20 years ago, our founding father shares Singapore’s perspective on the root of the then-current 1997-98 Asian Financial Crisis at Baker Institute – a quick rise of foreign short-term debt to initiate long-term infrastructure projects in relatively closed economies that were not ready to handle such a huge influx of foreign capital.
This huge influx of foreign capital then found itself flowing into the stock markets, properties etc – any assets that can readily absorb a huge amount of money. These assets are then further collateralised to take on more debt for businesses, personal loans etc.
Money were being made, and many were getting rich.
Borrowers were excited by the ease of getting money and thought the low interest rates were guaranteed by their governments since their currencies were pegged to the dollars. So the party continued.
Eventually, when the US interest rates suddenly increased, many credit lines were cut off, financial institutes started drawing out the laundry list of their borrowers and the countries and started calling back the loans and issuing different credit ratings than before.
The honourable Minister Mentor Lee Kuan Yew shared how several Asian economies which have been working hard to uplift their people out of poverty for more than 30 years and succeeding on their own, and which hoped by opening their economies and adopting the global banking standards that they could do more for their people, watched in horror how their 30 years of hard work vaporised within 30 months.
These issues of hot short-term foreign capital flow, unsustainable foreign debt and not-as-strong corporate governance are still very relevant in the current context, and investors can protect ourselves by observing how management utilise their sources of cash flow.
For instance, we are seeing huge overseas corporates take on significantly more debt to buy back shares at not-so-cheap valuations and paying more dividends to their shareholders – a good way to maximise equity, improve return on equity, “create value” for shareholders and while they are at it, get a performance increase too.
But we are wary – done sustainably, these practices serve well. Overdone, and the damage can be long-lasting.
Meanwhile, we observe how Singapore investors’ interests have been protected and acknowledge the unseen work, furiously paddling behind-the-scene, to stabilise our broad equity and property markets before any short-term hot flow of capital could cause their impact.
We are a blessed bunch.