2014 differ significantly from the Tom Yum Kung crisis. In 2014, the crisis impacted the foundations of the economy differently.
The 2014 crisis affected the foundations differently from the ‘Tom Yum Kung’ crisis.
Large corporations and banks continue to profit, but the lower-income brackets are struggling. This gap is exacerbated by high interest rates, which disproportionately impact those with informal debt.
The challenges of the present economic landscape are more intricate than the 1997 crisis. While the lessons learned from the Tom Yum Kung crisis are valuable, the current economic climate requires a nuanced approach to addressing the unique vulnerabilities of the Thai economy.