by Calvin Tan | Posted on June 9, 2013 | Comments Offon THE ASIAN FINANCIAL CRISIS (1997 – 1998) – Why It Hit Johor Hardest!
As early as 1995 there were warnings that the Malaysia Economy is OVERHEATING. What is An Overheating Economy? Let me illustrate by a costly lesson learnt from experience – or inexperience. In 1979 I got my driving license on the 1st test. While ferrying children to Church the car stalled.
I started the engine again, droved another hundred feet and the engine dies off again. I repeated this several times till the engine completely stopped and wouldn’t start anymore.The car was towed to a workshop. The mechanic asked me, “Did you put water into the radiator? “For what use is water, the car only run on petrol?” I protested. I was a dumb newbie, you see. “Well the water in the radiator is to cool down the engine – to prevent the engine from Overheating”. “Oh, I see – nobody ever told me that there is such a thing called engine Overheating.”
There was OVERHEATNG IN MALAYSIAN ECONOMY – It Reaches Into Almost All Area Of Economic Activites. The Stock Market – 2nd Board especially shot up into Big Bubble territory. In Kuala Lumpur, Mr. Lee of Lee Motor Company would book 3 batches of 50 Proton cars. He later sells them at RM3,000 to RM5,000 marked up Prices For New Protons. The demand is SO HOT for New Protons that the Normal Waiting time is up to 8 months. For some models One Year waiting period.
Why? Because 2 Hand Car Dealers Are Placing Fleet Bookings For All Available New Cars & Cornered the Market. If you want FAST Delivery you have to pay between RM3k to 5k extra. For PROTON PERDANA (Top Model) IT WAS AN EXORBITANT RM10,000! This new phenomena happened in most Major Towns in Malaysia.
Mr. Ho of SP Motor (Kuala Lumpur) brought me to his 1st Floor Office and showed me his newly Renovated Office. The cost – Rm50,000. He told me it’s All Free. I asked him, “How?”. “Well I won it from playing the Stock Market.” he replied. Mr. Ho had altogether 9 SP Motor Branches employing 70 workers.
Over In Batu Pahat, Johor Is Mr. N of N Motor (Name not mentioned.) In any typical month he sold about 70 cars, averaging RM3,000 profit a car. That’s RM200,000 profit a month. He is the top or among the top rich Car Dealer in Batu Pahat, Johor.
Not contented, he expanded into the sale of reconditioned Mercedes from Japan. As for Capital he had full borrowing rights. There is Floor Stocking Facility whereby if a Car is Worth RM100,000, you can borrow up to 90% (RM90,000).
With the RM90K you can buy another car at RM90k and borrow another RM81k , then you can use the same borrowed money to repeat the same process again and again. In Johor State, especially Johor Baru, Car Dealers borrow up to their nose (so to say) in their business venture.
THEY ARE VERY HIGHLY LEVERAGED. With RM1 Million Cash A Car Dealer Can Stock Cars Worth RM10 Millions – RM15 Millions (Almost All On Borrowed Money!) Since the people of Johor are more highly geared than KL or Penang, when the Asian Financial Crisis Hits, It Hit Johor the Hardest.
Most Car Dealers Also Own Multiple Properties. All on Borrowed Money. This is Really Overheating In these GO- GO YEARS! These went on merrily, merrily until –
THE ASIAN FINANCIAL CRISIS HIT LIKE A FINANCIAL TORNADO!!
THERE IS NO WHERE TO HIDE AT ALL!
THE RINGGIT COLLAPSED FROM US$1 to RM2.40 to US$1 to RM4.50 (A Crash of 80%). On July 2nd 1997 George Soros attacked the Thai Bath and contagion spread to the Ringgit, The Korean Won, the Indonesia Rupiah & a lesser effect The Sing dollar.
Someone in KL went to the Bank to exchange some ringgit for her children studying oversea. The Bank Officer told her that the ringgit has crashed and the cause was by a man named Soros. SOROS sounded like SOR LOW (in Cantonese) meaning “Stupid or Mad fellow”. “How can a stupid or mad person caused the ringgit to loose so much of its value.” she protested.
George Soros, who broke the bank of England is one of the smartest currency traders in the world. He sold the yen on hearing Abenomics. He sold his gold holdings just before it crashed below US1400. He is calling for a Short on the Aussie Dollar. And he may well be right again this round. His timing is impeccable.
If this is true, then avoid buying Aussie Properties or Assets or even Aussie dollars at this time. They might go Into A FREE FALL. On a recent visit to Perth in 2010 people are asking around A$1,500,000 for a 6,000 sg ft bungalow in Perth – up 10 times since the last recession. At this juncture, it is a high risk to buy anything Australia – be it property or currency.
Coming back to The Asian Financial Crisis. With the Crash of The Ringgit, the Stock Market followed. It went down All the Way From A Height of 1332 points to a low of 262 points (A Drop of 81%). Then The Housing Bubble Burst! And property prices fell, rental also fell.
Over in Singapore we just sold our HDB Flat and scouting around for a place to rent. A proud lady told us that her 5 room HDB Flat tenancy is S$1,600 a month- take it or leave it. Then my wife called, “We found a place in HUME PARK 1, Bukit Timah going for S$1,500 a month. It has a huge swimming pool with 2 free car parks. Next year in 1999 the rental was further reduced to S$1,300! (It was previously tenanted to an european expat for S$3,000}
With The 80% Collapse of the Ringgit Value, the 81% Collapse of KLSE Index the Collapse of Property Prices Begin In Earnest. Then Followed by a 70% Collapse in Car Prices (How do you know? I was a Car Dealer for 20 years). There is really no where to hide. If you keep money in property, property prices crashed by up to 80%.
If your keep your money in cash, ringgit devalued by 80% If you buy shares (you might have lost 81%). What about cars? Car prices also crashed by a huge margin. Before the crisis a PEUGEOT 505SR is worth RM40,000. After the crisis prices have fallen to a low of RM12,000 – a crash of 70%!
LIKE A SWEEPING FINANCIAL TORNADO DEVASTATION IS EVERY WHERE!
Mr. Lee, Mr. Ho & Mr. N disappeared and went into hiding. Let me relate that we might learn and not repeat their mistakes.
Mr. Lee’s 2nd Hand Car Business was badly affected. At least he is able to clear his remaing stock. But he said EON Factory will not reimburse him the 50 or more new cars which he had paid booking fees. At this time when no one is buying any new cars it is better to forgo the deposits. Since his capital is borrowed he gone into hiding.
Mr. Ho of SP MOTOR speculated in the Stock Market. When the Stock Market crashed he wanted to sell his cars and told me to give value. Cars purchased at RM50k had outstanding loan of RM35K.
Since actual market value had fallen below RM30k, no dealer will buy his cars. Only banks will repossess them then auction them off and sue him for the outstanding balance.
As for his shops the banks have stopped or reduced lending. As a last resort he went to the loan sharks. Finally the shops were force sold to the Ah Longs (Loan sharks) at their terms. I was curious and went to see these loan sharks.
To my surprise they look like any ordinary business men. I thought they might look menacing or have horns on their head. Never, never borrow from loan sharks – with the multiplication of interest upon interest you can never extricate yourself from them. In the end Mr. Ho fled and went into hiding.
Over in Batu Pahat Mr. N, too, went to the loan sharks. Since the loan syndicate saw his Mercedes in his showroom they gladly lend him money at the monthly rate of 6% interest (Monthly 6% not yearly 6%, mind you) . As he borrowed more and more hundred thousand each time interest rate was raised to 8% a month.
Finally when interest rate was raised to 10% per month he told the loan shark he might one day run away. They didn’t believe him. They saw the Cars in his showroom but did not know that everything – cars, office and all are charged to the bank. Finally the inevitable end of the end game arrived. Without leaving a word to his staff or family Mr. N disappeared.
THE ASIAN FINANCIAL CRISIS WENT ON WITHOUT MERCY.
At many Used Car Dealership Bank Officers Took Charge Over The Sale Of Every Car; while the Used Car Bosses sat watching in despair. All the Inventory Sold are insufficient to cover the losses. You see, in economic term they all All Under Water. The Value of Everything – houses and cars have Fallen below loan margin.
Compounded with these problems people are spreading rumour that some banks might fail. MAYBANK Share price crashed to a low of RM2.50 (From over RM20 to Rm 2.50 – A Crash of Almost 90%!)
And Anwar Ibrahim being the finance minister then, wanted to go to the IMF. With so much uncertainty, panic & fear Dr. Mahathir implemented Capital Control & resisted IMF. Instantly the bleeding stopped. Stock Market stopped falling & slowly recovered.
INDONESIA & KOREA WENT TO THE IMF FOR HELP
Even with the Help of IMF Suharto Fell. The impoverised Indonesians could not survive below One US dollar a day. Many plundered the rich Chinese. Seeing this the S’PORE GOVT gave RM5 Billion aid to Indonesia. Many Korean Assets were sold at Fire Sale prices to US Companies. IMF means different things to different people.
For Suharto IMF means “I Am Fallen”.
For Mahathir: “I Am Fine”
For Anwar, “I Am Fired
For Korean Company bosses, “I Am Finished”
To poor Indonesians, “I Am Famished”.
To Indonesian Chinese, “I Am Fearful”.
For Singapore Govt, “I Am Friendly”
For Thousands of Business Men, “I Am Failing”
For Those Owing Loan Sharks, “I Am Fleeing””
To countless multitude, “I Am Forsaken”
As For The Americans, they do the Very Opposite of what they advocate. Through IMF they told Asian Nations to Stop Lending & Raise Interest Rates, Raise taxes, Raise Petrol Prices.
THE US THROUGH QE 1, QE 2 LEND FREE MONEY TO BANKS. INTEREST RATES IS SUPRESSED TO ZERO.
QE or Quantitative Easing or Bond Buying or Money Printing Is The Financial Life Support System For The Dying US Economy. Without QE the Entire US Banking System & Wall Street Will Collapse. It is the Air that Reflate the US and by proxy The Entire World System Today. Nobody has the Ultimate Answer as to how perpetual QE will lead to. What is the final end of the end game in QE?
Since The Future Ahead Is Fraud With Danger, Marc Faber, the wise & witty economist advocate 4 classes of Investments For Capital Protection:-
25% In Cash Or Bond (Corporate Bond)
25% In Gold (Keep In Banks Outside USA)
25% In Stock (Preferably in Shares of Thailand, Malaysia & Singapore)
25% In Property Or Real Estate.
This is A Balancing Act Between 2 Things Basically – Deflation & Inflation.
In Times of High Inflation Cash Is Trash. In Times of Deflation or Depression Cash Is KING. Having CASH & GOLD ON THE ONE HAND AND STOCKS & PROPERTY ON THE OTHER HAND will Help To Retain Value. This Allocation Method Shows Return OF Capital More Important Than Return ON Capital.
Next: THE REALITY OF PROPERTY CYCLE
Previous: COLLAPSE OF RINGGIT MADE MALAYSIAN EXPORTS SUPER COMPETITIVE!!
Dear Fellow i3 Forumers,
The Edgedaily has an excellent article on THE ASIAN FINANCIAL CRISIS OF 1997 - 1998.
Calvin would like to urge all to get a copy of the latest THEEDGEDAILY and read its warnings.
20 years ago in 1997, July 2nd, I went to Boon Lay Way in Singapore to exchange some ringgit for Sing dollars. Alas! The exchange rate for all other currencies were listed - EXCEPT THE RINGGIT!
There was no quotation for the Malaysian Ringgit & I think the Thai Bath was affected, too, though I cannot recall clearly.
After that the Ringgit Collapsed, KLSE Collapsed, Car Prices Collapsed & Finally the Property Market Also Collapsed.
There was really no escape from this carnage.
Now let's take a ride in downtown KL City on one of these days.
Ha! There is very little traffic. KL looks like a deserted country road. Travelling everywhere was a breeze - SEE - NO TRAFFIC JAMS!!
No job. Many companies shuttered. 50 Banks & Financial Imstitutions shrunk to 10 Banks only. Thousands of Companies gone bankrupt. Hundreds of thousands got retrenched ot lost their jobs.
Now Calvin goes to tender Company cars. 10 Company cars were on tender. Ha! No Car Dealers around? All Gone Bankrupt.
Well, there were 4 other people looking at the Company Cars. Oh! These are individuals looking for bargains.
Calvin submitted very very low prices for all 10 Cars. On the day tenders were opened Calvin got 6 Cars. Lost 4 Cars to 4 different individuals who bought for their own use.
They were all laughing. Why?
The answer is this:
They got their dream cars at up to 70% Discount!! Wuhuhu!
A Merc Benz before the Asian Financial sold for Rm200,000 could be bought for Rm60,000 then when Bankrupt Companies Forced Fire Sale!
And don't be surprised! As No Banks are Allowed to Give Out Car Loans for Used Cars (for some months).
All Car Dealers Die Standing. How to sell by Cash? Surprise of Surprises!! So many Individuals paid CASH For Their Cars.
Yes, IF YOU HAVE CASH - YOU ARE KING! FOR IN THE TIME OF DEEPEST RECESSION - CASH IS INDEED KING!
And if You Still Got Cash You Could Buy
1) Public Bank at 80 sen
2) Maybank at Rm2.50
3) Tenaga National at Rm2.80
4) Nestle at Rm12.00
Many others fallen to 10 sen , 20 sen or 30 sen shares then. Some on the brink of bankruptcy & insolvency.
Times were really fearful. People avoided the Stock Market for the next decade till year 2006 when there was a boom till 2007 when Lehman Brothers' Debacle Hit Again! Oh boy!
So now those who have been burnt generally avoid KLSE. That's why BURSA is still dominated by Institutions Buying & Foreign Funds. Retail participation has never recovered back to the Go Go Years of Pre- Asian Financial Crisis.
Who are these new participants? All young newbies & some seasoned die hard gamblers who survived the Asian Financial Crisis
Memories gone or ignorant of the crisis - those terrible times now faded into misty years long forgotten.
Aha! You guys are totally unprepared if one should strike you unaware.
Better stop now.
Check your steps and ask yourselves, "Are you punting blindly as if there is no crisis ahead?
I don't know if a crash will come soon or not. Or with QE now the crisis is postponed indefinitely. Or they might continue kicking the can down the road. But be prepared. While you invest - invest defensively.
Remember the words of Sifu Warren Buffet
1) Rule No. One - NEVER TO LOSE MONEY
2) Rule No. 2 is to Remember Rule No. One - NEVER TO LOSE MONEY.
If you cannot - then better keep Cash.