The Asian Financial Crisis 1995–98

Birth of the Age of Debt

Russell Napier

• Publisher: Harriman House
• Year: 2021
• ISBN:
  9780857199157
• Topic: Negocios y empresa
• Subtopic: Gestión de riesgos financieros

In the space of a few months, across Asia, a miracle became a nightmare. This was the Asian Financial Crisis of 1995–98.In this economic crisis hundreds of people died in rioting, political strong men were removed and hundreds of billions of dollars were lost by investors. This crisis saw the US dollar value of some Asian stock markets decline by ninety percent. Why did almost no one see it coming? The Asian Financial Crisis 1995–98 charts Russell Napier's personal journey during that crisis as he wrote daily for institutional investors about an increasingly uncertain future. Relying on contemporaneous commentary, it charts the mistakes and successes of investors in the battle for investment survival in Asia from 1995–98. This is not just a guide for investors navigating financial markets, but also an explanation of how this crisis created the foundations of an age of debt that has changed the modern world.

Part One: Learning the hard way - a beginner’s guide

Tuesday, 9 September 1997

Harry – Hello. Hello. It’s Harry here.

FM – Ah, Harry who?

Harry – Harry from PT XYZ, we met in Jakarta last year.

FM – Oh yes. Hi Harry.

Harry – We need some money.

FM – Sorry?

Harry – We need some money.

FM – Dollars or rupiah?

Harry – Any money, any money, we need some money.

FM – What maturity?

Harry – Any maturity, any maturity, we need some money.

FM – I’m sorry Harry we don’t [line from Indonesia goes dead].

Phone conversation on Tuesday, 9 September 1997 between a fixed interest fund manager at HSBC Hong Kong and the chief financial officer of an Indonesian corporate

Harry and his company stood on the edge of bankruptcy less than two months after they had benefited from one of the biggest economic booms in history. Having spent years turning down cheap foreign finance, Harry was now begging for it, but not a penny was to be found.

Harry of course was not his real name and neither was PT XYZ a real company. This transcript I produced for institutional investors in September 1997 did not reveal those details for fear of heaping more problems upon Harry and risks upon the fund manager who received the call. By September 1997, Asia was full of Harrys and they didn’t just operate out of the finance departments of Asian companies. On 8 October 1997, a very similar call was placed, but this time from the Ministry of Finance of the government of Indonesia and it was to the International Monetary Fund (IMF). This country of almost 200 million people had run out of money.

It was not the only country in Asia that was suddenly on the verge of bankruptcy. A financial feast had turned to famine in just a few months.

There’s no money left

The consequences of running out of money transcended finance and economics. By May 1998 in Indonesia, over 1,000 people had been killed in riots and President Suharto’s 31-year tenure was over.

It was no ordinary recession that brought such chaos to Asia. In the Asian financial crisis the decline in gross domestic product (GDP) per capita, measured in US dollar terms, was of a huge magnitude: Indonesia −56%, South Korea −34%, Malaysia −30% and Thailand −27%. Investors who sold billions of US dollars and other currencies to buy Indonesian equities lost 90% of the value of their investment, in US dollar terms, in little over a year. Losses in other regional stock markets may not have been as bad, but they were still eye-watering declines in the US dollar value of investments: Hong Kong −58%, Malaysia −87%, the Philippines −78%, Singapore −59%, South Korea −71%, Taiwan −36% and Thailand −89%.

Savers had invested to benefit from the famed Asian economic miracle. They got the notorious Asian financial crisis. This is the story of that crisis, but not a history of it. It is told primarily through the writings of someone who was there at the time and who was trying to assess the economic and financial outlook both before and then through the chaos. It is a story of what it is like, as an investor, to live through one of the largest ever financial crises without the benefit of knowing where and when it will end.

In learning the investment lessons from that crisis, the mistakes in forecasting the future you will find in this story are probably more important than the successes. They are my mistakes – your author.

The so-called Asian economic miracle turned crisis

I was enfranchised to make these mistakes as I was, at the age of 30, hired to advise global equity investors on where and where not to invest in Asia. As the Asian Equity Strategist for one of Asia’s largest stockbroking companies, I lived through and chronicled this economic miracle that became a crisis.

I landed in Hong Kong in May 1995 to join the wild party in financial markets that was a key part of the so-called Asian economic miracle, but by the time I left in September 1998, much of the region was on financial life support provided by the IMF and the crisis looked like it could trigger a global depression. In just over two years, what was widely admired and praised as an economic miracle had turned into what is now widely known as the Asian financial crisis. Portfolio investors and commercial bankers lost hundreds of billions of US dollars in little more than a year.

The collapse threatened the solvency of the global financial system, bankrupted Russia and brought devaluation and economic chaos to Brazil. It also did something that was to prove even more destructive, as it created, in its aftermath, the conditions that were to fuel one of the biggest debt booms in global history – a debt boom that in 2021 continues on its destructive course.

It all began in the rear end of a koala. For three and a half years I chronicled the end of a boom and then the storm of the Asian financial crisis from the 33rd floor of what was then called the Lippo Centre in Admiralty, Hong Kong.

The two-towered building had been built by Australian entrepreneur Alan Bond. The Bond Centre, as it was originally called, was completed in 1988 when Alan Bond was at the zenith of his success. Bond was a proud Australian, though born in England, and he had the two towers designed in the shape of trees, each complete with a series of climbing koalas. My office was in the rear end of one of those koalas hanging out over Admiralty with a view across Hong Kong harbour to Tsim Sha Tsui. On a clear day, of which there were increasingly few, you could see the hills of the New Territories. China was not visible but, because of the pollution, you could often smell it.

The rear of this particular koala had its own warning about the perils of assuming that enterprise funded with excessive debt is an enterprise built upon firm foundations. Alan Bond went spectacularly bankrupt just a few years after the Bond Centre was completed. This was not the only casualty associated with the Bond Centre. After Bond’s demise, the building became the Lippo Centre and the Lippo Group of Indonesia was almost mortally wounded in the Asian financial crisis.

Of the two towers of the building, one was named the Peregrine Tower after the stockbroking company that was to be one of the more high-profile casualties of the Asian financial crisis. Local Feng Shui experts suggested that it was the shape of the glass koala that brought such bad luck to those that were associated with this building. Perhaps they were right, but during the time I occupied the rear of the koala, there was little good luck to be had anywhere in Asia.

My job in Hong Kong was to write papers advising professional investors on which of the many Asian equity markets to invest in and which to avoid. The View from the Rear of the Koala would have been a striking title for these writings, but perhaps too outrageous even for my famously irreverent employer, CLSA.

Instead, I settled on something much more prosaic for these musings with two words from a song called ‘Northern Muse’ written by Van Morrison. The writings you will find reproduced here, mainly written in the low light of an early Hong Kong morning, are as they hit the press from 1995 to 1998, published under the banner of The Solid Ground. From the outset, I saw the irony in that title as there is no such thing as anything solid in forecasting the future – financial future or otherwise. That is both the curse of those who try to forecast and also the appeal of the pursuit to the enquiring mind.

Fortunately, the job of an investor or their adviser is not to accurately forecast the future, but to forecast it more accurately than the consensus. These writings attempted that task without of course knowing anything about the future.

Mistakes and misconceptions in the fog of war

Historians know what happened next and this informs, often wrongly, their interpretation of events and decisions at the time. Misconceptions and mistakes are analysed without any understanding of how reasonable they seemed to those wrapped in their own fog of war. What follows here is a story of those mistakes made in the fog of war and of the major, then prevalent, misconceptions and their role in creating one of the world’s worst financial crises.

The content published here was written from 1995 to 1998 and cannot be described as history because it was written in an attempt to forecast the future. Now that we know that future, we can assess what advice, whether right or wrong, proved of value to those trying to secure positive real returns from their investments in the teeth of one of the world’s greatest financial crises. Your author believes that it will be advice that will be helpful for investors still involved in the battle for investment survival.

It was perhaps John Kenneth Galbraith who best described why memories, even perhaps if they are someone else’s, are “utilitarian” and can protect us all, at least somewhat, from the “luminous insanity” that sometimes pervades markets:

The story of the boom and crash of 1929 is worth telling for its own sake. Great drama joined in those months with a luminous insanity. But there is the more sombre purpose. As protection against financial illusion or insanity, memory is far better than law. When memory of the 1929 disaster failed, law and regulation no longer sufficed. For protecting people from the cupidity of others and their own, history is highly utilitarian.

John Kenneth Galbraith, The Great Crash 1929, Preface to the 1975 edition

No extrapolation allowed

As an over-confident 30-ye...