FRED
08-29-06, 08:10 AM
Is the Housing Bubble Global?
Report from Thailand
Guest Commentary - August 29, 2006
by Mark Sengel
In 1990 when my wife and I first moved to Thailand, the baht was pegged to the dollar. Month to month, year to year, 25 Thai baht bought one US dollar. If you were changing money at the airport, you didn't check the exchange rate. The currency was only permitted to fluctuate a few satang.
When we moved back to Thailand in August of 1997, the baht was rapidly losing value. Currency speculators had won. In six months Thailand exhausted its 32-billion dollar foreign exchange reserve. Some traders lost millions when Thailand, in a last stand, forced speculators to default on short positions by limiting access to the baht overseas. This only strengthened those with longer positions, most notably George Sorros. The baht was finally floated and quickly sank. In January of 1998, 56 baht bought a dollar. The currency had lost 50% of its value in less than six months.
Many articles recapping the devaluation still blame Sorros, but the crisis was rooted in crony capitalism and lack of regulation. In 1996 Bangkok Bank of Commerce (BBC) had finally been exposed. Rumors the bank was rotten were rampant. Books had been cooked to hide massive debt. Near the end, in a desperate attempt to re-capitalize, BBC did what banks never do: pay depositors a higher rate than they collect from borrowers. The Thailand government bailed out the BBC in 1996 at the cost of 10% of GNP.
In the early 90's, Thai companies and financial institutions secured loans denominated in US dollars. With the prime rate in Thailand between 13 and 14 percent, they were lured by lower interest rates. As Thailand's currency depreciated, it became impossible to pay back dollars with baht. Land developers without cash were forced to hand over collateral. In 1998 Thanong Khanthong, business editor of The Nation began a column: "Bangkok is now for sale." Unemployment doubled and executives made news by becoming noodle vendors. Most visible to everyone everywhere, construction stopped as 25 to 40 percent of Thai bank loans were for construction projects. The stock market which peaked around 1,500 in 1994 collapsed, eventually bottoming near 200.
After the 1997 to 1998 crisis, 50 to 60 financial institutions were shut down, but despite assurances to the IMF, Thailand never adopted bankruptcy reform. "Why would a parliament pass bankruptcy reform when so many parliament members would be adversely affected?" BusnessWeek.com wrote in 2000. To this day, many companies and individuals have ignored massive debt, simply refusing to acknowledge their obligations to creditors.
Cronyism taints every government. During scares of avian flu and massive culling of poultry, the public stopped eating chicken. As "smugglers" were arrested for illegally importing vaccines to protect their flocks, the prime minister donned a hat and apron to fry chicken and assure the public it was safe. To bail out the chicken magnates, government officials tried to barter stockpiles of frozen chicken for Russian fighter jets. And every government has its emblematic cronyism photo op. A friend at work has pictures of George W. Bush and Thaksin Shinawatra, Thailand's prime minister, side by side. Bush is in his flight jacket, thumbs up on the aircraft carrier. Thaksin is wearing a chef's hat.
When we moved back to Thailand in 1997, billboards on the highway advertised finished condos for less than US$10,000. These were buildings completed just before the crash, but in every direction abandoned projects rose from weeds and rubble. Today, Thailand is booming again. In many areas land prices have doubled in three years. A rai of land (1 rai = 2/5 acre) near the soon not-to-be-quaint "fishing village" of Bang Saray rose from 400,000 baht (US$10,642) to 650,000 baht (US$17,269) in a year. Luxury condo prices are approaching 100,000 baht (US$2,659) a square meter. An apartment a friend rented for 500 dollars a month is priced for sale at US$250,000.
Speculators are back at it. Bulldozers cleared a ten-acre lot two blocks from our house. Crews erected two enormous billboards. The fading pictures show a condominium with pools, shops, and gardens. You can buy a unit. You can sell a unit. But there has been no actual construction activity on the site for ten months.
Pattaya newspapers recently reported approval of a 91-story condominium in nearby Jomtien. It would be the highest residential building in the world.
Replicating the rivalry of Lowes and Home Depot, HomePro and Homeworks have built massive stores to take on Homemart. Home improvement company CEO's are predicting 40% growth in sales in the next two years.
Thailand is often labeled an "export economy." Shrimp and rice farmers are grumbling about the strength of the baht, but the Bank of Thailand officials told exporters on Friday to "get use to it," citing "US current accounts deficits of two billion dollars a day." Real estate spinners are saying baby boomers from all over the world are just beginning to retire and will continue moving here, pushing housing prices higher for the foreseeable future. Pity the average Thai worker.
A year ago the million baht in my bank account was worth $US24,000. It's now worth $US27,000, up 12%. It's tempting to take profits, but I won't be repatriating money to the United States.
In the global speculative economic system, we're all speculators now, aren't we?
Report from Thailand
Guest Commentary - August 29, 2006
by Mark Sengel
In 1990 when my wife and I first moved to Thailand, the baht was pegged to the dollar. Month to month, year to year, 25 Thai baht bought one US dollar. If you were changing money at the airport, you didn't check the exchange rate. The currency was only permitted to fluctuate a few satang.
When we moved back to Thailand in August of 1997, the baht was rapidly losing value. Currency speculators had won. In six months Thailand exhausted its 32-billion dollar foreign exchange reserve. Some traders lost millions when Thailand, in a last stand, forced speculators to default on short positions by limiting access to the baht overseas. This only strengthened those with longer positions, most notably George Sorros. The baht was finally floated and quickly sank. In January of 1998, 56 baht bought a dollar. The currency had lost 50% of its value in less than six months.
Many articles recapping the devaluation still blame Sorros, but the crisis was rooted in crony capitalism and lack of regulation. In 1996 Bangkok Bank of Commerce (BBC) had finally been exposed. Rumors the bank was rotten were rampant. Books had been cooked to hide massive debt. Near the end, in a desperate attempt to re-capitalize, BBC did what banks never do: pay depositors a higher rate than they collect from borrowers. The Thailand government bailed out the BBC in 1996 at the cost of 10% of GNP.
In the early 90's, Thai companies and financial institutions secured loans denominated in US dollars. With the prime rate in Thailand between 13 and 14 percent, they were lured by lower interest rates. As Thailand's currency depreciated, it became impossible to pay back dollars with baht. Land developers without cash were forced to hand over collateral. In 1998 Thanong Khanthong, business editor of The Nation began a column: "Bangkok is now for sale." Unemployment doubled and executives made news by becoming noodle vendors. Most visible to everyone everywhere, construction stopped as 25 to 40 percent of Thai bank loans were for construction projects. The stock market which peaked around 1,500 in 1994 collapsed, eventually bottoming near 200.
After the 1997 to 1998 crisis, 50 to 60 financial institutions were shut down, but despite assurances to the IMF, Thailand never adopted bankruptcy reform. "Why would a parliament pass bankruptcy reform when so many parliament members would be adversely affected?" BusnessWeek.com wrote in 2000. To this day, many companies and individuals have ignored massive debt, simply refusing to acknowledge their obligations to creditors.
Cronyism taints every government. During scares of avian flu and massive culling of poultry, the public stopped eating chicken. As "smugglers" were arrested for illegally importing vaccines to protect their flocks, the prime minister donned a hat and apron to fry chicken and assure the public it was safe. To bail out the chicken magnates, government officials tried to barter stockpiles of frozen chicken for Russian fighter jets. And every government has its emblematic cronyism photo op. A friend at work has pictures of George W. Bush and Thaksin Shinawatra, Thailand's prime minister, side by side. Bush is in his flight jacket, thumbs up on the aircraft carrier. Thaksin is wearing a chef's hat.
When we moved back to Thailand in 1997, billboards on the highway advertised finished condos for less than US$10,000. These were buildings completed just before the crash, but in every direction abandoned projects rose from weeds and rubble. Today, Thailand is booming again. In many areas land prices have doubled in three years. A rai of land (1 rai = 2/5 acre) near the soon not-to-be-quaint "fishing village" of Bang Saray rose from 400,000 baht (US$10,642) to 650,000 baht (US$17,269) in a year. Luxury condo prices are approaching 100,000 baht (US$2,659) a square meter. An apartment a friend rented for 500 dollars a month is priced for sale at US$250,000.
Speculators are back at it. Bulldozers cleared a ten-acre lot two blocks from our house. Crews erected two enormous billboards. The fading pictures show a condominium with pools, shops, and gardens. You can buy a unit. You can sell a unit. But there has been no actual construction activity on the site for ten months.
Pattaya newspapers recently reported approval of a 91-story condominium in nearby Jomtien. It would be the highest residential building in the world.
Replicating the rivalry of Lowes and Home Depot, HomePro and Homeworks have built massive stores to take on Homemart. Home improvement company CEO's are predicting 40% growth in sales in the next two years.
Thailand is often labeled an "export economy." Shrimp and rice farmers are grumbling about the strength of the baht, but the Bank of Thailand officials told exporters on Friday to "get use to it," citing "US current accounts deficits of two billion dollars a day." Real estate spinners are saying baby boomers from all over the world are just beginning to retire and will continue moving here, pushing housing prices higher for the foreseeable future. Pity the average Thai worker.
A year ago the million baht in my bank account was worth $US24,000. It's now worth $US27,000, up 12%. It's tempting to take profits, but I won't be repatriating money to the United States.
In the global speculative economic system, we're all speculators now, aren't we?