Twenty years on, it couldn't happen here - could it?

In July 1997 Thailand devalued its currency, the baht, as its economy found itself drowning in overseas debt that it could not repay and investors began to flee the country, taking precious foreign currency with them and leaving the Government unable to support a peg to the dollar.


The bath taken by the baht sparked a loss of confidence in similarly over-extended, excessively-indebted nations who were dependent on foreign lenders. As a result, South Korea, Indonesia, Malaysia and the Philippines also suffered runs on their currencies and local economies and stock markets alike plunged too.

Advisers and clients tempted to dismiss this as ancient history might like to think again.

As American writer Mark Twain once observed “History does not repeat itself, but it rhymes,” and it is possible to see clear parallels between 1997 and 2017 – especially if advisers and clients take even a cursory peek at the finances of many Western governments, including that of the United Kingdom.

This is not to say the UK is about to suffer a currency crisis or have to call in the International Monetary Fund (although it had to take the latter course in 1976, so such a scenario is hardly science fiction).

But as this chart shows, the pound had been losing ground for some time before the June 2016 referendum vote, on a trade-weighted basis:

Sterling still trades well below recent peaks on a trade-weighted basis

Source: Bank of England

What this shows is that advisers and clients need to be on their guard, especially as the Brexit talks grind on, economic performance remains sluggish across the West, politics remains fractious and central bank policies continue to diverge.

One way to prepare for a sterling shake-down would be to simply park assets overseas, in stocks, bonds or even cash, a policy which has worked well since the EU referendum vote in 2016, should any clients start to feel nervous.

Sterling is currently rallying so such concerns may seem overblown - but, to use another aphorism regularly attributed to Twain, “It ain’t what you don’t know that gets you into trouble. It’s what you know for certain that ain’t so.”

Currency crisis

After the Thai baht’s tumble, the Korean won, Indonesian rupiah, Malaysian ringgit and Filipino peso all lost between 30% and 80% of their value over the next 12 months.

Worse still, consumers and corporations found themselves unable to service their debts in newly-depreciated currencies.

They were plunged into poverty or went to the wall, especially once the International Monetary Fund offered multi-billion bail-outs – but only in exchange for huge increases in interest rates and fierce financial reform programmes.

The quintet of ASEAN nations eventually bounced back, to great effect in the case of Korea in particular, but only after deep recessions and plunges on local stock exchanges.

Lessons were learned and to this day, foreign-debt-to-GDP ratios are low, much lower than the 100%-plus figures which led to their downfall in 1997-98.

Note that Taiwan, which emerged unscathed 20 years ago owing to its low levels of debt and modest reliance on overseas borrowing, has continued to keep its nose clean:

Asian crisis victims have cut their dependence on overseas lenders ... unlike the UK

Source: CIA World Factbook

The right-hand side of the above table, however, makes uncomfortable reading for one nation in particular – the UK has the eighth highest foreign-debt-to-GDP ratio in the world.

The kindness of others

And at 314%, according to the CIA’s World Factbook, the UK’s overseas exposure massively outstrips the 100%-plus threshold which brought the five ASEAN countries to their knees in 1997.

Allowance can perhaps be made for the UK’s reliance on financial services as its banks will represent a big chunk of these liabilities (and the same issue presumably explains why Luxembourg, Malta, Ireland and Cyprus are all up there too, although the last two names offer some sort of warning in themselves, given how the Eurozone’s own debt crisis has rumbled on since 2009).

Some succour can also be drawn from how foreign ownership of UK Gilts had peaked, at least as a percentage of the available stock, before the Debt Management Office apparently stopped releasing the data in early 2016.

Overseas ownership of Gilts stood at 27% of the total in 2016

Source: UK Debt Management Office

However, the amount in absolute terms had continued to rise sharply and the drop in percentage terms may have as much to do with the Bank of England’s £435 billion Quantitative Easing programme.

There is another potential danger sign. Besides the budget deficit – partially funded by the Gilts acquired by overseas buyers (as well as the Bank of England, domestic pension funds and individual clients) – the UK also runs a trade deficit.

The trade deficit has not markedly improved despite last summer’s post-referendum slide in the pound.

UK still runs a substantial trade deficit

Source: ONS. (Based on three-month rolling average monthly import and export figures, including erratic items).

That leaves the UK running a current account deficit for good measure. In 2016, the aggregate budget and current account deficit came to 8.2% of GDP – a figure that ranked the UK down among such economic powerhouses as Colombia, Kazakhstan and Kenya.

Thankfully both the current account and budge deficit look set to decline as a percentage of GDP in 2017. But last year’s combined numbers left the UK in 54th position out of 61 nations among the combined developed, emerging and frontier markets, as defined by MSCI, and the only developed nation in the bottom ten.

UK still runs a substantial trade deficit

Source: CIA World Factbook 2017, International Monetary Fund World Economic Outlook, April 2017

This is nothing of which we as a nation can be proud. And it does leave the UK exposed to what Bank of England Governor Mark Carney has termed “the kindness of others,” those overseas trading partners who are happy to sell to Britain on credit and buy its Government debt.

Rule of law, a record of Government debt repayment that runs back to 1672 and central bank independence all support faith in the pound.

Given the experiences of Indonesia, Malaysia, the Philippines, South Korea and Thailand in 1997-98, advisers and clients with substantial exposure to sterling assets will doubtless be hoping that this faith is not knocked by any unforeseen event – such as the loss of banking and financial services business post-2019 should the Brexit negotiations not go according to plan, perhaps?

AJ Bell Investment Director

Russ Mould’s long experience of the capital markets began in 1991 when he became a Fund Manager at a leading provider of life insurance, pensions and asset management services. In 1993 he joined a prestigious investment bank, working as an Equity Analyst covering the technology sector for 12 years. Russ eventually joined Shares magazine in November 2005 as Technology Correspondent and became Editor of the magazine in July 2008. Following the acquisition of Shares' parent company, MSM Media, by AJ Bell Group, he was appointed as AJ Bell’s Investment Director in summer 2013.

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