Looking back at the past of the Thai financial-banking-capital market business and looking forward to the future (Part 4)

The Thai financial institution crisis has been showing signs since 2539 when there was an attack on the baht. Because foreign investors are beginning to lose confidence in the Thai economy. And it is predicted that Thailand must devalue the baht. and the reserve fund of Thailand was brought in to intervene

We have now reached the third part of the presentation of my study and work experiences from 3-2534. During this period, there were many important events, so I would like to divide the content into two parts. The first part of this article will discuss the “Tom Yum Kung crisis” both before and after the crisis, which spread to cause a financial institution crisis and had an ongoing effect on the Thai economy as a whole.

The second part of this section, which will be presented in the next issue, will be about the enactment of 11 laws, which are called “Treason Laws: Are They Really Treason Laws?” along with a summary of my important experiences during the third period of Thailand’s economic crisis.

Part 3 (2534 to 2544): The Tom Yum Kung crisis: The Fall from Grace

After the government of General Chatichai Choonhavan was the Prime Minister who came from an election and received benefits from the adjustment of the Thai economy for a period of 8 years during the time when General Prem Tinsulanonda was the Prime Minister, it resulted in Thailand having rapid economic growth until in 2535 there was a coup d'état by the National Peacekeeping Council led by General Sunthorn Kongsompong and Mr. Anand Panyarachun was appointed as the Prime Minister.

In the year 2535, there were many laws enacted, including the Value Added Tax, the Securities Act in the Stock Exchange of Thailand, and the Public Limited Company Act. During that period, it was considered that there were many laws enacted that had a positive effect on doing business in Thailand because it was in a state where the government came from an appointment.

There was another election after the government of Mr. Anand Panyarachun. The Thai economy continued to grow by leaps and bounds, to the point where there was hope that Thailand would become the 5th Tiger of Asia. In addition, foreign trade and investment increased, financial liberalization occurred, and the International Banking Business (BIBF) was opened by Thai commercial banks. This financial liberalization itself was considered an important cause of the bubble crisis, which led to the Tom Yum Kung crisis in 2540. Financial liberalization, especially the BIBF, resulted in the following events:

1. Real estate bubble situation because there is short-term loan from abroad with lower interest rate than the interest rate in Thailand, causing many businesses to borrow foreign currency to gain profit from the difference in interest rate, especially borrowing money through commercial banks and lending it to real estate businesses instead of lending it to export industries which was the original intention, including using the method of issuing promissory notes of financial companies by using such loan to lend to personal loans and real estate businesses.

This caused financial companies during that period to experience a 26% growth in their assets, which was the source of the impact on both real estate companies and construction companies that built condominiums, office buildings and residences in excess of consumer demand, as most of them were speculative investments. In addition, Thailand at that time began to have a continuous current account deficit.

2. The hot stock market, with the stock index soaring to 1,754 points in 2537, was mainly caused by the inflow of foreign capital and because Thailand's GDP expanded at 7-8 percent. There was stock price manipulation by some investors. The Bangkok Bank of Commerce Limited (BBC) lent to political groups to take over companies in the Stock Exchange of Thailand without sufficient collateral, which was the source of NPL debt and caused damage to Thai financial institutions in 2539-2540.

3. In 2539, Thailand's export sector began to have problems because Thailand's major trading partner, Japan, slowed down. In 2547 and 2548, Mexico experienced a financial crisis, so investors began to move their capital out of Asian countries, including Thailand.

4. In 2539, the baht began to be attacked because foreign investors began to lose confidence in the Thai economy and assumed that Thailand would devalue the baht. The Bank of Thailand intervened in the baht by using international reserves to buy baht directly from the money market. In order to maintain the level of international reserves, foreign exchange swap transactions were carried out in advance. When there were rumors that the baht would be devalued, George Soros's Quantum Fund attacked the Thai baht in May 2540.

And on May 14, 2540, the Thai government spent more than ten billion US dollars to defend the baht at the highest rate in Thai history, causing Thai reserves to fall to only 2,500 billion US dollars from 24,300 billion US dollars in early May, until on July 2, 2540, Thailand announced a devaluation of the baht and floated the currency, which was announced on July 9, 2540 and thereafter.

The Thai baht's plunge caused banks and institutions to fall into bankruptcy. It is noteworthy that on January 12, 2541, the baht plunged to its lowest point in Thai history at a rate of 56.1 baht per 1 US dollar, which was the beginning of the Tom Yum Kung crisis.

Thai financial institution crisis before and after the Tom Yum Kung crisis

The Thai financial institution crisis has been showing signs since 2539 when the baht was attacked because foreign investors began to lose confidence in the Thai economy and predicted that Thailand would have to devalue the baht, and the Thai Reserve Fund intervened to buy baht directly from the money market.

There were transactions of foreign exchange swaps in advance, causing Thailand's reserves to fall to only 2,500 billion US dollars from 24,300 billion US dollars, until Thailand had to announce a devaluation of the baht and enter the IMF's assistance program.

The financial institution crisis began with the Bangkok Bank of Commerce or BBC, which was the cause of the failure of financial institutions later because BBC had liquidity problems. The Financial Institutions Development Fund (FIDF) had to step in to fix its operations. During that time, BBC Bank lent money to a group with quality politicians called Group 16 to take over shares and bring in collateral with low value, causing BBC to have debt of more than 7.7 billion baht.

The transactions in which BBC created bad debt were loans to take over the businesses of Chaloem Phran Cement Co., Ltd., Morakot Vegetable Oil Industry Co., Ltd. and SVI, and in May 2539, the Ministry of Finance used its legal power to take control of the bank to operate BBC's business.

Although the Bank of Thailand has tried to rehabilitate BBC by increasing and decreasing its capital, in the end, the damage of BBC caused the rehabilitation fund to suffer a great deal of damage. Later, the Ministry of Finance transformed the bank into Bangkok Commercial Asset Management Company Limited to manage assets and solve the debt problems of various banks. After that, it was used as a company to purchase assets that generated income from other financial institutions until it was listed on the Stock Exchange of Thailand at present.

In addition, during the period of 2538, the Ministry of Finance and the Bank of Thailand had an idea to upgrade financial companies to the status of commercial banks and to allow large financial companies to conduct foreign exchange business and accept savings account deposits. In 2540, there was an attempt to control and reduce the number of financial institutions of 3 types, which numbered as many as 104, because the financial companies caused a great burden to the government.

In 2538, under the Chuan 1 government, Mr. Tharin Nimmanhaemin, Minister of Finance, created a Financial System Master Plan that was used from 1 March 2538 – 28 February 2543. Five new banks were established, five foreign banks were opened as branches, capital markets were developed and existing laws, such as the Hire Purchase Business Act, were amended.

When signs of financial institution problems began to appear in early 2540, there were attempts to merge large financial institutions, such as Thai Danu Bank Co., Ltd., which announced the merger of Ek Thanakit Finance Company. However, the failure of the merger between Thai Danu Bank and Ek Thanakit Finance Company could be considered the beginning of the crisis of Thai financial institutions, which caused depositors of financial companies to lose confidence in the financial companies and began to withdraw money until the government ordered the closure of 42 financial companies, including 16 that had already been closed, totaling 58.

The Ministry of Finance has issued promissory notes of closed financial companies to be exchanged for NCDs of Krung Thai Bank, with the Ministry of Finance and the Bank of Thailand as deposit and loan guarantees to build confidence among depositors.

After that, other commercial banks also had problems in raising capital, namely Laemthong Bank, Nakorn Luang Thai Bank and Asia Bank.

In 2540, the Financial Institutions Reform Act (FIRA) was established to manage the sale of assets of financial companies that had been ordered to close down.

In late 2540, DBS Bank increased its capital by purchasing shares in Thai Thanu Bank Co., Ltd., becoming the first foreign bank.

The structure of the Metropolitan Bank has been changed. The rehabilitation fund has been given the go-ahead to manage it to become a Good Bank.

There is an increase in capital of Krung Thai Bank Public Company Limited.

Later in 2541, Rattanasin Bank was established to purchase high-quality assets from 56 finance companies from the RFA. Rattanasin Bank began operations on March 16, 2541.

In 2541, there was an attempt to rehabilitate the business of Sri Nakorn Bank and Mahanakorn Bank, but it was not successful. Although the government ordered Mahanakorn Bank to reduce and increase its capital so that the rehabilitation fund would become a shareholder, at the same time, Nakorn Luang Thai Bank also encountered a similar situation: it reduced and increased its capital so that the fund held 97 percent of the shares. As for Laem Thong Bank, the government later ordered it to merge with Rattanasin Bank at the end of 2541.

As of June 30, 2541, the 15 Thai commercial banks had a net loss of 113,330 million baht, most of which was due to a large increase in bad debt provisions.

Until later, there was a measure called the August 14, 2541 project, which the government (during the time when Mr. Tarin Nimmanhaeminda was the Minister of Finance) established a capital assistance project to solve the liquidity problem of banks and financial companies operating in Thailand only. Those financial institutions could request assistance with both Tier 1 and Tier 2 capital in exchange for purchasing shares of FIDF. In order for the banks to increase their Tier 1 capital, they would need to have full reserves in the year 2543.

The government issues 10-year bonds to pay for the shares, which the financial institution will treat as Tier 1 capital until the financial institution's Tier 2 capital increases to 2.5 percent, with the FIDF purchasing preferred shares and investment from the new private equity partner in the ratio of 1:1.

Financial institutions participating in the Tier 1 capital project include Siam Commercial Bank, TMB Bank, TISCO Finance, Thanachart Finance, Industrial Finance, Asia Finance, Ekachart Finance, and Book Club Finance. Bangkok Bank has also joined the Tier 2 capital project and has increased its capital.

Kasikornbank did not participate in the project, as did Bank of Ayudhya. Kasikornbank and Bank of Ayudhya have issued instruments called equity-like debt instruments called SLIPs (Stapled Limited Interest).

Four royal decrees were issued to support the August 4, 14 measures, allowing the Ministry of Finance to borrow no more than 2541 billion baht for capital increase projects with financial institutions. During that crisis, Thailand established a committee to promote debt restructuring to set clear guidelines for debt negotiation and restructuring, debt compromise between the private sector and financial institutions. There was a scope of operations and the government borrowed 3 billion baht to restructure the debt with the Rehabilitation Fund.

It must be said that the August 14 project is the project that has saved most Thai financial institutions from the problem of bad debt up until now.

In 2544, the Asset Management Corporation Act (AMC) was enacted to act as a central organization to resolve non-performing loans from the commercial banking system quickly and completely in order to build confidence in financial institutions in continuing to lend to the manufacturing and service sectors.

Those interested in the Tom Yum Kung crisis should read the book “15 Years of the 2540 Economic Crisis: Where is Thailand?” by ThaiPublica (March 2556) because it will give you a good understanding of the background of this crisis, as it includes interviews with people directly involved in the event.

Stay tuned for the second part of this series in the next issue.