Transparency in Thailand's 1997 Economic Crisis - The Significance of Disclosure

Transparency in Thailand's 1997 Economic Crisis: The Significance of Disclosure
Author(s): Scott B. MacDonald

Source: Asian Survey, Vol. 38, No. 7 (Jul., 1998), pp. 688-702
Published by: University of California Press
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TRANSPARENCY IN THAILAND'S 1997
ECONOMIC CRISIS
The Significance of Disclosure
Scott B. MacDonald
The fall of governments, demonstrations under the hot

Asian sun, and a plunging national currency all rocked the Kingdom of Thai-
land in 1997. During what became an acute crisis in confidence, one prime
minister's sanity was questioned in the Thai press and a rapid succession of
personalities marched in and out of the Ministry of Finance. What a number
of analysts had proclaimed as Asia's next newly industrialized economy
(NIE) was suddenly found wanting. The strong economic growth seen
through most of the 1990s stalled in 1997, and it appears that the economy is
contracting in 1998. What went wrong?
The lack of transparency and disclosure in financial and corporate affairs
will go down as one of the major Achilles's heels that allowed Thailand and
other Asian nations (such as Indonesia and Korea) to be savaged by interna-
tional financial and foreign currency turmoil in 1997 and 1998. There are
obviously many other reasons that Asia ran into problems in 1997, but the
lack of transparency and disclosure in the financial sector played its part and
cannot be easily dismissed. This is because it reflects the more important
issue of the rule of law in its broadest sense, which is a critical factor in
underpinning local, regional, and global commerce. Without trust in the sys-
tem to uphold contracts, enforce regulation, and ultimately establish and
maintain a level playing field, confidence erodes. In today's world that can
be reflected by an investor stampede out of local stock markets, a cooling of
direct investment programs, a buffeting of local currencies by speculators,
and the collapse of national banking systems.
It is the purpose of this article to examine the role of transparency and
disclosure in Thailand's 1997-98 economic crisis with a focus on the coun-
Scott B. MacDonald is Director of Sovereign Research, Fixed Income

Division, Donaldson, Lufkin & Jenrette Securities Corporation, New York, New York.
? 1998 by The Regents of the University of California
688
SCOTT B. MACDONALD 689
try's banks, finance companies, and to a lesser extent corporations while pro-
viding a brief comparison to the rest of non-Japan Asia. It is argued that the
systematic obscuring of financial and corporate accounts has contributed
significantly to wide-ranging bankruptcies and sectoral collapse in Thailand,
while the obscuring of national accounts has misled international financial
institutions and investors (both foreign and local) and contributed to a re-
gional financial crisis that threatened to become global. As economist Rudi-
ger Dornbusch aptly noted: "With transparency, you get the right prices and
you can get the most stability."1 Clearly, the lack of transparency and disclo-
sure plays a central role in a broader syndrome of personalism, money poli-
tics, and corruption that would not be possible without the cover provided by
an opaque cloud that obscures the actual nature of the transactions.
A Post-Crash Reflection-
Thailand's Tiger Economy
In the decades prior to the 1997 crisis, Thailand's economic development was
dynamic and a considerable body of literature has emerged extolling the vir-
tues of this Southeast Asian "tiger." According to the World Bank, real GDP
growth from 1980-90 was an annual average of 7.6%, followed by a blister-
ing 8.4% during 1990-95.2 Even in 1996, when growth slowed to 6%, Thai-
land's real GDP growth easily outpaced most OECD countries.
There are a number of reasons for Thailand's economic success. Thailand
is blessed with abundant natural resources and a relatively well-educated
population. Thailand was and still is a clear beneficiary of Japanese direct
foreign investment. As Japan "hollowed out" its heavy industries, it looked
to Southeast Asia and Thailand in particular as a place with a skilled, literate,
and comparatively cheap labor pool. A number of other countries' multina-
tionals were attracted to the Southeast Asian nation, rounding out foreign
direct investment from U.S., French, German, and Italian companies. More-
over, Thailand enjoys an important central geographical location in Southeast
Asia that provided closeness to other potential markets in Indochina, Malay-
sia, Indonesia, and South Asia. Another reason was that in the 1980-88 pe-
riod the country enjoyed a relative degree of political stability under the
leadership of General Prem Tinsulanond, while the role of the monarchy
helped provide an important degree of societal continuity.3
1. Quoted in Sharthi Kalathil, "Mystery Still Shrouds Books," Asian Wall Street Weekly Edi-
tion, December 15, 1997.
2. World Bank, World Development Report 1997 (New York: Oxford University Press,
1997), p. 235.
3. Political stability was relative because in the 1980-88 period Thailand experienced two
coup attempts, three unplanned elections, and a government (in 1986) that seemed doomed by
the opposition to its austerity plan. All the same, Thailand's governing elite remained largely the
690 ASIAN SURVEY, VOL. XXXVIII, NO. 7, JULY 1998
Although Thailand was hit by a number of external shocks in the late

1970s and 1980s, the country demonstrated considerable resilience and initi-
ated major reforms during the 1981-85 period. Thailand's trade and invest-
ment policies were largely characterized by a liberal attitude vis-a-vis foreign
investment inflows and a trade system that shifted from import substitution to
export promotion (with a decisive break coming in the mid-1980s). Gener-
ally speaking, Thailand sailed into the 1990s as an export-driven economy
characterized by strong economic growth, prudent fiscal policies, relatively
low inflation, and manageable external debt levels. The main drivers in the
economy were manufacturing, agro-industry, tourism, and, increasingly, fi-
nancial services.
The Road to Financial Crisis

Thailand's 1997 financial crisis had a number of pre-conditions, which were
greatly aggravated by attacks on the baht by foreign currency speculators and
ultimately the flight of foreign investors. These pre-conditions included a
proliferation in the number of financial institutions; the rapid expansion of
credit into the economy; a heavy reliance on informal networks to conduct
business, compounded by a weak emphasis on credit analysis; and the exist-
ence of money politics, which linked the political and financial sectors at
times to the detriment of prudent supervision. Although not all Thai banks
and finance companies fell into these problems, the majority of finance com-
panies did, as well as some of the commercial banks.
What is important to clarify is that the lack of transparency in finance
functioned to screen what was really happening in much of Thai banking.
The opaque nature of business relations allowed large deals to be concluded
with a handshake, loans to be granted without review by watchdogs, and, in
some of the more egregious cases as with the Bangkok Bank of Commerce,
intentional violations of law. While the Thai economy was in a strong
growth mode, the opaque nature of finance was not as noticeable as a prob-
lem. However, when growth slowed or scandals occurred, the lack of trans-
parency was indeed regarded as problematic.
Bearing the comments of the preceding paragraph in mind, the roots to
Thailand's 1997 crisis can be found in the 1980s, a period in which the Thai
financial system underwent profound changes as banks and finance compa-
nies rapidly expanded and became weightier players in local markets and, by
the 1980s, regional markets. However, the real dynamic expansion of busi-
same and a high degree of policy continuity was maintained. See Richard F. Doner and Anek
Laothamatas, "Thailand: Economic and Political Gradualism," in Voting for Reform: Democ-
raccy, Political Liberalization, and Economic Adjustment, ed. Stephen Haggard and Steven B.
Webb (New York: Oxford University Press, 1994) p. 411.
ness came from finance and securities companies. From 1985 finance firms
were able to offer high interest rates to mobilize savings, which they lent to
the expanding manufacturing sector. Consequently, between 1985 and 1993,
the total assets of finance companies increased from 133 billion to 918 billion
baht.4
Throughout much of the 1990s economic growth remained high. Commer-
cial banks and finance companies were active lenders to manufacturing and
construction companies and property developers. The real estate sector, in
particular, became a bubble.5 Additionally, many banks and finance compa-
nies got caught in the trap of borrowing short-term funds to provide for long-
term loans. Thailand's creation of the offshore Bangkok International Bank-
ing Facility (BIBF) also helped fuel credit expansion as it led to a large in-
flow of cheap funds from overseas into the country. This was especially the
case when the Bank of Thailand gave permission for commercial banks to
undertake offshore operations in 1993.6 Of later concern to the Thai govern-
ment, the BIBF's market was not monitored closely and the authority's initial
inability to quantify short-term dollar debt was to become both problematic in
1995 and 1996 and a major pinprick in eroding investor confidence. While
economic growth remained at high levels, little consideration was given
about lending practices, the viability of many borrowers, and the amount of
borrowing from offshore. The last was driven largely by the attractiveness of
borrowing in U.S. dollars, which could be had at lower interest rates and to
which the baht was loosely pegged.
Another area that was to become problematic in the area of transparency
and disclosure was that the Thai financial world functioned with a significant
informal network. As the World Bank's Cheryl W. Gray noted in another
context: "There is a growing literature on informal product and credit mar-
kets in developing and transition countries that shows the importance of repu-
4. Pasuk Phongpaichit and Chris Baker, Thailand: Econonmy and Politics (Kuala Lumpur:
Oxford University Press, 1995), p. 158. Reflecting the process of change in the financial system,
total assets of commercial banks expanded from 714 billion baht in 1985 to 2.657 trillion baht in
1993. Owing to the swings in the exchange rate, no U.S. dollar equivalents have been given in
this article. For reference, US$1 = 25.6 baht in December 1996 and 47.2 baht in December
1997.
5. Watsaya Limthammahis, "Financial Institution Crisis: From Japan, Korea to Thailand,"

Bangkok Bank Research Department Paper, 1997, p. 14. According to the Bank of Thailand,
housing credits extended by commercial banks expanded from 100.645 billion baht in 1989 to
426.100 billion baht in 1996, while the finance companies grew 42.073 billion baht in 1989 to
362.840 billion baht in 1996.
6. Some of this money went into the Thai stock market boom of 1993-95.
tation and family or ethnic networks as screening devices in selecting reliable

partners in the absence of formal contract-enforcement institutions."7
The transparency issue must also be seen in regard to Thai societal tradi-
tions. Although this should not be overstated, the traditional outlook of pa-
tron and client plays a role in reinforcing the opaque nature of financial
transactions. The patron is the phu yai, or "big man," and the client is the
phu noi, or "small man." They have what has been defined as an exchange
relationship: each party benefits but to an unequal degree, reflecting their
superior or subordinate status. As John Girling has noted of this relationship:
"The client is at the beck and call of his patron, and in return for these 'serv-
ices' benefits from the achievement of his patron's interests: he will rise in
the social hierarchy (and receive incremental rewards) as his patron rises.
Indeed, patron-client relationships provided (and still provide) the main chan-
nel of social mobility in Thailand."8 What this means from a transparency
standpoint is that a patron-client relationship can and does undermine the
concept of contract enforcement institutions as the informal network contrib-
utes to a bypassing of formal processes. Informal family or ethnic (particu-
larly Thai-Chinese) relationships also have played an important role. This is
especially true in the banking system. For example, Thailand's largest bank,
Bangkok Bank, has been dominated by the Sophonpanich family throughout
much of its existence since being established in 1944.9
Another dimension of transparency and disclosure is the link between
owners of finance companies and politicians in what has been referred to as
"money politics." In the broad sense, money politics is the blurring of the
distinction between corporate and political power; a pattern of clientelism,
involving "much unproductive deployment of economic resources; growing
political corruption and cronyism; and the increased use of money in party,
state, and federal elections."10
Money politics have been able to function in Thailand because of a prefer-
ence for informal networks and the weakness in the legal system. Although
the Thai legal framework relevant to economic activity has been adequate for
growth, that framework has been deficient in its respect for the parliamentary
system (as reflected by the country's many coups) and the processes for
7. Cheryl W. Gray, "Reforming Legal Systems in Developing and Transition Countries," in

Finance and Development, September 1997, on Internet at <http://www.worldbank.org/fundd/
english/0997/sep97.htm>.
8. John L. S. Girling, Thailand: Society and Politics (Ithaca, N.Y.: Cornell University Press,
1988), p. 39.
9. Jesse Wong, "Taking Big Hit, Bangkok Bank Can't Rely on Family Ties," Asian Wall
Street Journal Weekly Edition, February 16, 1998.
10. Edmund Terence Gomez and Joma K. S., Malaysia's Political Economy: Politics, Pa-
tronage and Profits (New York: Cambridge University Press, 1997), p. 27.
transfer of power, as well as a more mundane level of routine legal philoso-

phy and practice vis-a'-vis commercial activity and the operations of the mar-
ket system. Robert J. Muscat noted: "While I have stressed the continuity of
Thai economic policies, the legislative embodiment of the particulars of pol-
icy authority has been notably lacking in predictability. Also weak has been
the quality of transparency that reinforces the confidence of investors and the
general public in their understanding of the law and of the processes of legal
formulation and implementation." What this has meant is that laws are not
entirely specific, are open to interpretation, and few contain mechanisms for
controlling abuse of discretionary powers. An added dimension to this is that
predictability and transparency are further undermined by an insufficiency of
codification. Once again, as Muscat noted: "New laws frequently contradict
old ones without canceling the latter, while the absence of codification can
leave it unclear to administrators and the public whether all the law, or the
current law, applying to individual cases has been identified.""
In an environment with a weak legal structure and wide administrative
scope, compounded by dynamic economic growth, money politics can flour-
ish. The Chatichai government (1988-91) was regarded as the "buffet cabi-
net" in which corruption was a major problem. The coalition parties lacked
any major ideological thrust and were not representative of any regional or
large societal group. One scholar penned the following brutal assessment:
"The main parties were composed of factions that also had no basis in policy
but were merely sets of patrons and clients contending for dominance, cliques
led by rival politicians most of whom had to be businessmen with the wealth
to help clients finance election campaigns and to cement political alli-
ances." 12 It was no surprise that one of the objectives of the leaders of the
1991 coup was to rewrite the Constitution in a way that it would discourage
the practice of vote-buying. Although the Chuan administration (1992-94)
was regarded as relatively clean from scandals, the Silpa-archa government
was perceived as a throwback to the same blatant money politics that marked
the Chatichai period. General Chavalit's emergence as prime minister fol-
lowing the November 1996 elections in a six-member coalition that included
General Chatichai's Chart Pattana party again raised concerns over money
politics and special interests linked to various politicians. Without tougher
rules concerning transparency and disclosure in the financial system as well
as in how leading politicians came into their fortunes, the stage was set for
Thailand's crash.
11. Robert J. Muscat, The Fifth Tiger: A Study of Thai Development Policy (Armonk, N.Y.:
United Nations University Press/M. E. Sharpe, 1994), p. 267 for the first quote and p. 268 for the
second.
12. Muscat, The Fifth Tiger, p. 269.
The Crash of 1997

As Thailand's export growth cooled in 1996, concerns arose about the
overlending in the finance sector and the ability of companies to pay back
loans, especially those loans made in U.S. dollars. Easy access to credit both
in baht and offshore in dollars had made corporate expansion possible. Now,
as market conditions were shifting to slower growth, an overextended finan-
cial sector found itself looking to tough times ahead. It was difficult for
many finance companies to reverse suddenly their operating mode, and there
remained some degree of confidence that the government would not devalue
the baht from its standing vis-a'-vis the dollar. It was felt that, considering the
build-up in U.S. dollar debt among the Thai finance and corporate sectors,
such an action would be disastrous. What greatly compounded the situation
was that the government did not have an awareness as to the extent of the
problem in numerical terms. Moreover as the bubble began to burst, informal
networks were used to seek help from the authorities to stave off looming
disaster.
Although the Chavalit administration appointed the respected Amnuay
Viravan as finance minister, the new government was highly politicized and
prone to considerable factional infighting, which led to an inability on the
policy side to address critical issues. By early 1997, fears grew sharply of an
impending crisis as property values plummeted and export growth continued
to decline. Many local and foreign lenders cut back on lending to weak Thai
institutions, which with time passing and bad loans soaring prompted a li-
quidity crunch.13 On July 2, the government belatedly devalued the baht
after massive foreign exchange reserve losses. Many companies were taken
by surprise and had failed to hedge against such an action. The dollar debt
burden of corporations and financial concerns suddenly became all that more
onerous, reflected by a sustained plunge in the stock market. As the Thai
economy reeled, the Chavalit government was forced in August to turn to the
International Monetary Fund (IMF) for assistance. One of the key areas that
the IMF highlighted in its reform package was a cleaning up of the financial
sector, including measures to be taken to improve transparency and disclo-
sure.
The fallout from Thailand's economic crisis in 1997 in the financial sector
has been devastating. In March 1997, Finance One, the largest financial
company in Thailand, signed a memorandum of understanding to merge with
Thai Danu Bank on account of liquidity problems. In June 1997, the Thai
authorities shuttered 16 finance companies that were technically insolvent.
Another 42 finance companies were shuttered in August. Despite a casualty
13. Paul M. Sherer, "Foreign Capital Arrives for Thai Bank," Asian Wall Street Journal
Weekly Edition, September 22, 1997.
list of 58 finance companies out of 91, the Thai government was slow to
make any closures permanent. Instead, the Thai government initially loaned
58 lenders 430 billion baht equal to 9% of 1996's GDP to keep them afloat. 14
Allegations were heard that these loans were made due to political connec-
tions between owners and the members of the government. Moreover,
though closed for regular business, the government allowed some finance
companies to provide some services and gave numerous deadlines on which a
final decision will be made on their future.
The closure of the finance companies had a further ripple effect in the Thai
economy. Simply stated, Thai companies went from having too much credit
available up to 1996 to no credit in mid-1997. This meant that the closure of
finance companies froze many hundreds of billions of baht in loans to the
corporate sector, while the still-open finance companies and banks severely
restricted their lending. What made this particularly difficult for many Thai
companies was that the devaluation of the baht considerably elevated both
levels of foreign currency debt that companies had as well as their servicing
costs.15 Thailand's 15 commercial banks did not ride through the crash un-
scathed. All the banks were forced to recapitalize and, in some cases (as with
Siam City Bank), the government was forced to intervene.
Generally speaking, the lack of transparency and disclosure opened the
door to other problems that became aggravated in an economic downturn.
Without adequate disclosure and reporting guidelines, the major problems in
the financial sector were too much credit or overlending, compounded by a
lack of credit controls and prudential internal regulations. Weak government
supervision also played its part. Many of the same problems existed in terms
of corporate governance. The Alphatec case reflects the problem of poor
transparency and disclosure.
The Case of Alphatec

Alphatec Electronics was one of the more well-known Thai companies to fall
from grace in the 1997 economic crisis. Its business activities were in
microelectronics, in particular as a chip "assembler" or "packager." This is
defined as a relatively low-tech, labor-intensive work involving slicing up
other manufacturers' silicon wafers, mounting the cut-up chips in plastic cas-
ings, and testing the final product before shipment. The Thai company
14. "Thai Finance: More Questions than Answers," The Econonmist, October 18, 1997, p. 77.
15. Ryan O'Connell, Nicholas Karsno, and Jerome Fans, "The Impact of Market Turmoil in
Southeast Asia and Korea on Japanese Banks and Other Asian Financial Institutions," Moody's
Investors Service, November 1997, p. 5. One offshoot of this was noted by Moody's Investors
Service in November 1997: "The problems are acute and a sign of this is that many companies
are simply declaring bankruptcy, even at this relatively early stage-just walking away from
their obligations rather than working things out with their creditors."
processed wafers for large global companies such as Texas Instruments, Ad-
vanced Micro Devices, Inc., and Cypress Semiconductors Corp.16
Having gone public in the great bull market of 1993, Alphatec had been
one of the hottest traded stocks on the Bangkok Stock Exchange. Investor
confidence was enhanced first by having a reputable London-based law firm
conduct its initial "due diligence" and then by having the international ac-
counting firm Peat Marwick sign off on accounts that were reported healthy
in subsequent years. However, in 1997 it was revealed that the company was
deeply troubled with a lack of transparency and disclosure in its operations,
especially on the part of its chairman, Charn Uswachake, being the root
cause. In July 1997 an independent audit by Price Waterhouse indicated that
the Thai company had overstated profits by at least $164 million between
1994 and April 1997; the report stated the company in fact should have been
reporting "significant losses." Moreover, Price Waterhouse discovered that
Alphatec had transferred at least $160 million of corporate funds to other
Charn-controlled companies without board approval. Finally, the accounting
firm revealed that Alphatec maintained two sets of widely divergent account
books.17 As the Wall Street Journal's Peter Waldman and Paul M. Sherer
commented:
Once lionized as Thailand's best hope for leapfrogging into the upper ranks of the
world's technology producers, Alphatec now stands as an object lesson in the dan-
gers of doing business in a country where management accountability is spotty at
best. The stark absence of corporate controls in Alphatec-the mingling of funds,
the amounts listed, the nature of closely held companies run by the same family,
the use of multiple sets of accounting books and misleading accounting methods,
the highly paid, rubber-stamp board-mirrors the problems at other Thai compa-
nies that have brought this country's economy to the brink of collapse.'8
Alphatec, like many Thai companies, enjoyed rapid expansion from a fast-
growing economy and easy access to financing from both within Thailand
and international sources. In 1996, the company's debt load grew signifi-
cantly as Charn pushed forward a highly ambitious expansion. The plan was
to gain a foothold in every rung of the chip-making ladder by creating new
companies to develop these ventures. Charn's new companies were headed
by family members and independent of publicly listed Alphatec. Financing
for the new units came from both Thai and foreign banks. These loans were
to be repaid from stock offerings on Thailand's then-booming stock ex-
16. Peter Waldman and Paul M. Sherer, "Alphatec's Travails Show Why Thai Economy Is
Shot," Wall Str-eet Journal, September 8, 1997.
17. Much of the foregoing is based on Henry Sender, "The Siren Song in Bangkok," Far
Eastern Economic Reviews (FEER), September 25, 1997, p. 46.
18. Ibid.
change. In late 1996, Thai stock prices began a protracted, steep fall. Conse-
quently, Charn's ability to make initial public offerings of stock became
impossible and Alphatec and its creditors soon found themselves on a slip-
pery slope into deep financial troubles.
Responding to the Crisis

Thailand's 1997 crisis has forced a serious rethink of the way the country
conducts its business. This is by no means to argue that the Thai business
sector is hopelessly corrupt and the situation is irretrievable. Rather, it im-
plies that as the Thai economy has become more globalized, it is being held
to more global (some would argue Western) standards of transparency and
disclosure. This clearly has a political component in that as Thai democracy
evolves (as reflected by the passage of the new Constitution in 1997), the
country's political elite will be forced to provide a clear picture of their fi-
nances and who is providing campaign funding. Thailand has a long distance
to travel before it exits from the current economic crisis.
Part of the problem remains the ongoing links between business and poli-
tics. The Thai government's response to the 1997 economic crisis and, in
particular, the crash of the financial sector was slow and greatly complicated
by politics. For example, representatives of the suspended finance companies
met with government officials on a number of occasions, including Prime
Minister Chavalit and the leader of the second largest party in the ruling
coalition, General Chatichai, to lobby for weaker guidelines.19 The owners
of the shuttered finance companies also dragged their feet on responding to
government demands for market valuations of their assets and in general
fought a tough rearguard action to stave off final closure. On October 14,
1997, the government launched its financial restructuring package; as it did, it
admitted that the country' s financial sector suffered not only from a downturn
in the economy but also from "legal, institutional, and information deficien-
cies, including a weak supervisory system."20 It did not bode well that the
chairman of the committee devising the plan resigned, concerned that it
would make the politicians argue.21
The Thai authorities' overall strategy with the financial sector was to sepa-
rate and suspend the weakest institutions and support those remaining.22
19. See Suebpong Unarat, Nuntawan Polkwoundee, and Cholada Ingsrisawang, "Chatichai
Hears Gripes from Suspended Firms," Bangkok Post, October 9, 1997.
20. Joint Statement by the Ministry of Finance, "Financial Restructuring Package," October
15, 1997, p. 1.
21. "Thai Finance: More Questions Than Answers," The Economist, October 18, 1997, p. 77.
22. Other measures included the removal of foreign ownership limits on all finance compa-
nies and commercial banks for ten years, and the introduction by the year 2000 of new loan
classification and provisioning requirements to bring them in line with international standards.
This program accelerated with the advent of the Chuan administration in No-
vember 1997, which was followed in December by the closure of 56 of the 58
finance companies eventually shuttered. It was an important break with the
past as it overturned the informal network and nudged Thailand toward hav-
ing a more open financial system. The decision was difficult as the closures
were expected to throw 6,000 people out of work in addition to the estimated
14,000 who had earlier lost their jobs in the finance sector. The government
stated that it would take new measures to "improve the system of accounting
and public disclosure to increase transparency" and, equally important, "im-
prove the efficiency and timeliness of supervision and examination of finan-
cial institutions."23
While the financial crisis in Thailand reflects severe problems, changes are
finally being made as reflected by the Bank of Thailand's intervention in the
Mahatan Finance Company in November 1997. Exercising its newly ex-
panded powers, the central bank took control of the small finance company
following the discovery of fraud and mismanagement by its directors and
senior executives. The central bank ordered the assets of three top Mahatan
executives frozen for 180 days, a number of senior executives and directors
were ordered to step down, and two regulators and one outsider were ap-
pointed to serve as directors and investigate the company's books. Although
the central bank' s action was not a massive or dramatic break with the past, it
did show that the authorities had taken a harder stance to deal with an issue of
transparency and disclosure.
Thailand and Asia: Generalizations

The problems pertaining to transparency and disclosure in Asia are not lim-
ited to Thailand. In fact, the Thai crisis soon put a spotlight on all Asian
banking and corporate systems. It led to what has been called the "Asian
contagion," with the crisis rippling outward from Thailand throughout much
of Asia and beyond. Clearly, the banking and corporate systems in China,
India, South Korea, Malaysia, and Indonesia have many of the same
problems. This has a big cost: according to research conducted by Peregrine
Group, the extent of the bank crisis in non-Japan Asia could rise to more than
The government announced it would, through the Financial Institutions Development Fund
(FIDF), guarantee depositors and most creditors of the non-suspended institutions. Moreover, a
Financial Restructuring Agency was established to supervise the rehabilitation or liquidation of
the 56 closed finance companies, while an Asset Management Corporation (AMC) was created
to buy the bad assets of suspended financial institutions.
23. Rajan Moses, "Thailand Takes Tough Action on Finance Firms," Bangkok Post, Decem-
ber 8, 1997.
$500 billion, indicating that Thailand is hardly alone.24 And, as demon-

strated by the closure of the country' s fourth largest brokerage house
(Yamaichi) and the 10th largest bank (Hokkaido Takushoku) in November
1997, Japan also has substantial problems.
The Hong Kong-based Political and Economic Risk Consultancy, Ltd.,
conducts surveys on transparency. In late 1997, its survey cited Vietnam,
India, China, Indonesia, and South Korea as the five countries with the great-
est lack of transparency.25 The significance of the survey's results was noted
by journalist Shanthi Kalathil:
The diving currencies and ballooning bad debt in Asia today have their roots in
optimistic but opaque balance sheets that attracted investors, who were themselves
often all to willing to overlook the lack of financial data. Now that markets have
sunk, many investors are taking the opposite view: without solid information,
they're believing the worst.26
To this one could add that investors, local and foreign, opted out of Asia in
1997 and for part of 1998, dealing a serious blow to regional economies
needy of capital flows to upgrade infrastructure and human capital.
Let us briefly consider Indonesia and Korea in this context. Indonesia, like
many other Asian countries, lacks transparency and disclosure due to a heavy
reliance on informal networks and close government-bank-corporate rela-
tions. Moreover, the number of Indonesian banks had mushroomed in excess
of 200 by 1996. Although the state-owned banks underwent crises in the
early 1990s, the banking sector actively continued to extend credit up until
1997, when the Asian contagion forced the government to let the rupiah float.
As the Indonesian economy cooled, it was revealed that the country's cen-
tral bank did not have a complete accounting of the amount of dollar debt
held by its corporate sector, which in turn owed money to local banks. As the
economic crisis unfolded and Indonesia turned to the IMF for assistance, it
was revealed that private sector corporation debt was in excess of $60 billion,
well beyond the country's foreign exchange reserves of $24 billion. As part
of the IMF package for Indonesia, the Suharto government did close 16 banks
in early November 1997, indicating that the authorities would take action.
However, backsliding on reforms soon occurred. It was most noticeable
when one of President Suharto's sons was granted a new license for a bank in
the exact same premises and with largely the same personnel as his earlier
"closed" institution. Indonesia's economic crisis deepened and by January
1998, the government was forced to adopt a second round of IMF measures.
24. Christopher Danville, "Peregrine Sees Asia ex-Japan Bad Debts at $500 Bn," Bloomberg,
November 21, 1997.
25. Asian Wall Street Journal Weekly Edition, December 15, 1997.
26. Ibid.
Considerable effort will be needed to instill greater transparency and disclo-

sure in Indonesia given the close-knit relations between banks and corpora-
tions and the government.
South Korea also has considerable problems over disclosure in the finan-
cial and corporate sectors, though it is important to note that the historical
development of Korean and Thai banks are very different. In January 1997,
Hanbo Iron and Steel Company fell under debt of 5 trillion won ($5.9 bil-
lion), knocking out the country's 14th largest conglomerate. It was later re-
vealed that Hanbo founder Chung Tai Soo had masterminded a massive
scandal in which he bribed numerous bank executives and politicians in ex-
change for loans.27 As the year continued, Korea's banking and corporate
sectors were hit by ongoing problems that reflected a serious lack of trans-
parency and disclosure in lending practices. By year-end 1997, the problems
in the Korean banking sector had resulted in ratings downgrades by interna-
tional rating agencies, government assistance to the more troubled institu-
tions, and a liquidity squeeze that left most major Korean banks hard-pressed
to remain profitable, let alone solvent. Finally, in December 1997, the gov-
ernment, having opted to turn to the IMF for help, closed nine out of the
country's 30 merchant banks.
The problems facing Korean banks at the end of the 20th century reflect
their evolution since the 1960s as commercial banks functioning as state de-
velopment banks. Park Chung Hee, who dominated South Korea from
1961-79, was suspicious of banks and upon assuming control of the country
put all of them under state control. During this period, Korea's banks were
little more than the government's instruments for disbursing credit along
party lines. This meant that most officers in banks were appointed by the
government and the bankers were largely told to which "strategic industries
and companies to lend."28 If the government favored the development of the
steel sector, then the banks were guided to lend to those companies that were
favored by the government. With such tight control over credit, the govern-
ment was able to dictate economic policy. The combination of a state ac-
tively directing the economy-with its tasks being carried out by large
private sector conglomerates (chaebols)-and financing by banks that took
their directions from the state established the foundations for the Korean eco-
nomic miracle of the 1980s and early 1990s. Transparency and disclosure in
this system was not an issue-in fact, it could be regarded as an impediment.
Sometimes referred to as "Korea, Inc.," this combination also set the stage for
the crisis in 1997.
27. Charles J. Lee, "South Korea, Not a Pretty Picture," FEER, September 25, 1997, p. 78.
28. Nicholas Krasno, Josh Wang, and Shinji Okabe, "Banking System Outlook: Korea,"
Moody's Investors Service, November 1997, p. 5.
As the Korean economy became more industrialized, joining the Organiza-

tion for Economic Cooperation and Development and becoming the world's
11th largest economy in the 1990s, demands were placed on the East Asian
nation to open its economy and move away from the state's activist role.
Measures were taken to open the economy but fell short to making major
strides in financial liberalization. At the same time, the longstanding Korean
banking practices had resulted in a highly indebted corporate sector (which
had little regard for returns on investment) and a banking system largely hos-
tage to these highly indebted companies. When the domestic economy
cooled in 1996 and, in particular, in 1997, Korean companies struggled to
stay current on their loan obligations. Unfortunately, Hanbo was not the only
chaebol to run into difficulties in 1997 and a number of companies declared
bankruptcy, especially when the won was devalued late in the year. This, of
course, reverberated in the banking sector, forcing the government to assist a
number of banks, while moving forward with new reforms in late November
1997. The financial institution's rescue package included the establishment
of the Korea Asset Management Corp. (a nonperforming asset fund); a capi-
tal gains tax waiver on the sale of collateral; general repayment support for
borrowings; loans amounting to 1 trillion won at the below-market rate of 8%
to Korea First Bank (the country's largest bank); and a government subscrip-
tion to 800 billion won of Korea First's equity, giving it 49% interest in the
bank.29 Despite these reforms, changing the nature of the Korean banking
system will be a long and difficult process, yet necessary if the country is to
remain competitive in the global economy.
Conclusion
In 1997 Thailand witnessed a collapse in domestic asset markets, widespread
finance company failures, bankruptcies in the corporate sector and an overall
brutal downturn in economic activity that extended into 1998. Reasons for
the 1997 crisis included a failure to delink with the U.S. dollar after it appre-
ciated in 1995, a growing and dangerous current account deficit (8% of GDP
in 1996), slow and inadequate policy responses to a growing crisis, and local
companies feeding the currency frenzy by panic-buying of dollars to beat
further devaluations, setting up a cycle of ongoing weakening in the baht.
Yet, while these factors all played a role, the major explanation is not to be
found in currency or monetary issues nor for that matter in traditional fiscal
issues. As economist Paul Krugman notes: "Instead, to make sense of what
went wrong we need to focus on two issues normally neglected in currency
crisis analysis: the role of financial intermediaries (and of the moral hazard
29. "S&P Affirms Ratings on Five Korean Banks; Lowers One," S&P Creditwire, November
26, 1997.
associated with such intermediaries when they are poorly regulated), and the
prices of real assets such as capital and land."30 Consequently, the issue of
transparency and disclosure rears its head as a major actor, especially in light
of the role played by poorly regulated financial intermediaries as in the Thai
finance companies. Moreover, the difficulty in assessing the value of assets
in a bubble economy only fed the problem.
Have Thailand and other Asian nations learned from the 1997 crisis? At
the annual membership meeting of the Institute of International Finance held
during the IMF-World Bank meetings in Hong Kong, on September 1997,
Thailand's then-Finance Minister Thanong Bidaya stated: "It is important
that the principle of timely dissemination of correct data and prompt and
transparent early action to solve financial problems be undertaken in a clear
manner."31 Clearly, the Chuan administration is seeking to make the Thai
financial system as well as politics less opaque and more open in its conduct.
New laws are being established and reporting commitments tightened. More-
over, the central bank is pushing families that control banks to bring in credi-
ble foreign partners and hand over management to independent professionals.
The growing importance of transparency and disclosure in Asian banking
and corporate systems will continue to be a key factor affecting how fast
countries, such as Thailand, Korea, and Indonesia rebound from the crisis of
1997. At the heart of the matter is that as Asian nations become more global-
ized, their financial and commercial institutions are being held up and com-
pared to others around the planet. This clearly has an impact on their ability
to raise capital and their cost of funds, all of which in turn have an impact on
their national economic development. As the Thai case reflects, changing the
nature of financial and corporate business is not an easy matter as it is com-
plicated by cultural preferences for informal networks and political connec-
tions. Yet, the costs of not adopting the global rules of the game can be
highly dangerous, especially for those countries that are actively engaged in
international commerce. Moreover, a weak banking system in one country
can easily pass its problems on to others as witnessed in 1997 with the so-
called Asian contagion.
30. Paul Krugmnan, "What Happened to Asia?" January 1998, on the Internet at <http://
web.mit.edu/krugman/www/DISINTER.html>.
31. Address by H. D. Thanong Bidaya, minister of Finance of Thailand, at the Annual Meet-
ing of the Institute of International Finance, Inc., in Hong Kong, September 1997, pp. 5-6.

Transparency in Thailand's 1997 Economic Crisis - The Significance of Disclosure

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Transparency in Thailand's 1997 Economic Crisis - The Significance of Disclosure

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Transparency in Thailand's 1997 Economic Crisis: The Significance of Disclosure

Author(s): Scott B. MacDonald

The fall of governments, demonstrations under the hot

Scott B. MacDonald is Director of Sovereign Research, Fixed Income

? 1998 by The Regents of the University of California

Although Thailand was hit by a number of external shocks in the late

The Road to Financial Crisis

5. Watsaya Limthammahis, "Financial Institution Crisis: From Japan, Korea to Thailand,"

tation and family or ethnic networks as screening devices in selecting reliable

7. Cheryl W. Gray, "Reforming Legal Systems in Developing and Transition Countries," in

transfer of power, as well as a more mundane level of routine legal philoso-

12. Muscat, The Fifth Tiger, p. 269.

The Crash of 1997

The Case of Alphatec

Responding to the Crisis

Thailand and Asia: Generalizations

$500 billion, indicating that Thailand is hardly alone.24 And, as demon-

Considerable effort will be needed to instill greater transparency and disclo-

As the Korean economy became more industrialized, joining the Organiza-

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