Asia '97: The financial crisis that left its mark for good

Piyush Gupta recalls the Asian financial crisis clearly. The chief executive of DBS was at Citi at the time, and when riots broke out in Indonesia, the country head did not want to go back to Jakarta with his family. So Gupta put his hand up to go.

“For the next year, I had a conference room which was like a war room,” he says. “Every morning, when we got there, we would map out: where is the civil unrest in the city? Is the branch shut? Can we move cash in and out?

“It was not like being a banker. It was like being a platoon commander.”

Don Hanna, then Asia economist for Goldman Sachs and now at CIMB, recalls it well too. He was in Jakarta the night before the race riots broke out and had dinner with an IMF representative whose wife had just arrived. 

“I was telling them: ‘Don’t worry, this is a lovely safe place,’” he says. “A day and a half later they were being evacuated.

“It was not the finest moment for forecasting,” he says, but he does not treat the moment lightly. “That day sticks out for the loss of life and tragedy. It was a dismal moment for the country generally.”

Nestor Tan left BZW in London for what is now BDO Unibank, and where he is now chief executive, in May 1997. 

“I started here in June, and by July the crisis came,” he says in Manila at the bank’s head office. “So I brought the crisis with me. I was four weeks into my job and it happened.”

One banker recalls flying to Bangkok to work on a bank restructuring and being forced to go in through a back entrance, starting work at midnight because nobody was willing to admit publicly that there was a problem. Another remembers the sense of denial in Seoul, in the midst of an IMF bailout, where the banks and public offices continued to turn off the air conditioning at 5pm, crisis or no crisis, because that was what they had always done. 

The Asian financial crisis left a mark on everyone who worked through it.

If you had to pick a day the crisis started, it would be July 2, 1997, the day the Thai baht devalued. Hanna recalls it well since he was on a plane flying to San Francisco. When he boarded the plane, the baht was at Bt25 to the dollar, when he got off it was Bt29 and would not bottom out until it hit Bt56 six months later. 

At first it seemed localized. 

“The contagion occurred really over the course of the summer, and a lot of it hinged around two sets of things,” says Hanna. 

The previous year export growth in Asia relative to GDP had decelerated sharply: “And that became problematic for Asia because of the large current account deficits that were being financed on the expectation that export growth was going to be strong.” 

As exports slowed, bankers began to wonder if they were goíing to be repaid. Confidence drained and the stock market dropped by 75%; by August Thailand was accepting a rescue package from the IMF.

Still, it wasn’t until later in the year, around November, that Indonesia began to be swept up. 

“That was a function of a naïve intervention by the IMF,” says Hanna. 

The IMF asked the authorities to close a number of banks and companies widely known to be insolvent. 

“But it did it without providing a generalized guarantee to bank deposits in the system,” says Hanna. “And because depositors couldn’t tell healthy banks from unhealthy ones, it started a bank run. That was the death knell of the rupiah.”

South Korea had separate issues that were gradually dragged into the vortex of the regional crisis. Korea had long-standing problems with its chaebol conglomerates, which grew excessively without necessarily being profitable or prudent and which took huge bank lending with them, leading to heavy non-performing loans across the sector.  

On top of that, Korea had joined the OECD, and in doing so had been required to liberalize its capital account. 

“That was important because the way the Korean authorities had tried to discipline the chaebol was by controlling their access to finance,” says Hanna. Once the chaebol could access international finance, there was no method for discipline. 

“The chaebol continued to operate in the fashion they had domestically: invest, invest, invest, don’t worry about return,” says Hanna. “And that became more problematic when the amount of money investors were prepared to give them was quasi-infinite.”

There were many other sub-plots along the way, such as Malaysia imposing capital controls in 1998, a moment that continues to resonate through Malaysian politics today. The fixing of the exchange rate came a few days before Mahathir Mohamad, then (and now again) the prime minister, sacked Anwar Ibrahim, then the finance minister and Mahathir’s intended successor (as, oddly, he is again, after two long jail terms and Mahathir having changed sides). 

But there was one problem Asia as a whole had in common: companies borrowing in dollars but earning in local currency. This became an immense problem when currencies devalued, meaning borrowers might have to pay twice, or even four times, as much as before just to service the same debt. When they couldn’t, banks who were exposed to the failing companies failed with them. 

“A lot of the banks felt that the stable currency would remain indefinitely, so they tolerated it,” Tan at BDO Unibank recalls. “A lot of the conglomerates went into real estate even when it was not their core competency, because when property starts to appreciate everyone looks like geniuses: you buy something and then it goes up. But when it started to depreciate, they didn’t know how to handle it.”

Few banks know more about the Asian financial crisis than Bank Mandiri in Indonesia: it was born out of it.

In 1997, Agus Martowardojo was chief executive of Bank Bumiputera, following a career that had started at Bank of America and moved on to Bank Niaga. As he remembers it, the crisis escalated suddenly. 

“The crisis started from Thailand and Korea and then moved very fast to Indonesia,” he says. “It was an exchange rate crisis that became a banking crisis. First it impacted the economy, then it was social, then political.” 

The moment he realized it was truly a crisis was when Indonesia’s exchange rate started to sink; from Rp2,300 to Rp15,000 against the dollar in the space of about four months. 

“You can imagine, if an exchange rate appreciates like that, it really impacts the quality of assets of banking institutions,” he says. “Non-performing loans increase and then capital outflows start.” 

He remembers the government closing 16 banks, but it wasn’t enough, so it guaranteed bank liabilities and then formed a special institution for bank restructuring, called IBRA.

This institution would have quite an impact on Agus. In 1998 he was asked to become chief executive of Bank Ekspor Impor Indonesia, a state-owned, failing bank that was one of four that IBRA wanted to merge together to create a new one. This would become Mandiri.

It is hard to imagine, sitting in Mandiri Tower in Jakarta today, that it grew from such dismal beginnings. 

“Indonesia was in crisis,” Agus says. “If you are managing an institution or a merger during a crisis, it’s really difficult. Secondly, the four banks were insolvent, with negative equity and high non-performing loans.” 

They were also in the grips of a negative spread in the banking system, with average net interest income in the banks at 15% and cost of funds at 70%. 

Moreover, banks had lost all power they ever had over their big clients. 

Piyush Gupta, chief executive of DBS

Gupta recalls: “The reality was that all the big tycoons and big corporates who had big loans from the banks basically said nobody could do anything about it.” 

He remembers going to one customer who, he knew from the private banking relationship, was capable of servicing the debt he had to the bank. Gupta asked him why he wasn’t paying the debt back? 

“He told me: ‘Piyush, it’s true, I have the money and I can service the debt, but my competitor is not paying his bank. If I service your bank, I can’t compete with him, so I can’t pay you.’

“The whole thing about how you deal with a crisis situation was a complete eye-opener.”

With every further drop in the currency, the loan book would worsen. And it wouldn’t stop falling. Hanna recalls sitting down to dinner in Bali with his family around Chinese New Year 1998 and realizing that his more than decent meal was coming to $10 because of the depreciation of the currency. “I realized then that this had gone far beyond what was necessary to deal with any kind of economic adjustment.” 

This is what the new Mandiri was dealing with as it came into being. 

The best consultants in the world, says Agus, told him that it would take four years to merge the four banks, otherwise it would not have the resources to be sustainable. Instead, it was formed in seven months. The merger process began in January 1999 and was finalized in August, followed by an injection of Rp174 trillion ($12.35 billion) to recapitalize it. 

“Our strategy was to form one new bank by removing all the good assets of the four banks,” he says. “And then we would manage the bad bank of the four legacy institutions.” 

Oddly, one of the consultants involved back then is today the chief executive, Kartika Wirjoatmodjo, known to all as Pak Tiko. He joined Boston Consulting in 2000 as the recapitalization programmes began in Indonesian banking, assigned first to BNI and later Mandiri, where he was seconded for three years working on risk management and credit scoring. 

Which is more fun, consulting or execution? “Execution, of course. For me it’s more adrenaline-pumping,” Wirjoatmodjo says.

He says Mandiri’s terrible beginnings had an impact that endures today. 

“It is because of where we came from that we are so aware that reformation is crucial to survival,” Wirjoatmodjo says. 

Mandiri did not start out with a strong footing in a particular area, like Bank Central Asia in corporate banking or Bank Rakyat Indonesia in microfinance, so it had to look for its niches. 

“We are still moving towards how we manage what sort of core businesses we want to evolve the banks towards,” Wirjoatmodjo says. 

Today, corporate and wholesale is still the biggest pillar, accounting for 40% to 45% of income. Subsequent ventures into small and medium-sized enterprises and the middle market have had mixed success – Wirjoatmodjo was brought in specifically because credit quality was failing and the bank needed to be re-centred – but the sense of evolution and innovation remains. 

He links the establishment of subsidiaries for multifinance and bancassurance, the development internally of multipurpose international loans, a bank focused on pensioners and a Shariah bank back to that need to innovate because the bank came with no clear original foundation.

“That became our competence – to build and grow new businesses,” says Wirjoatmodjo. “That transformation DNA is so inherent that we create something new every year to create a new base for revenue growth.”

Eventually the crisis reached Hong Kong. 

There was an odd pride at first. Alan Smith, who at the time had just left his role as chairman of Jardine Fleming, remembers being at a property launch with local tycoons such as Raymond Kwok in attendance, where they learned that the spiralling crisis in Asia was bringing markets down in the US. 

“We thought: this is great! Our crisis here is having ramifications there. It used to be the other way around. We’ve arrived!” Smith didn’t know how bad it was going to get.

Laura Cha, now chairman of HKEx, was deputy chair of the Securities and Futures Commission (SFC) and head of corporate finance at the time. She remembers getting a call from Peregrine, one of the largest local investment houses. “They wanted to come in within an hour,” she says. She remembers immediately putting together a team and issuing a restriction order. 

The failure of Peregrine is still talked about today and Euromoney’s 1997 interview with chairman Philip Tose is a brilliant snapshot of an institution under fire. Among other things, the collapse led to Smith, by then vice-chairman of Credit Suisse, having to save the Hong Kong Sevens rugby tournament, of which Peregrine was the principal sponsor.

Everyone involved was learning by the day. 

“We found in the course of that process that we have the tools,” says Cha, “but we never envisaged it to be happening where we would have to use all the tools at once.” 

Then local firm CA Pacific also collapsed. “That was the one that really put us to the test,” says Cha. “All of 1998 was a difficult year.”

Boon Chye Loh, now head of the Singapore Exchange, was then at Deutsche Bank: “It was an extraordinary event. Overnight rates hit 3,000%, depending on the currency.” 

David Chin, now head of corporate client solutions, Asia Pacific at UBS, was running a corporate finance team at the newly merged UBS/SBC. 

“There was a very spectacular day when the Hang Seng dropped 1,000 points,” he recalls. “It was all part of the excitement.” 

Joseph Yam was the man in the hot seat as chief executive of the Hong Kong Monetary Authority (HKMA). Yam and his team had only just digested the handover of Hong Kong from the UK to China when the financial crisis started to affect Thailand. 

He had been concerned for some time “about the trend of financial globalization, and everybody being enthusiastic about embracing international capital and not being familiar with the risks arising from that.” 

International capital, he thought, represented three Vs: voluminous, volatile and vicious.

As soon as Thailand devalued, there was renewed focus on fixed exchange rates, and Hong Kong had the most famous of them all – the peg to the US dollar. Money started flowing out of the Hong Kong dollar. 

“With a fixed exchange rate and a disciplined currency board system, there was no alternative,” says Yam. “If there are capital outflows, then interest rates will have to go up.” 

Overnight rates in Hong Kong dollars went over 200% at one stage (280% on October 23, 1997 – which, remarkably, was also the listing date of the $4.2 billion China Telecom IPO in Hong Kong and New York, the company that is now known as China Mobile). “That involved quite a lot of pain for quite a lot of people, but we had to bear that pain.”

It wasn’t enough. “It was quite obvious then that these international players in financial markets were taking advantage of the highly sensitive interest rate environment in Hong Kong, and of capital markets to those interest rate changes,” says Yam. 

The game of the time was to short the Hang Seng index and attack the currency, driving up interest rates.

“At some point of time I felt I had to deal with it,” says Yam. “There was obviously market failure. Free markets are not supposed to be markets that can be freely manipulated. So, by August 1998, we decided to intervene in the market.” 

The HKMA spent about $15 billion buying up stocks, as well as borrowing all the stocks available in the market so they could not be borrowed by others to short. “It was a battle that we fought. And fortunately, we won,” Yam says.

Not everyone thought it was a good idea. Alan Greenspan criticized Yam’s approach at the time, although years later he would write that it had been the correct call. 

“[Greenspan] is a very respectable person, but obviously from his perspective, running the largest market in the world, his perception of the free market is a little different,” says Yam now. 

Contrary to what you might think, Yam doesn’t think of himself as interventionist. 

“I am a strong supporter of a free market too,” he says, “but at that time I came to realize that markets can and do fail. And when they do, you have the responsibility as a monetary authority to sort it out.”

Smith describes the eventual approach of buying the market as “a typical Hong Kong response – really it was quantitative easing ahead of its time. Instead of buying real estate investment trusts or exchange-traded funds, we bought the whole index.”

Smith recalls that the peg was assisted by the fact that there was nobody obvious to fund the speculators. 

“There were only two or three banks that could really lend the money,” he recalls. “Bank of China might be able to, but how could that possibly be in China’s interest? HongkongBank might have got short-term gain, but they would not seriously want to damage their golden egg here. So if those two banks stopped playing, kept their money home and wouldn’t lend it, then the peg could not be broken.”

There was a sense that this was the end of the financial crisis – that there were still hard times to come, but that it would go no further. The holding of the Hong Kong dollar peg was a line that would not be crossed.

Then came a long process of learning that is still being felt today. 

“We spent from 1997 to almost 2005-2006 cleaning up the problems we’d had,” says Tan – just in time for another crisis.

But 20 years on, most are able to find positives in the whole experience. 

“The crisis really hurt, but I believe that with it, Indonesia really learned,” says Agus. “Indonesia committed to transformation and became a stronger country. We continued our reform and you saw that in 2008: there was a global crisis and we were relatively ready to face it.” 

Agus went on to become the minister of finance and then, in 2013, governor of Bank Indonesia.

All over the region, gearing reduced and regulation strengthened. 

The best outcome for the Hong Kong SFC, Cha says, was that it “really made us look at the regulation of the intermediaries: the margin requirements, the capital requirements, the risk base requirement. All of that was sharpened as a result of the Asian financial crisis. And like every crisis, we shouldn’t let it go to waste.

“It was really at that time we equipped ourselves completely to be able to deal with the next crisis that comes.” 

Hanna thinks that one distinctively good move Asian regulators made after the crisis was not just to address losses financial institutions had on their books but to work out the borrowers themselves.

“In a number of countries, if you didn’t work out the balance sheet of the borrowers as well as the lenders, you couldn’t recover,” he says. 

Institutions such as Kamco in Korea and Danaharta in Malaysia were important, “not for the timing of the recovery but in allowing it to be more robust,” says Hanna. “If you continue to have maimed balance sheets, even if your banks are capitalized, then to whom will they lend?”

Asked if the crisis was good for Asia, he says: “I would put the message differently. I would say lessons were learned. Obviously, one would prefer to learn the lesson with fewer broken bones or bruises, but people did learn.” 

It was the making of some people. It certainly worked out well for Boon Chye Loh. 

“I was on the right side of liquidity. The crisis created the development of the fixed income market in Asia,” he says. 

In its heyday the markets business Loh built at Deutsche was one of the most powerful engines in banking.

“I think the experience taught me many things, one of which is that you can’t take things for granted,” he says. “Interest rates did not go up to 3,000% right away. First you saw it go to 100%. Could it go to 200%? Maybe not. But ‘maybe not’ is taking things for granted. Eventually it shot up to 3,000%.

“We have to remind ourselves: what we have seen before may not continue, so be open-minded. A crisis is always half-full, half-empty,” he says. “It gave the opportunity for building up the capital markets.”

Uday Kotak, head of Kotak Mahindra, recalls the bloodbath in non-bank financial companies (NBFCs) in India – of which Kotak Mahindra was one – that came with the Asian financial crisis. 

“I remember in a period of four years we went from 4,000 NBFCs to 20. It was major carnage, people forget, but it was a big lesson in risk management early in my career.” 

Did it make the industry healthier? 

“Undoubtedly,” he says. “It made people recognize the importance of prudent simplicity and humility.”

He has never forgotten that lesson. 

“Financial institutions first and foremost,” he says, “are about risk management, risk management, risk management. It may not be the most glamorous part. But I’m a believer that it is the number one job in financial services. We are not masters of the world.”

Daniel Wu, now president of CTBC in Taiwan, took these lessons from the crisis: discipline, a cushion, and getting ahead of problems. 

“Never steer into troubled waters or take risk aggressively,” he says. “Run countries like a company. If you are under a deficit for a long period of time, some day it will come back to haunt you, that’s for sure.”

And some came out of the whole thing in a philosophical frame of mind. 

“A crisis should be seen as a transitional phase, like an old tree growing tiny sprouts,” says Jahja Setiaatmadja, chief executive of Bank Central Asia in Indonesia. “A crisis may lead to unwanted effects, like a strong wind that could uproot an old tree, then it falls down and crushes everything nearby. After the fall, new sprouts may grow or the tree may need to be replanted.” 

Jahja Setiaatmadja, chief executive of Bank Central Asia in Indonesia

Companies are the same, he says – they need to be renewed to stay alive: “It is important to see a crisis as part of a process for a company to be reborn and to find new ways to balance itself. Everything affected by a fall will be better and improve in time.”

More prosaically, Jahja says his bank avoids crisis now by maintaining liquidity, capital and low non-performing loans. 

By the time the global financial crisis (GFC) rolled around, Asia was ready for it. Regulation was stronger, debt lower, government deficits milder and reserves sturdier. 

“The reason Asia escaped a lot of the ravages of the GFC was because we had got immunization from the Asia financial crisis,” says DBS’s Gupta. 

What the regulators in the West started doing in 2008 and 2009 – more inclusive regulation, more inclusive supervision and more macro-prudential regulation – Asia had done in 2000. 

Gupta says: “Both the regulators and the industry benefited a lot from the Asian financial crisis.”

Chin at UBS says that the macro and fiscal position is far stronger than it once was. 

“The dollar might strengthen and local currencies might depreciate, but today those sort of movements would not have the potential to destroy an economy,” he says.

Still, 2008 wasn’t easy; it was a return to the powerlessness of being hit by other people’s problems. Tan at BDO Unibank had spent most of the previous decade clearing up the mess of the Asian financial crisis, upgrading IT, building better long-term assets and strengthening risk policies. The global financial crisis saw his bank elevated to leader in the market without really trying. But he didn’t like the experience. 

“The first cycle was our own doing,” he says. “When 2008 came, our problems were exogenous. We had no control over what was going on. 

“Personally, I felt so helpless: you wake up at five in the morning and the first thing you do is open Bloomberg and CNN to work out what happened the night before.” 

The key to resilience, he has learned, is “trying to make the hard decisions when it does not appear to be right at that time. You say no to a good asset because you are over-exposed. You say no to a good deal because you believe that it may be overvalued, or you cut losses where you believe that things may go further south. 

“You may do these things 10 times and you will be proven right only once. Nine times may be precautionary, but that one you will have avoided what would be catastrophic for you.”

One person whose career was shaped by the Asian financial crisis was Raghuram Rajan, best known today for his time as governor of the Reserve Bank of India. He was hired as chief economist by the IMF in 2003, well after the Asian financial crisis but very much in its aftermath. 

“There were still the vestiges of the Asian financial crisis playing out, including the fact that the IMF had a very sticky reputation in Asian countries for coming in in 1997/98 and imposing its standard template there,” he says. 

Specifically, the IMF is widely accused of having called for fiscal consolidation when the problems lay far more in the financial sector. 

So, as much as Asia has evolved since the financial crisis, so has the IMF. 

Rajan says now: “My sense is that since then the IMF has come a long way and has understood that on one hand it’s not just fiscal it’s much broader; and that in imposing conditionality, some buy-in from the country is necessary, otherwise it looks like external imposition.

“The IMF still has to act as a little bit of a scapegoat because it is convenient for domestic politicians to say they were forced to do it by the IMF,” he adds. “But the IMF has increasingly realized that it can’t push countries to the point that there is a revolution.”

Big though the crisis was, there is a frame of reference to remember. Anyone old enough has seen worse. Bankers in Vietnam have fled war and returned. Many Korean bankers have seen war in their country, while the Chinese survived the Cultural Revolution. 

Consider Singapore’s UOB. It opened its doors in 1935 as United Chinese Bank; within seven years Singapore would be under Japanese occupation, with the Chinese coming in for particularly brutal treatment. It has seen the formation of Malaya, Singapore’s exit from it and its birth as a sovereign state, then more recently the Asian financial crisis and its global successor.

“We are lucky,” says chief executive Wee Ee Cheong. “I always believe bad loans are made when the time is good. When the tide is low, you see more things. My father always said: ‘We have to help ourselves, to be a little bit more conservative. We have to make sure our balance sheet is strong enough.’”

Even those who haven’t had to undergo war have seen plenty of turmoil. Smith remembers a dramatic climb in the Hong Kong stock market up to March 1973, when it peaked at 1,700 points, whereupon it crashed to about 150 by early 1975. 

“So now, when people say there’s a stock market crash because it came down 25%, I say: ‘That’s not a crisis. That was a crisis.’”