GOdfathers today, defending their empires

The 1990s: Ecstasy and reckoning

‘The good thing about Confucianism is it makes Asian people willing to suffer pain …’
Hong Kong tycoon Ronnie Chan, FinanceAsia magazine (2002)

The decade of the 1990s – as in ‘Remember the nineties’ or ‘What if it turns out like the nineties?’ – is already historical shorthand in Asia for what can go wrong in developing economies. But to fully understand what happened, we must return briefly to the 1980s. Moreover, we must leave our friends the godfathers alone for a moment and consider what was happening in the aggregate, or macro, economy. For it remains the contention of this book that the godfathers are a symptom of south-east Asia’s condition as much as they are a cause. Speak it in a whisper, but reality is more than the sum of the tycoons.
The macro story that led up to the Asian financial crisis was defined by four powerful and mutually reinforcing trends. The first of these was that by the 1980s governments of the ‘proper’ countries we are following emulated the examples of Singapore and Hong Kong and settled, in terms of their external economies, on a policy that delivered incontrovertible benefits. Export-oriented industrialisation (EOI) replaced import-substitution industrialisation (ISI) – which became mired in a bog of godfather arbitrage and corruption – as the prevailing orthodoxy. This coincided with the first major birth pangs of the contemporary globalisation era. By the 1980s there was no shortage of multinational companies looking to gain by relocating basic manufacturing operations to developing countries. Just when political south-east Asia was ready to rent out its cheap labour, so Western big capital was keen to lease it. Global foreign direct investment flows began to pick up significantly in the 1980s and by the mid 1990s, one year of worldwide cross-border investment was worth what had previously occurred in a decade. The knock-on effect was starkly evident in the expansion of south-east Asian exports. In the twenty-six years from 1960 to 1985, exports from Thailand, Malaysia, the Philippines and Indonesia rose an average 10–15 per cent a year. These were healthy gains, driven heavily by a commodities boom in the 1970s.1 None the less, the increments came from low bases. When processed manufacturing exports kicked in from the mid 1980s – off a more substantial foundation – growth rates increased considerably. In the decade from 1986 to 1995, average export growth in Thailand, Malaysia and the Philippines increased by between 4 and 10 percentage points per year.2 Over a decade, this uptick had a big impact. Thailand’s exports jumped from US$9 billion in 1986 to US$57 billion in 1995.
The boom in labour-intensive manufacturing that filled up huge factory parks in the suburbs of capital cities and other specialist export centres like Penang coincided with a second force for accelerated growth: demographics. South-east Asian population growth peaked in the immediate post-Second World War decades, and by the 1980s hoardes of young people were looking for cash-based employment. Fertility rates remained high while infant mortality rates fell in each of Thailand, Malaysia, the Philippines and Indonesia in the 1950–80 period, and populations more than doubled in thirty years. Human capital is an economic input whose increase drives growth like any other.3 Multinational business found itself in a halcyon era where labour had relatively low bargaining power (there was too much of it) and productivity increases comfortably outstripped wage hikes.4
The third trend was rising savings rates. Greatly increased numbers of people entered the labour force and earned wages – rather than working for little or no cash in agriculture – and they saved an increasing proportion of their income. Governments, which rarely ran budget deficits, saved, too. The result was that domestic savings as a proportion of GDP pushed up to between 30 per cent in Hong Kong or Indonesia, and more than 45 per cent in Singapore. In the mid 1960s, the savings rate in south-east Asia was on par with that in Latin America; by the early 1990s, it was around 20 percentage points higher. Here was the money that filled state and godfather banks to bursting point. From a macroeconomist’s perspective, however, a deep pool of savings is a wholly good thing for a developing economy because it makes possible a high level of investment, and hence the infrastructure and productive capacity that are necessary to long-term growth. Investment is essential to early-stage economic development, the only caveat being that the expenditure needs to be, in the aggregate, productive and not a destroyer of capital. In the mid 1990s, domestic savings were also supplemented by large inflows of foreign money as a source of investment. Later, in the post-mortem of the financial crisis, there would be a heated – and often low-quality – debate among politicians and economists about the degree to which this short-term foreign capital contributed to the meltdown.
Finally, in the pre-crisis era, south-east Asia seemed to be enjoying a form of psychological advantage that can be observed in fast-growing emerging economies in their early stages. The phenomenon might be described as the ‘developmental honeymoon’. What happens in this period is that populations are unusually willing to trust authority and their leaders’ promises to deliver continuous improvements in standards of living. When south-east Asians were told that free association of labour was antithetical to growth – a curiosity given unionisation’s failure to prevent the emergence of the United States, Europe, Japan and South Korea – and that constraints on individual freedom and the media are part of Asian culture, they acquiesced. People went to their jobs and, in general, worked extraordinarily hard, believing it was a matter of only two or three more decades before their countries would emerge as developed nations in which everyone would enjoy a share in the spoils. Many people focused on their children’s futures. With the average GDP growth rates from 1986 to 1995 picking up to 8-10 per cent a year in Malaysia, Thailand and Indonesia, versus 6-8 per cent in the period after 1960, they trusted politicians and waited for the bourgeois nirvana that would release them from the shackles of economic need.
Both Feet Off the Ground
Macro forces provided the context for a period of increasing, and ultimately monumental, delusion. The boom in foreign-invested exporting contributed to growth and provided lots of employment, but it did not change south-east Asia’s inability to create globally competitive companies. The demographic spike drove growth, but it also clouded the fact that this growth came from increased inputs of labour as well as from productivity gains. The rising savings rate translated into more investment, but that investment was mostly mediated by state- and tycoon-owned banks that were not run on commercial lines. In the mid 1990s, stock markets fell precipitously from the peaks they hit in late 1993 and early 1994 as corporate earnings failed to keep up with investor expectations, but the banks just kept on lending. The meek deference of south-east Asian populations, meanwhile, both increased the region’s reputation for industrious stability and stoked the narcissistic hubris of their leaders.
A fantasy world began to take shape, in which everyone believed in their version of the fantasy. Mahathir Mohamad, the Malaysian premier, spent more and more time refining a vision of how his country would achieve developed status within a quarter century; he called it ‘Vision 2020’. Mahathir approved projects for vast dams, new airports and rail links. In 1995, he decided to move the federal administrative capital to a new site in the jungle, and connect it to Kuala Lumpur with a Multimedia Super Corridor dedicated to high technology;5 much of the money for the infrastructure came from oil and gas revenues. The diminutive doctor moved into a vast new prime minister’s palace with commanding views; he kept a close eye on surrounding construction sites and telephoned project managers daily demanding to know what was going on.6 Mahathir’s closest tycoon friend, Ananda Krishnan, began construction of his Petronas Twin Towers in the centre of Kuala Lumpur, which would be the tallest in the world when completed at the onset of the financial crisis.
In neighbouring Singapore, Harry Lee Kuan Yew was ever more vociferous about his ‘Asian values’ and Chinese racial theories of what was driving growth. He lectured the post-Marcos leaders of the Philippines, Corazon Aquino and Fidel Ramos, on the need for discipline before democracy in their society, apparently dismissing the possibility that the country’s laggard performance in the 1990s might be related to the debt load from the highly disciplined, undemocratic kleptocracy run by Ferdinand Marcos until 1986. Aquino, herself one-quarter Chinese, labelled Harry ‘an arrogant bastard’ after an encounter with him.7 The British queen’s equestrian-obsessed daughter Princess Anne was made to listen to Lee’s genetic theories before observing pointedly: ‘It doesn’t work with horses.’8 With his neo-Confucian city state posting double-digit growth in 1993 and 1994, few people dared argue with Harry Lee.
In Indonesia, despite the 1996 death of his beloved wife and confidante, Madame Tien,9 Suharto concluded that only he could be trusted to run a country growing at 8 per cent a year. At the age of 76, he would in 1998 seek a seventh five-year term as president, taking as his vice president Jusuf Habibie, a widely ridiculed minister who was spending billions of dollars trying to create an aircraft manufacturing industry in what was still a third world country.
In Thailand, the sense of excess and unreality were if anything more palpable. In May 1992, around fifty people had lost their lives in demonstrations that reversed a 1991 military coup. But within a couple of years it was not just business and politics as normal, it was surreally ‘normal’. With the economy growing at over 9 per cent, Banharn Silpa-archa, known for his political largesse as ‘the walking ATM’, won a 1995 election with a vow to cover the country in six-lane highways. A year later former commander-in-chief Chavalit Yongchaiyudh withdrew his support for Banharn, spent an estimated US$800 million on an election, and grabbed the top job for himself.10
Even in Hong Kong there was a tendency to assume that the good times were built on rock-solid foundations. Chris Patten, despatched from London with a mandate to exit the colony in 1997 in unusually principled fashion, built his political strategy entirely around an expansion of the electoral franchise. With the exception of the deregulation of the British-operated telecommunications monopoly, there was no substantive move to address the cartels filling local tycoons’ pockets. A series of well-meaning but toothless competition reports by the Hong Kong Consumer Council merely set the trend for years of idle discussion about what to do with a self-evidently anticompetitive domestic economy.11
Should Have Known Better?
Of course, politicians are always saying silly things and the behaviour of southeast Asia’s more self-aggrandising leaders in the 1990s was regarded by most folk as somewhere between eccentric and tedious. What is really important is what hard economic evidence there was – anecdotal and analytical – in the period that a financial crisis was brewing. As a corollary to this, there is also the question of how well the International Monetary Fund and the World Bank performed their tasks of surveillance and advice. At an anecdotal level, there were three patterns to be discerned in the mid 1990s. The first was that greed, corruption and excess were spiralling out of control. The second was that asset trading was replacing productive business as the core activity of many corporations. And the third was that some financial institutions were already beginning to crack under the strain.
A good example of where greed was leading was the affair of the phantom Busang gold mine in Indonesia. It began in 1996, when a Canadian company announced it had made a massive gold find in Borneo. It was also the year that Suharto’s wife, Madame Tien died. She was the one person who could keep Suharto’s kleptocratic children in check. What followed the Busang announcement was a shocking public free-for-all as eldest son Sigit Harjojudanto and eldest daughter Siti Hardijanti Rukmana (known as Tutut) squared off with rival international mining consortia to demand Suharto give them the mining rights. Suharto, at a loss as to what to do, called in his godfather golf partner, ‘Uncle’ Bob Hasan, to mediate between the siblings; Bob cut a deal giving companies controlled by him and different members of the first family a 30 per cent stake in the prospective mine, with the details to be fought out in private. All this was reported in the international media, and the Suhartos had never looked so brazen or so greedy. The show ended in 1997 when it transpired that the original gold samples were fakes, there were no deposits and events had been driven by fraudsters ramping their mining company shares in Calgary.
Blind, unthinking greed also played a decisive role in the investment bank Peregrine’s fatal misadventure in Indonesia. It was always reported in the media that the firm’s US$270-million bridging loan to a Jakarta taxi company called Steady Safe was part of its drive to build an Asian junk bond business. It was true. But on this deal, Peregrine was not simply funding Steady Safe to buy some toll road assets from the ubiquitous Tutut Suharto; it was funding Tutut to cash out of those assets at a good price. Peregrine bankers wanted to lead the planned privatisation of Indonesian toll road operator Jasa Marga, over which Tutut had a pre-eminent influence. It was also rumoured that she would take over from her father if he did not complete a seventh presidential term. So Peregrine bet one-third of its capital base on a political maybe, when a regular bank would be hesitant to risk 5 per cent of its capital on an economic near-certainty. Sooner or later, huge unhedged bets like this were bound to end in tears. Philip Tose always refused to say if he personally sanctioned the Steady Safe deal.
‘These companies don’t have strategies. They do deals,’ observed Michael Porter, the Harvard Business School management professor, of south-east Asian companies at the time. It was a moot point. Asset trading had come to define south-east Asian business. The trajectory of one of the region’s brashest new tycoons, Vincent Tan Chee Yioun, bears this out. Tan began to ascend Malaysia’s greasy corporate pole in the 1980s in the traditional manner. He constructed his links to Mahathir and the Malaysian political élite. He formed a close relationship with Mahathir’s favourite nephew, Ahmad Mustapha bin Mohamad Hassan, and brought him on to several company boards; Tan and his brother Danny were also involved in a car trading business with a brother-in-law of Mahathir. In 1984, Vincent Tan obtained his first untendered privatisation, buying a small industrial company from state investment agency PERNAS. A year later came his core cash flow, in the form of a lottery privatisation, again untendered. Tan then went on an acquisition spree, building a stable of seven listed businesses involved in everything from consumer durables to infrastructure to media to hotels to logging to stockbroking. But what was most striking about his sea of corporations – he had an airline, too – was how little operating profit was produced. Almost all income came from buying and selling assets, often between Tan’s own listed companies. He had a textile firm that became a logging business; he had a logging business that became a financial services conglomerate; his lottery franchise was sold out from under the noses of his gaming company investors, only to reappear via a reverse takeover a year later. From 1989 to the mid 1990s, exceptional gains from asset trading constituted between two-thirds and all of Tan’s holding company’s profits in any given year. Net operating profit as a share of revenues was sometimes less than 1 per cent. By 1995, minority investors had figured out what was going on and were marking down shares in his companies; but the banks kept backing him. Vincent Tan and those like him were a calling card for business running off the rails.12
The financial crisis did not come completely out of the blue; banks were beginning to fail in the lead-up to it. As already recounted, in Indonesia, Bank Summa went bust in 1993, a major state bank, Bapindo, in 1994, and Bank Pacific in 1995. In Thailand, the collapse of Bangkok Bank of Commerce (BBC) in 1996 is held up as a powerful warning of the carnage to come. It was. But the fact that central banks in south-east Asia, which are directed by politicians, always bailed out failing commercial banks, made warnings painless and easy to ignore. From 1983 to 1991, the Thai state bailed out no less than thirty financial institutions.13 Even as the horror of BBC’s loan portfolio began to be made public in summer 1996, the central bank was secretly spending another US$20 billion (BBC needed around US$2 billion) to shore up scores of other financial institutions, mostly finance companies. This was only revealed in testimony by the central bank governor, Chaiyawat Wibulswasdi, after the crisis broke. In sum, bank crises were reaching a new peak, but south-east Asia always had bank crises and governments previously managed to deal with them behind closed doors.
Shoot the Economists
The analytical record of macroeconomists prior to the crisis was not good. The only timely reality check came from work by Alwyn Young at the Massachusetts Institute of Technology, and a team of fellow growth accountants, that was popularised by Paul Krugman in a Foreign Affairs article in November 1994. Krugman’s ‘The Myth of Asia’s Miracle’ was a direct riposte to a triumphalist World Bank report, ‘The East Asian Miracle’, published a year earlier. Krugman presented an analysis that showed most of Asia’s growth was coming from increased inputs of capital and labour and that productivity gains lagged behind those of the mature US economy. Much of the data focused on Singapore and left Harry Lee apoplectic. Research since the crisis suggests that long-term productivity gains in south-east Asia have been better than Krugman’s article indicated, but the basic point that the contemporary economic trajectory was unsustainable was as correct as it was contrary to received opinion. Young and Krugman, however, forecast a slowdown rather than a meltdown.
The World Bank, by comparison, was in the mid 1990s living in a dream world whose paradigm was neatly captured by its widely quoted ‘East Asian Miracle’ report, published in 1993.14 The Bank had some excellent staff in the region, and over the years had produced some sharp, critical analysis. In Indonesia, for instance, it condemned the industrial licensing regime unequivocally in research published in 1981. In the early 1990s it warned about rising external debt. But as time went on the Bank, which ran substantial offices in south-east Asian countries, appeared to suffer more and more from being too closely embedded with local regimes. To continue the Indonesian example, foreign correspondents in Jakarta were astounded in 1996 when Bank staff lauded the government’s issue of new telecommunications licences, stating that the sale of the licences was carried out with ‘full transparency and strict adherence to clearly defined rules’.15 In fact the whole telecommunications industry was carved up in the most opaque and corrupt manner among Suharto’s children and cronies. The Bank, as the Far Eastern Economic Review’s veteran reporter Adam Schwarz wrote, ‘spectacularly misunderstood the ravaging effect of corruption on Indonesia’s economy’.16 The World Bank’s management showed almost no interest in questions of institutional governance. Only token protests were made about the siphoning off of billions of dollars of development funding. When an American academic, Jeffrey Winters, estimated that up to one-third of Bank funds were being lost to corruption, the resident representative in Jakarta dismissed the claim even as an internal Bank review was showing that up to 30 per cent of money was indeed going missing.17 Much of the problem was that Asia, when set against Africa and Latin America, was the World Bank’s star performer and staffers were loath to do anything that would embarrass their class favourites.18
The IMF, which is relatively more centralised than the World Bank, did not have a problem with being over-embedded in south-east Asia. In many respects, the institution’s failing was the opposite: it paid insufficient attention to how policies it promoted were enacted on the ground. The IMF also omitted to question long-run theoretical assumptions in a changing environment until it was too late. As Jonathan Anderson, an IMF staffer based in Beijing during the crisis, observes: ‘There’s no question. The Fund was caught napping.’19 The IMF’s twin yardsticks of progress through the 1980s and early 1990s were privatisation and deregulation. But when privatisations were almost invariably conducted without tenders, and deregulation merely substituted godfather cartels for state monopolies, the agency failed to sound the alarm. It was as if the rhetoric of privatisation mattered more than the practice. This turned out not to be the case. The ‘deregulation’ of financial services had a particularly malign impact. Thailand and Indonesia spawned hundreds of new banks and non-bank financial institutions, operated by godfathers, and lending most of their funds to related godfather businesses.
The IMF’s failure to question long-run assumptions was most damaging with respect to its view on south-east Asian exchange rate policies. Beginning in the early 1980s, each of the governments we are interested in had decided to peg its national currency to the American dollar. The decisions to do this followed a series of banking crises in the early 1980s and recessions in the middle of the decade. The biggest attraction of pegged currencies – the technical means by which this was done varied from one place to another – was that they reassured foreign investors about the future international value of their investments and exporters about the international competitiveness of their products. After fifteen years of heavy foreign direct investment flows and burgeoning exports, it was natural by the mid 1990s to see exchange rate pegs as a good and proven thing. Anything that is fixed, however, can change its character if the world around it changes. That is what happened in the 1990s as short-term flows of international money increased exponentially, the American dollar began to appreciate and investment bankers and Asian godfathers figured out the arbitrage opportunities with pegged exchange rate regimes. Mexico, another country with a dollar-pegged currency, experienced a major financial crisis in 1995, but very few people saw this as a harbinger for Asia. Again, economists at institutions like the IMF had long-run assumptions that were hard to shift. Mexico’s crisis was the Latin American sort, provoked by a government flirting with insolvency, and revolving around state bonds. South-east Asian governments, by contrast, ran budget surpluses and had manageable debt loads. In the region’s two-track political economy, with largely separate political and economic élites, it was the private business sector that took on most debt. And private business did not behave as irresponsibly as governments. Or so it was thought. As Jonathan Anderson recalls: ‘The Asian crisis was an entirely new kind of crisis that no one inside the IMF was even thinking about.’20
This is not to say that IMF employees were without concerns. They could see that Mahathir privatisations were not best practice, or that there were doubts about Indonesian bank data on related-party lending. But without thinking far outside their quotidian box – something almost impossibly difficult in the face of the hubris of the era – they were never likely to see what was coming. The IMF began to react to the looming crisis only when its spreadsheets said it should – when 1995 and 1996 data on current account deficits and stalling foreign trade suggested unsustainable economic imbalances. The Fund then, as one example, recommended that the Thai government de-peg its currency and devalue on several occasions before this actually happened.21 It is a reminder of the limits to what international institutions can do that Thai officials, for their part, were already in 1995 and 1996 lying brazenly to the IMF and everyone else about what the real state of their foreign exchange reserves was.
The Trigger and the Gun
Much post-crisis analysis in Asia focused on the roles of international exchange rate movements, short-term capital flows and offshore corporate borrowing in undermining the region’s pegged currencies. These subjects are all important and must be dealt with. However, as should be clear by now, the Asian financial crisis was about much more than short-term imbalances. Some economists argue that with better macro policies, and without interference from international institutions, there would have been no crisis. Milton Friedman went so far as to say that the IMF’s bail-out of Mexico in 1995 created such widespread belief that international speculation is insured by the Fund – so-called moral hazard – that it caused the Asian crisis. Friedman, however, was wrong when he declared Hong Kong’s economy to be the freest in the world, and he was also wrong on this count. Without pegged exchange rates and the IMF the timing and shape of the crisis might have been different, but it was a reckoning waiting to happen.22 Financial meltdowns afflict countries with political manipulation of the economy, abusive banking systems, cartelisation and restrictions on free enterprise. Even in a globalised world, these internal imbalances are much more important than external ones. To say otherwise is to confuse the gun with the trigger. The key point is that by the mid 1990s south-east Asia had built itself a big gun, and it was ready to be fired.
The question of what was the trigger is not only secondary, it can never be satisfactorily answered because in a regional financial crisis there is more than one trigger. In this sense the gun metaphor breaks down. It is, however, important to set out what is known about the lead-up to the crisis. The first point is that investment rates increased most powerfully from the mid 1980s to the mid 1990s in Thailand (the country where the crisis broke) and Malaysia (a country damaged by the crisis, but less dramatically than Thailand). As a proportion of GDP, investment in these countries leapt from around 25 per cent to over 40 per cent. In the city states of Singapore and Hong Kong, the investment rate increased about 8 percentage points over the same period. In Indonesia, the country that would be most completely wrecked by the crisis, the increase in the investment rate was not so acute, trending up between the mid 1980s and mid 1990s from around 23 per cent of GDP to 30 per cent. The Philippine investment rate was crushed in the post-Marcos misery of the mid 1980s and only recovered to one quarter of GDP by the time of the Asian crisis. The increase in investment rates, though it is never mentioned, was therefore a less than perfect guide to what was going to happen and who would suffer most. Excluding the Philippines, with its Marcos-driven chronology, a better leading indicator was the relative level of abuse and corruption in the banking systems. From worst to best: Indonesia, Thailand, Malaysia, Singapore, Hong Kong.
Until the early 1990s, investment in south-east Asia was being funded overwhelmingly from domestic savings. The world-beating savings rates in the region would always tend to push down the cost of capital, and real interest rates in the early 1990s were either negative or low in most states. This meant that inflation and interest costs were roughly equal and domestic investors could reasonably expect the value of investments that are not internationally traded – real estate being the classic example – to at least keep pace with the nominal cost of money. Hong Kong, for instance, had negative real interest rates from the end of 1990 to the start of 1995. Gary Coull, the late co-founder of CLSA, said he understood what the 1990s was about when K. S. Lo, the real estate tycoon and elder brother of Vincent Lo, told him he would buy any property in Hong Kong sight unseen.23 That was how clever godfathers were thinking and it was a pointer to the forcefulness of the investment trend. In Thailand, Malaysia, Indonesia and the Philippines, one-fifth to one-quarter of all lending in the run-up to the crisis was going to real estate projects.
The infamous foreign capital flows became significant only in the last few years before the crisis. If we take Thailand (which had the strongest foreign capital inflows) as an example, 93 per cent of investment in the 1987–96 period was funded by household savings. However, government finances – the traditional ‘Asian difference’ – weakened markedly in the 1990s and the Thai government over this period ran budget deficits that soaked up more than 10 per cent of domestic savings. It was the resulting shortfall of about 20 per cent of aggregate investment that was made up by foreign money, most of it short-term.24
The rush of foreign money into south-east Asian stock markets in 1993 has already been discussed. Other capital was attracted by high nominal interest rates. Where domestic investors wanted to borrow because of low real rates, foreigners wanted to lend for high nominal rates since they would later repatriate their money to places where inflation was lower. This somewhat unintuitive state of affairs was predicated on the fact that almost everyone expected the currency pegs to endure, so there was no risk that currency movements would spoil the trades. A lot of paper and hot air has been expended arguing whether foreign banks were aggressively pushing foreign exchange into south-east Asia, or whether local borrowers – principally our godfathers and their banks – were blindly seeking it out. The answer is both: everyone was looking for a deal, which is the nature of business. In Thailand, the situation was made worse by the fact that the government was actively encouraging foreign banks to lend foreign exchange from offshore as a stepping stone to deregulation and their entry into the domestic market; licences were expected to go to those who showed most commitment by lending the most money.25
The final ingredient in the pre-crisis mix was what was happening in international currency markets to the US dollar, to which south-east Asian currencies were pegged, and to the Japanese yen. The yen was important because Japan was the region’s dominant provider of long-term investment for its export manufacturing sector. When the yen was strong relative to regional currencies, the textile, petrochemical, electronic and automotive exports that Japanese companies processed in the region were more attractively priced than when the yen was weak. This is obvious. In the aftermath of the crisis, however, there was a tendency to intimate that the weakening of the yen-to-dollar exchange rate in the run-up to 1997 was somehow an international knife in the back of south-east Asia. In reality, local export processing economies had had an unusually good ride from a very weak American dollar, and hence stronger yen, in the early 1990s – the result of a US recession and those familiar trade deficits. No one commented that that period was abnormal, yet many people after the Asian crisis said that the resurgence of the US dollar in the mid 1990s – it appreciated 30 per cent against the yen in eighteen months, starting in spring 1995 – was unusual. In reality, south-east Asian economies by this point were too fragile to prosper in the real world. A stronger dollar and a weaker yen made a portion of regional exports uncompetitive – low-end export processors were already moving to China in droves – and aggregate export growth collapsed. The export processing economy was still the only globally competitive part of the broad south-east Asian economy, but it could no longer deliver surpluses that would compensate for serial domestic weaknesses.
Fireworks
And then it started. By June 1997, the Thai central bank was almost out of foreign reserves. Amnuay Viravan, a former head of Chin Sophonpanich’s Bangkok Bank, who as finance minister led the way in trying to bail out Thailand’s banking cartel while keeping the IMF in the dark about the depletion of foreign reserves, resigned in the middle of the month. Two weeks later, on 2 July, the government gave up the dollar peg and let the currency float. The Asian financial crisis had begun. The baht promptly headed from 25 to the US dollar towards 50, an exchange rate that, by year end, would double the local cost of servicing foreign debt. The IMF was called in and, by mid-August, agreed a package of major structural reforms in return for US$17.2 billion of multilateral support, to be disbursed as changes were made. But Chavalit’s coalition, and the godfather-run banking cartel, were not keen to take the IMF’s medicine. In October Prime Minister Chavalit backtracked on tax reforms, another finance minister resigned (soon to reappear, as we shall see, as an employee of Thaksin Shinawatra) and street protests started in Bangkok. Chavalit failed to get military support to declare martial law and stepped down on 3 November, to be replaced by an administration under Chuan Leekpai.
Meanwhile, from the moment the Thai peg was broken, other regional currencies started to come under pressure. Foreign fund managers wanted some of their money out of local stock markets; foreign banks wanted to limit their lending exposure by calling in their short-term loans; local banks and corporates scrambled to buy dollars to cover their borrowing positions; godfathers started to move money offshore; and speculators, local and foreign, began to borrow and sell Asian currencies in the expectation of buying them back more cheaply in the future – what is called ‘short selling’. For the first time in more than a decade, everyone in the region was focused on the implications of currency realignments against the US dollar. In this new environment, central bankers quickly succumbed to the inevitability of having to give up their dollar pegs, and within three months the pegs in Indonesia, the Philippines and Malaysia were abandoned. The Indonesian rupiah – local corporates had foreign exchange borrowings of around US$80 billion versus central bank reserves of US$20 billion – slid from 2,500 to the US dollar to 3,000 by the end of August, while the Jakarta stock market dropped 35 per cent. The Philippine peso drifted lower and the Manila government – already the region’s IMF junky – immediately called in the Fund. The Malaysian ringgit dropped from 2.5 to the US dollar to 3 by mid-September. This was just the beginning.
In September Mahathir used the annual meeting of the IMF, which happened to be taking place in Hong Kong, to blame the unfolding ‘manipulated crisis’26 on a Jewish-led Western conspiracy to keep Asians poor. ‘We are Muslims and the Jews are not happy to see Muslims progress,’ he said, adding disingenuously: ‘We may suspect that they have an agenda but we do not want to accuse them.’ Mahathir banned short selling on the Kuala Lumpur market, but the index kept falling anyway. An IMF enquiry after the crisis found little evidence that hedge funds and other leveraged investors played a significant role. There was widespread anecdotal evidence in the region of massive capital flight orchestrated by local tycoons; but Singaporean and Hong Kong banking secrecy is such that this is impossible to quantify. On 8 October – by which time the rupiah was trading at 3,700 to the US dollar – Suharto called in the IMF and began negotiations. On 23 October, attention shifted to the biggest financial market in the region – Hong Kong. The Hang Seng index plunged 10 per cent in a day. Speculators had sought to attack the Hong Kong dollar, but, given the territory’s rigid currency board system (meaning, essentially, that Hong Kong dollars in circulation are fully backed by US dollar reserves), this led not to a breaking of the peg but to an increase in interest rates; speculative demand for Hong Kong dollars for short selling just put up the price of borrowing them. However, the currency board was no panacea because high interest rates sent the stock market into a tailspin. Between early August and the end of October, the Hong Kong market lost half its capitalisation. Real estate prices also began a precipitous decline.
New Year 1998 saw an acceleration of the sell-off of south-east Asian currencies. In January the Thai baht collapsed to 56 to the dollar, the Indonesian rupiah to 15,000, the Malaysian ringgit to 4.8 and the Philippine peso to 44, representing falls of 45–85 per cent in a few months. These exchange rates were all close to the lowest levels experienced during the crisis. Over this period, Suharto’s endgame began to play out in Indonesia. On 31 October 1997, the Indonesian government signed a first letter of intent with the IMF for a US$43-billion rescue package. But disbursement of the money was conditioned on dismantling ‘Uncle’ Bob Hasan’s plywood cartel,27 Liem Sioe Liong’s Bogosari flour milling monopoly, Tommy Suharto’s clove import monopoly for kretek cigarettes,28 and much more. The IMF also demanded the closure of sixteen insolvent banks, including Ibnu Sutowo’s Bank Pacific,29 Bambang Suharto’s Bank Andromeda and a bank controlled by Suharto’s half-brother, Probosutedjo.
The bank closures, in November, may have been an error because they caused increased panic and withdrawals by depositors, and exacerbated capital flight – estimated at US$8 billion and rising in the fourth quarter of 1997. But more important was the fact that IMF money was not disbursed, because Suharto said one thing and did another. Even before agreeing the first letter of intent with the IMF, he instructed the central bank to lend funds – known as Bank Indonesia Liquidity Support (or BLBI, the Bahasa Indonesia acronym) – to cash-strapped private banks. In November, finance minister Mar’ie Muhammad pointedly refused to answer rumours that the central bank had already lent out IDR8 trillion in contravention of the tight money policy the IMF wanted to protect the currency. Bambang Suharto was allowed to transfer the assets and liabilities of Bank Andromeda to a Liem Sioe Liong-controlled bank. In December, Suharto fired four out of the seven managing directors of the central bank and BLBI credits spiralled out of control.30 By the end of January, IDR85 trillion had been pumped into the banking system, a figure that would rise to IDR145 trillion. Of this only IDR50 trillion was withdrawn by the public; much of the rest was used by godfathers to buy up foreign exchange (and hence wreck the rupiah). It would also later transpire that Suharto’s Tamil Sri Lankan crony Marimutu Sinivasan, head of the Texmaco group, availed himself of an astonishing US$900 million of the central bank’s dwindling foreign exchange reserves in early 1998. Suharto told the central bank his friend needed the money.
The plunging rupiah never had a chance. Cash in circulation increased 50 per cent in the three months to the end of January. Indonesia was heading beyond crisis into chaos. One after another, world leaders telephoned Suharto and demanded he heed the IMF. In January, an IMF team returned and signed a second agreement, which gave rise to one of the enduring images of the era – IMF managing director Michel Camdessus standing over Suharto with arms folded as the old man put pen to paper. But Suharto was no more committed to this deal than the first one. In February his armed forces began reacting to student protests with extra-judicial abductions.31 In early March he secured re-election as president and named the least credible cabinet in Indonesian history, starring Tutut Suharto as minister for social services and Bob Hasan as minister of trade and industry. On his second day in the job, Bob gave his view on monopolies: ‘If they serve the needs of the people, then there’s no problem,’ he opined.32
Inflation was soaring, real wages plummeting, and protests spreading. Violence and rioting took hold in May in Jakarta, Yogyakarta, Bogor and Medan. Then events turned weird. The IMF made another agreement in April, one element of which was modest increases in fuel prices. On 5 May, Suharto instead put up fuel prices by 70 per cent and bus fares by a similar amount. On 9 May, Suharto held a rare press conference at which he said he sympathised with people’s suffering because he himself used to be poor, and left the country on a 10-day trip. Fatal clashes with security forces began around Indonesia soon after, and the great Jakarta riots broke out on 14 May. Over three days mobs of preman – Indonesia’s underworld answer to triads – and other looters pillaged, raped and murdered. More than 1,200 people died; the Chinese quarter of north Jakarta was heavily targeted. Security forces colluded with the preman, though under whose direction and to what ends remain matters of conjecture. If the military backed Suharto, violence might have suited his purpose; but if the military turned against Suharto – which was already happening in the case of senior commander and future presidential candidate General Wiranto – violence could also justify the military’s management of his succession. In the end, the loser in the game of Encourage Turmoil and Present Yourself as Saviour turned out to be Suharto. Returning to Jakarta, he found the military and Wiranto decisively against him, and agreed to step down on 20 May. It was, however, a managed defeat since the military agreed that vice-president Jusuf Habibie would be Suharto’s replacement.
Thus it was that Indonesia set most of the benchmarks – whether violent deaths or economic distress – in the Asian financial crisis. In the second quarter of 1998, official data showed the economy was 16.5 per cent smaller than the year before, while prices rose over 50 per cent in the first six months of the year. The ouster of Suharto made it possible to deal somewhat more seriously with the IMF, but it was not until January 1999 that laws were passed enabling more democratic elections later in the year that put an end to Habibie’s tenure. There followed a short-lived government of blind cleric Abdurrahman Wahid, followed by another false start under the presidency of Sukarno’s daughter, Megawati Sukarnoputri.33 Both administrations were plagued with corruption and sectarian violence. Like most effective authoritarians, Suharto left behind him a political and institutional vacuum in which there was little of substance to replace him.
To Russia and Back
Just as Suharto was losing the presidency in summer 1998 amidst the worst violence in Indonesia for three decades, the Asian financial crisis spread out of the region to Russia. Despite IMF support in July, the rouble was devalued in August and government debt repayments were suspended. In reality the Russian crisis had little in common with what was going on in south-east Asia, but it added mightily to the sense of international malaise. In Kuala Lumpur, Mahathir decided he had seen enough of the IMF and that Malaysia’s solution to its problems would be a unilateral one. He imposed capital controls on 1 September, having already recalled his old ally Daim Zainuddin to the cabinet. By this point capital that wanted to flee had had plenty of time to do so, but the two-fingers gesture to the IMF and the fact that Daim announced a US$2.7-billion bail-out for UMNO’s long-time corporate vehicle, the conglomerate Renong, encouraged a final round of selling of other Asian currencies. Mahathir’s deputy Anwar Ibrahim, a former student activist who had been co-opted by the UMNO political élite, was dumped out of his job and arrested on charges of corruption and, subsequently, sodomy. His real mistake was to disagree with his boss. Kuala Lumpur has by regional standards long enjoyed a relatively open and tolerant gay scene, but when he needed an excuse to destroy his deputy, Mahathir threw on the robes of moral outrage. Anwar denied all charges; he was subjected to beating and a farcical show trial. It was vintage south-east Asian cant.
Just as Mahathir was making ready to put Malaysia’s markets on a tight leash in August, Hong Kong authorities suffered their own fit of acute paranoia. Joseph Yam, chief executive of the Hong Kong Monetary Authority (the local variant on a central bank), announced that the territory faced a ‘severe conspiracy’ by speculators. Yam would subsequently claim that: ‘Speculators launched coordinated and well-planned attacks across our markets.’34 In reality, the notion of an international conspiracy was fanciful, but individual speculators – as is their wont – were proving resourceful. They were amassing Hong Kong dollars by means such as short-term bond issues in order to have them ready to sell in tandem with short positions in the stock market. This made the currency board, which jacked up interest rates when Hong Kong dollars were borrowed through the banking system, less effective in heading off speculation against the peg. But rather than reach for regulatory adjustments – for instance, tightening settlement terms on short selling – the bureaucrats decided to go to war with the market. On 28 August the government poured US$15 billion of its reserves into the local bourse, buying up 10 per cent of large capitalisation (mainly godfather) stocks as a hammer blow to short sellers. It was instructive that Joseph Yam and his colleagues described this move, and the implicit threat of others, in terms of ‘victory’ and ‘defeat’ in a battle against speculation. There was no suggestion that Hong Kong’s plight reflected systemic weaknesses in its economy, no references to deregulation, the need to break up cartels or ensure greater competition. The huge share purchase itself was fortuitously timed and would prove profitable. But, in hindsight, the wider significance of the act was that it signalled a move towards more proactive, Singapore-style intervention in the economy. Six months later Donald Tsang would announce that the government was handing over the last prime residential development site on Hong Kong island to Li Ka-shing’s son Richard in an untendered, deferred-payment arrangement to build what it called a ‘cyberport’. This turned out to be a luxury residential development with a bit of extra wiring. Hong Kong had never been the free economy that British colonials claimed, but now it was heading further in the wrong direction.
The irony of these late summer antics was that south-east Asia’s economies were already stabilising. The Thai baht, Indonesian rupiah, Philippine peso, Singapore dollar and the Malaysian ringgit were no longer highly volatile currencies by the autumn and strengthened, modestly, from September. The rhetoric was about currency crises and craven speculation, but a big piece of the reality was that the market had simply adjusted currencies to levels commensurate with economic fundamentals. In particular, currencies had fallen to points at which south-east Asian export sectors – which were always kept in reasonable shape because they produced internationally traded goods – were once more competitive. It was to be no surprise that recovery in the region would be led not by godfather conglomerates, but by exporters. While a slow and patchy recovery took hold, however, there was a long period in which it was far from clear what the permanent impact of the crisis on domestic business structures would be. With the benefit of a decade’s knowledge, we can now speak with greater – but far from conclusive – authority.
A Nasty Crisis, for Some
The Asian financial crisis did two things to large-scale domestic business in south-east Asia. First, it culled or emasculated some of the least competitive, most value-destroying godfathers of the 1990s. Second, it brought about considerable regulatory change, although some of this proved superficial. As a corollary, foreign direct investment, and hence competitive pressure, in ‘sensitive’ sectors previously closed to outside investment – such as financial services – increased, and had a positive impact. However – and this is the big reservation – the crisis did not change the fundamental political–economic structure of the region. Local economies are still godfather economies, and the smartest, slickest godfathers were actually strengthened by the crisis. Until the system that creates tycoon economies changes, most godfathers will remain untouchable – just as their American equivalents were at the start of the twentieth century. Moreover, as we shall see, new godfathers will be created.
Among the very weakest godfathers were ones who had been promoted for what might be called sociological purposes. These were the showcase indigenous – bumiputra and pribumi – tycoons of Malaysia and Indonesia. The Philippines had a group of super-coddled godfathers under Marcos in the form of people given business empires for no better reason than they had been at university with the president or were friendly with his wife; those people were wiped out in the Philippine crisis of the early and mid 1980s.
In Malaysia and Indonesia, ethnic Chinese or mixed race citizens sometimes claim bumiputra and pribumi tycoons failed in the late 1990s because they were culturally, even racially, unadapted to business. In reality, the people in question had never been filtered in the way outsider godfathers are; their families never had to make their own first millions in order to get into the godfather game. In Malaysia, they were literally picked off the street (this is not meant to suggest working-class streets); in Indonesia they were most obviously the children of Suharto, and their friends. Moreover, these people were not tycoons in the regular sense. A large part of their role was as repositories of political wealth – assets and funding connected to the United Malays National Organisation in Malaysia and the ruling family and its Golkar political machine in Indonesia. In Malaysia, the highest profile bumiputra godfathers also lacked the core cash flows of their peers – monopolies on soft commodities and gaming licences – that provided insurance against bad times. Muslims could not be seen to be running gambling operations and, by the time many indigenous players got into business, the most juicy monopolies were already sewn up. In short, the indigenous poster boys were acutely exposed to the crisis, but not for reasons of genetics.
Malaysia’s bumiputra figurehead was Halim Saad, a man with expensive tastes in suits and office furniture, brought on by finance minister and UMNO treasurer Daim Zainuddin. Halim was introduced into the big time in 1990 when control of Malaysia’s North–South Highway, then directly owned by UMNO, was passed to him;35 he swapped the asset for control of a moribund listed company called Renong. This vehicle was then stuffed full of untendered privatisations and government contracts to the point where, in 1997, it had eleven listed subsidiaries involved in everything from banking and telecommunications to infrastructure and oil and gas. Despite such largesse, Renong had a history of liquidity crises, made little money and by 1997 was MYR25 billion in debt – the largest debt in the country, accounting for about 5 per cent of outstanding loans in the banking system. When recession and devaluation hit, there was no way Renong could service its borrowings. The government’s solution was a bail-out that set a new standard of shamelessness. Daim, returning to the cabinet in 1997, authorised one of Renong’s less leveraged listed subsidiaries, United Engineers Malaysia (UEM), to borrow MYR2 billion and use the loan, plus cash reserves, to buy 32 per cent of its parent without having to make a general offer. It was a royal shafting of UEM minority shareholders – forced to buy a failing company – in order to save Renong. It did not work because the public outcry was such that Halim Saad was forced to promise to buy back Renong’s equity within three years.36
But he had no way of doing this. He spent the time dreaming up a MYR17-billion bond issue that would somehow be honoured seven years hence with a one-off payment. The market was not interested. In 2001 the government was forced to use public funds to privatise UEM, and did the same with Renong in 2003. The cost to taxpayers, net of asset disposals, was at least MYR10 billion. Halim Saad, who in 1997 laid claim to a US$2-billion personal fortune, departed the corporate scene. Mahathir cut him loose after a fallout with Daim in 2001 – the reasons are murky, but Mahathir is in the habit of falling out with a lot of people – and in 2006 Halim faced the indignity of being on the wrong side of a court judgement for criminal breach of trust.
The demise of another Daim protégé and former employee, Tajudin Ramli, followed a similar pattern. A well-born bumiputra like Halim, Tajudin was given a five-year monopoly on mobile telephony in the late 1980s and then, in 1992, received the biggest personal bank loan in Malaysian history to enable him to take control of national carrier Malaysian Airline System (MAS). When the financial crisis cut passenger traffic, MAS posted huge losses. The Malaysian taxpayer, through the agency of Daim Zainuddin, came to the rescue in February 2001 by buying back Tajudin’s equity at MYR8 a share when the market price was a little over MYR3 (around the same time, the Philippine government bailed out Marcos crony Lucio Tan, who had taken over Philippine Airlines). Tajudin used the money to shore up his phone business. Unfortunately, evidence emerged that he may have siphoned off a very large sum of money from MAS, much of it via air cargo handling contracts in Germany with a private company in which Tajudin held an undeclared but sizeable stake. MAS filed a claim against Tajudin Ramli in the Malaysian high court in 2006.
Among ethnic Chinese Malaysians, a few egregious miscreants were put to the sword. Joseph Chong, a former senior politician and Mahathir ally, constructed a typical corporate Christmas tree in the 1990s with Sabah shipyard, a shipbuilder, large real estate projects and odd manufacturing businesses among its decorations. The biggest bauble was the Philippines’ National Steel, part of a Mahathir scheme to export Malaysian industrial ‘expertise’ around the region. The Mindanao-based steel plant was already in deep trouble by 1996 and the government prevailed on Halim Saad, through a private company, to buy it over for MYR3 billion. The Malaysian debt financing for Halim left no claim on the physical assets in the Philippines – these were already pledged to local creditors – and Malaysian taxpayers picked up most of the tab after National Steel suspended production in November 1999. Joseph Chong, meanwhile, posted hundreds of millions of dollars of losses in his other businesses and was the first businessman to seek court protection from creditors when the financial crisis broke. He exited corporate life.
For Multi-Purpose Holdings (MPH), which went spectacularly bankrupt in the 1980s after being marketed as a co-operative godfather-led investment vehicle for the Chinese community, there was a déjà vu moment. MPH had been sold, after its former boss was jailed, to Lim Thian Kiat (known as T. K. Lim), a politically well-connected would-be godfather with links to Anwar Ibrahim. In the 1990s, Lim reprised MPH’s folly, going on an acquisition binge and availing his businesses of nearly US$1 billion of debt. MPH had core cash flow – in the form of the Magnum gaming franchise – but Lim still managed to bankrupt it again. His association with Anwar meant he had no friends in power after the deputy prime minister’s imprisonment in 1998.
In Indonesia, the fall of Suharto meant there had to be some modest reckoning with the most brazenly and publicly corrupt tycoons. The former first family, despite occasional political rhetoric to the contrary, were all but untouchable. Suharto knew too much about the sins of the rest of the political elite,37 senior generals did not want him tried and his successors – especially Habibie, Wahid and Megawati – had almost no inclination to tackle the fallen king. Moreover, Suharto was old, claimed to have suffered a series of strokes after the crisis, and there were plenty of doctors ready to attest that he was unfit to face interrogation or trial. Charges were laid relating to fraud at the foundations his family controlled, but these were never seriously pursued and were dropped in May 2006. Various estimates were made of the wealth that the Suhartos had amassed during their time in power. A Time magazine investigation in 1999 said US$15 billion. Transparency International, a Berlin-based graft watchdog, reckoned somewhere in the region of US$15–35 billion. David Backman, an academic, listed 1,247 companies in which the family held equity.38 In the face of extreme public anger, most of Suharto’s children kept a sensibly low profile after the crisis; they quietly sold off assets, including luxury properties that highlighted their wealth;39 in April 2002, Bambang divested his controlling interest in key family holding company Bimantara.
The problem was Tommy, whose supercilious contempt for the institutions of government and provocative public remarks made him a particular hate figure. At the end of 1998, then-president Habibie, desperate to distance himself from the first family before elections took place in 1999, allowed the attorney general to proceed with one small corruption case against Tommy.40 He appeared in court in April 1999 before a gallery packed (by Tommy’s henchmen) with supportive young women while Suharto’s youngest son grinned arrogantly at the press. There followed an Indonesian judicial pantomime in which Tommy was twice cleared of all charges in the lower courts before being found guilty on appeal under the Wahid government in September 2000. Wahid’s reason for appealing the acquittals may not have been so much the original, relatively minor offence, but the fact that every time Tommy or his brother Bambang was summoned by the state a bomb went off somewhere in Jakarta.41 It began to look like Tommy and associates might be resorting to terror and, following a 13 September bombing of the Jakarta stock exchange in which fifteen people died, Wahid wanted him out of circulation. Tommy was sentenced to eighteen months and offered a special, luxury cell. He declined and went on the run. The following July the head of the three-member supreme court panel who had sentenced Tommy was assassinated, and two months after that another supreme court panel overturned Tommy’s jail sentence even while he was still a fugitive from justice. Following a national and international outcry, Indonesia’s police chief was sacked in November 2001 and, one day later, police miraculously found Tommy. He was brought to Jakarta police headquarters where the local police chief, perhaps forgetting the scene was being broadcast on live television, greeted him with a hug.42 In July 2002, Tommy was sentenced to fifteen years on convictions including ordering the murder of a supreme court judge; prosecutors asked for an unusually light sentence, which was further reduced on appeal, and Tommy left prison in October 2006.
The second high-profile figure given a spell inside was Mohamad ‘Bob’ Hasan. His trial followed the pattern originally set out for Tommy, before Suharto’s youngest son started killing people. Hasan was charged with two counts of fraud, relating to his timber concessions, and convicted on one, in February 2001. He was initially allowed to serve out his time under house arrest but, following another wave of public outrage, he was sent to the island prison of Pulau Nusakambangan, where thousands of Suharto’s political prisoners had died. This looked like an impressive gesture, but it subsequently transpired that Bob was given a special cell and treated more as a guest than a prisoner; he left on parole in February 2004.
Other godfathers who were threatened with a little jail time followed the Suharto route and became ill. Sjamsul Nursalim, of shrimp farm fame, was arrested in April 2001 on suspicion of fraud. He said he had a heart condition, was released, and fled to Singapore via Japan. Suharto’s half-brother Probosutedjo, convicted of defrauding reforestation programmes in 2003 and sentenced to four years, became ill in Indonesia. In a surprise move in 2005, he was dragged out of an executive suite in a private hospital in Jakarta and taken to prison. Sinivasan Marimutu, the Texmaco boss who loaded up on the country’s foreign exchange reserves during the financial crisis, decided to leave the country after ignoring several police summonses for questioning; his lawyer said he needed medical treatment. An international warrant remains out for his arrest and his profile still appears on Interpol’s website.43
A Pinch of Deregulation
Far easier than taking down godfathers, and prosecuting corruption through judiciaries that have learned to respond to the highest bidder, was to pass new laws and allow some modest deregulation of south-east Asian economies. This was the second impact of the financial crisis. The initial driver in Indonesia and Thailand was the IMF bail-outs, which were conditioned on – for the IMF – an unprecedented number of structural reforms.44 In Indonesia, structural changes included an end to restrictive marketing arrangements – cartels – for products including cement, paper and plywood, the end of public subsidy for Habibie’s aircraft manufacturing venture, the elimination of Tommy Suharto’s Clove Marketing Board, a reduction of support for the national car programme and the end of a compulsory 2 per cent after-tax contribution to charity foundations (that had previously been controlled by Suharto). This list of targets focused squarely on the Suhartos and their senior godfathers. The IMF has serious problems ensuring compliance to its conditions in developing countries, but these high-profile changes were mostly implemented.
The most important IMF demands, however, related to banks, and here results were better for quantitative targets than for qualitative ones. Across south-east Asia, governments forced the closure and merger of their smallest and weakest financial institutions, and increased requirements for paid-in capital to keep future bank numbers under control. Thailand and Malaysia went furthest among the ‘proper’ countries; in the latter, which did not participate in an IMF programme but where bank regulators kept a close eye on what the Fund was recommending, more than fifty banks were squeezed down to ten. Indonesia, where godfather banking was completely out of control in the run-up to the crisis, still had 131 banks in late 2006, but was persevering in a slow process of mergers that had been ongoing since 1997. What is harder to find is evidence of a qualitative change in the relationship between political power and banking. The IMF asked for legislated independent central banks, but the bank-led bail-outs mandated by Daim Zainuddin in Malaysia after the crisis broke, more politically sanctioned lending at state banks in Indonesia in recent years, and repeated efforts by Thaksin Shinawatra in Thailand to direct central bank policy suggest nothing of the sort is in prospect.
Central bank liquidity injections into banks in Indonesia and Thailand during the crisis, which were swapped for equity, made the local governments the owners of about half the shares in their banking systems (although this was followed by some privatisations). Given that state banks performed even worse than godfather-run private ones in terms of non-performing loans during the crisis, the expansion of state ownership, combined with the failure to create truly independent bank regulation, bodes ill. The crisis left a smaller number of banks in the hands of families and a larger number in the hands of the state.45 It did not produce any banks with the kind of diversified private ownership, wholly separated from management, that has been the comparative structural advantage of the Hongkong Bank.
Foreign investors, often intra-regional ones, were presented by the crisis with opportunities that had not been available to them before 1997; in part, this reflected IMF conditions demanding increases in foreign equity allowed in a range of businesses. The biggest buyer was Singapore, which ever since the crisis has exported its huge current account surplus via overseas investments. State corporations bought banks in Indonesia – as did private banks UOB and OCBC – as well as telecommunications businesses in Thailand and much more. Malaysian state businesses and government agencies invested in plantations and banks in Indonesia. European, American and Japanese companies increased their equity in existing joint ventures in manufacturing, telecommunications, petrochemicals and insurance and in some cases, where allowed, bought out their partners entirely. There was a modest number of new acquisitions of manufacturing businesses and banks by multinationals and private equity firms. All this has had a positive impact on business efficiency, although globally competitive performance is still not necessary in most domestic south-east Asian businesses because their output is not traded across borders.
Hong Kong and Singapore did not face pressure for major adjustments to their banking systems because solid, well-capitalised banks have long been at the heart of their role as the region’s offshore financial centres; large amounts of flight capital headed into the cities’ banks during the crisis. Banking excess in Hong Kong was reined in by regulators after bank collapses in the early 1980s, and in Singapore by conservative state ownership of the largest institutions and an onerous regulatory regime.46 Despite this, the Hong Kong Monetary Authority further increased requirements for financial disclosure by banks, while Singapore fired a shot across the bows of its more entrepreneurial private banks with an aggressive prosecution of UOB in 2000 over discrepancies in the listing of a non-core subsidiary.47
Much less responsive to the crisis in Hong Kong were the political leaders and the Securities and Futures Commission (SFC). The politicians, led from 1997 to 2005 by tycoon chief executive Tung Chee-hwa, resisted all calls for the creation of a monopolies regulator such as exists in every other developed state. The official position was opened up for long-winded discussion under Tung’s successor, Donald Tsang, but did not substantively change. The SFC, whose board has long been dominated by godfathers and their proxies, showed no interest in the fundamental reforms most popular with minority investors;48 instead, the agency contented itself with some tightening of existing rules. A survey published by CLSA Markets in April 2001 showed that only 5 per cent of listed Hong Kong companies had an independent chairman, less than 20 per cent had genuinely independent ‘independent directors’, while in four-fifths of businesses the board and management were substantially the same people.49
What did happen in Hong Kong after the crisis, however, was that an organised minority investor lobby developed in a manner that is unique in the region. In part this reflects the greater size and internationalisation of the local market, with more hedge fund and institutional investors unwilling to play the cosy, manipulative games that traditionally satisfied the needs of godfathers and their investment banks. The leading light in this bottom-up struggle was David Webb, a former investment banker and employee of local godfather Peter Woo, who founded the Hong Kong Association of Minority Shareholders (HAMS). HAMS’ proposal that it become a properly resourced watchdog, with an elected board, funded by a 0.005 per cent levy on stock market transactions, was supported by many investors, but was inevitably shot down by the government, in 2002. None the less, Webb and HAMS’ website acquired a roster of 14,000 registered subscribers and David Webb was elected a non-executive director of Hong Kong Exchange and Clearing, the company that operates the stock market, as well as a member of the Takeover and Mergers Panel. In these capacities he led campaigns for a range of reforms, built a database of cases of minority investor abuse and was at the forefront of moves that blocked some of the low-ball privatisation offers after the financial crisis by godfathers like Robert Kuok, Lee Shau-kee and Cheng Yu-tung.50 As Webb says: ‘It is feasible to achieve change here. I don’t get physically threatened in Hong Kong whereas I wouldn’t have tried this in Jakarta or Manila.’51
Singapore’s reaction to corporate governance issues raised by the crisis was a perfect illustration of that city state’s approach to business. On the one hand, regulators put in place much tougher corporate governance requirements than Hong Kong, with major amendments to the Companies Act in 200052 and a new Securities and Futures Act thereafter. On the other hand, Singapore retained its traditional bolt-hole role for the Indonesian godfather class. During the crisis the city became the base of operations for godfathers like Liem Sioe Liong and his son Anthony, while they waited for the security situation to improve in Jakarta and for confirmation that they would not face prosecution for the many illegal actions by their companies.53 Sjamsul Nursalim, wanted for questioning in Indonesia on suspicion of fraud since 2001, also set up shop in Singapore, from where he continues to run his businesses. The Widjaya family’s Asia Pulp & Paper (APP), which defaulted on US$14 billion of debt, and was then – as we shall see in the next section – the subject of an extraordinary subterfuge as the Widjayas attempted to buy back control of the company on the cheap, is incorporated in and run from Singapore; patriarch Eka Tjipta Widjaya has been based in Singapore since the crisis. Local authorities have never found cause to investigate APP or any other large Indonesian godfather business.
The crisis highlighted Singapore’s true colours: a squeaky clean regulatory machine that stands in stark contrast to some distinctly unsavoury businesses and businessmen. During the crisis, the city state was also amending regulations that have helped it draw offshore financial work away from Switzerland, which is under pressure from the European Union to assist it in clamping down on tax evasion and money laundering. Meanwhile, the moralistic Lee family decided to authorise and tender two vast gambling resorts which – despite the importance of ‘Asian values’ – were suddenly deemed essential to growth and employment.
Elsewhere in the region, progress on regulation of corporate governance was characterised by the traditional dichotomy between theory and practice. The Malaysian stock exchange introduced a voluntary code on corporate governance in 2000, and made changes to the listing rules that include a ban on (previously much-favoured) loans to unlisted holding companies and other third parties. While these modest changes were being introduced, however, the government was busy bailing out politically connected companies like Renong and Malaysian Airline System. In the Philippines there was almost no statutory change, and the presidency of Joseph Estrada confirmed a case of stock markets as usual. One of the contributing factors in Estrada’s fall in 2001 was a stock manipulation scandal in which Estrada was trying to block investigating authorities.54 Lucio Tan, a friend and financial backer of Estrada, obtained control of Philippine National Bank (PNB) on Estrada’s watch with a government-endorsed rights issue that only Tan subscribed to. Tan then reneged on a promise to buy out the government’s share in PNB because he already had control. Eduardo ‘Danding’ Cojuangco, another Marcos crony and Estrada pal, also prospered during the latter’s presidency, regaining the chairmanship of San Miguel. In Indonesia, the main governance reforms were that requirements be introduced for more independent directors and the creation of audit committees. In Thailand there were similar, modest changes.
Plus ça change …
The previous section is not meant to suggest that the crisis was not an agent of change. Rather, the point is that change was at the margin and not fundamental in nature. This becomes clear as we return to a more anecdotal analysis of how our godfathers fared.
The Philippines, as has been mentioned, was less affected by the crisis than other south-east Asian states because it had undergone an economic near-meltdown in the last years of Marcos and the years following his flight into exile. The economy shed its crudest crony characteristics under IMF supervision and the presidencies of Cory Aquino and Fidel Ramos55 and was not, in the mid 1990s, carrying an Asian-style debt load; this was assisted by the fact that chastened foreigners were unwilling to pour money into the Philippines in the period. None the less, the Philippines does provide a lead in to the post-crisis experience of its political cousin in the region, Thailand. In the 1998 Philippine presidential election, which followed the terms of Aquino and Ramos – both members of the traditional political élite56 – Joseph ‘Erap’ Estrada won election with a media-savvy pitch to the urban and rural poor. His true background was that he was the middle-class delinquent son of a government contractor, who happened to grow up in a rough part of Manila, but Erap’s self-characterisation as a man of the poor, and his B-movie career in which he specialised in ‘poor hero’ roles, saw him voted into office. Estrada was heavily backed by godfathers like Lucio Tan and Danding Cojuangco, as well as by owners of illegal gambling operations, all of whom stood to gain from his tenure. He lasted only two years before parliament started its first presidential impeachment proceedings over corruption allegations, and was forced out of office by a combination of street protests, the opposition of the armed forces and the manoeuvres of his (independently elected57) vice president, Gloria Macapagal-Arroyo, in January 2001. With Macapagal-Arroyo, the daughter of a former president, power was back in the hands of the establishment. But Estrada had pointed to the possibilities of a new, populist way to play the political game in the television age.
In Thailand, the same game was being explored not by a parvenu politician with godfather backing, but by a tycoon himself. Ever since the era of military juntas in Thailand began to fade in the 1970s, the number of businessmen elected to parliament has increased with each passing election. This is a long-term trend that began to blur the distinction between political and economic power. It was reinforced by the ongoing assimilation of ethnic Chinese Thais who dominate big business; by the 1990s the economic nationalism of the 1940s was forgotten and it was not a racial issue that part-Chinese businessmen constituted the majority of the members of parliament.58 As a result, the stage was set for big business and politics to merge completely, and the vehicle for this was Thaksin Shinawatra. Thaksin came from a tax farming and business family based in Chiang Mai with a long history of involvement in regional politics. He was drawn into national politics because his wealth derived from telecommunications and broadcasting concessions,59 which were the most politically fought-over rents that the state had to offer in the late 1980s and early 1990s. Other Thai telecom companies were arms-length backers of political parties in the quest for favour, but in 1994 Thaksin joined the cabinet of Chuan Leekpai as foreign minister. As Thaksin’s biographers, Pasuk Phongpaichit and Chris Baker, note: ‘He stepped across the line dividing business and politics.’60 He never went back. Thaksin took over leadership of a small party called Phalang Tham (Moral Force) and served two short terms as deputy prime minister in coalitions before the crisis. When the baht’s peg was broken, Thaksin had the only major telecommunications business whose foreign exchange debts were largely hedged against the devaluation. It was a provocative coincidence that Thanong Bidaya, the finance minister in the lead-up to the crisis and one of those who took the decision to float the currency, was Thaksin’s former banker, employee and a director of some of his businesses.61 Another person party to the decision to devalue, Bokhin Polakun, was subsequently accused in a parliamentary debate of being the channel through which information about the devaluation was passed to Thaksin; in 2004 he became Thaksin’s minister of the interior.
The baht’s loss of half its value against the dollar had nothing like the effect on Thaksin that it had on his rivals. But by the time of the crisis he had still accumulated huge debts and his entry into politics had not prevented the issuance of new telecoms licences and concessions to other tycoons who backed rival political factions. Moreover, after the IMF’s intervention the government agreed to deregulate telecommunications and establish an independent regulator, beginning in October 1999. This was not good news for a godfather business. In July 1998, however, a year after the crisis broke, Thaksin took a decision that would see him become a cash billionaire: he formed the Thai Rak Thai (Thais Love Thais) party, based initially in his office building. Over the next twelve months, as Thaksin honed a false public image of a poor boy made good, and his populist agenda and telegenic manner appeared to resonate with voters, other godfathers lined up behind him. He was endorsed by his long-time rival Dhanin Chearavanont, from the CP Group, whose business and family would provide two cabinet members for Thaksin;62 by the Bangkok Bank’s Sophonpanich family; by decimated media tycoon Sondhi Limthongkun; and by several major real estate players. It was a coalition of godfathers, brought up on economic rents and shell-shocked by the crisis, with almost no involvement from the manufacturing economy. But, brilliantly and brazenly, Thaksin sold himself and Thai Rak Thai as the political representatives of entrepreneurial small business and the rural poor, with a strong nationalist (but non-racial) tone. Unlike previous political parties, Thai Rak Thai also articulated a number of clear policies, including an amnesty on rural debts, the provision of village credit and universal healthcare.
Thaksin was well-funded and well-organised and, as his momentum built in the run-up to national elections in 2001, around a hundred sitting MPs defected to stand under his banner. This is the Thai and Philippine tradition whenever politicians see that the wind is blowing from a new direction. Thaksin ensured much of the campaign was focused on his own cult of personality, assuring his ascendancy. There was a biography, serialised in the press and synopsised in campaign material, that expanded on his Horatio Alger fantasy: ‘Brothers and sisters, I come from the countryside … As a rural kid, the son of a coffee shop owner, I helped my father with his orchards, newspaper delivery, and mobile cinema … Today, my friends range from hired motorcycle drivers to the presidents of great countries.’63 In the election, Thai Rak Thai won an unprecedented 248 out of 500 seats.
Five major business supporters, including Dhanin Chearavanont’s CP Group, were rewarded with cabinet posts. As Pasuk and Baker observe: ‘Thaksin’s rise was a logical extension of Thailand’s business-dominated “money politics”, but also a dramatic change of scale. It brought some of the wealthiest elements of domestic capital into the seat of power. It superseded “money politics” with “big money politics”.’ To the victor, spoils quickly began to flow. On his first day at work, Thaksin’s minister of communications announced a review of a new state company-run mobile phone business, approved by the outgoing Chuan Leekpai government to increase competition, which put the company’s launch on hold.64 The Thaksin family’s Shin Corporation – the premier and his wife, to meet constitutional requirements, had formally passed their shares to their children, relatives and employees – bought out another local mobile business and forced its foreign partner, Telekom Malaysia, to withdraw. Thaksin, meanwhile, publicly rubbished the competing technology standard of another operator and successfully supported the state Telephone Organisation of Thailand to maintain interconnection fees on rivals that were not charged to Shin businesses; (one of the rivals was controlled by Dhanin Chearavanont, an early warning to him that his new political partner would not look out for his interests).65 The appointment of regulators at a new National Telecommunications Commission, which was supposed to lead deregulation efforts, was stonewalled. With competition limited, deregulation blocked and economic recovery fed by more expansive economic policy, Shin’s core cash flow from its Advanced Info Service (AIS) mobile phone unit ballooned. Profits from the business increased from less than THB4 billion in 2001 to more than THB18 billion in 2003. Shin diversified into financial services with Singapore’s state-run DBS bank (granted various licences), into an airline joint venture with Malaysian low-cost carrier AirAsia (granted Thai landing rights and a 50 per cent discount on landing fees),66 and bought control of independent television channel iTV (granted a reduction in the licence fee it paid the government and an increase in the amount of low-cost entertainment it was allowed to broadcast). When the Thai stock market staged a recovery in 2003, doubling its much-reduced capitalisation, the value of Shin’s five listed businesses tripled.
Thaksin was not unduly short-termist. While Shin prospered, he delivered on his major campaign promises, particularly with respect to farmers. He promoted growth by encouraging the expansion of household debt and using quasi-fiscal financing arrangements to increase public expenditure without a short-term blow-out in public borrowing. Thai Rak Thai absorbed three more political parties after the election and, in February 2005, secured a second term with three-quarters of the seats in parliament – giving Thaksin sufficient votes to change the constitution and to block censure motions. He spoke of a quarter century in power. Unfortunately, Thaksin made two miscalculations: he failed to keep his fellow godfathers happy and he paid too little heed to middle class opposition in Bangkok. This opened the way for the military to step in.
In the best tradition of the so-called ‘bamboo network’, Thaksin forgot about his tycoon backers the moment he was elected. Not a bank owner himself, he showed no interest in defending the old banking cartel, which had to trade equity – and in some cases control67 – for infusions of foreign capital. Bangkok Bank’s Sophonpanich family, which was forced to reduce its stake to under 20 per cent after the crisis, pulled away from Thaksin during his first term. Dhanin Chearavanont, the top godfather before the crisis, supplied funds and cabinet ministers to Thaksin, but found him unwilling to provide the kind of political support for CP Group’s telecom businesses that he did for his own.68 When bird flu hit Thailand, Thaksin let the Chearavanonts manage their own response in their vast poultry-processing operation – without the intervention of public health officials – but then he did not have a chicken business. When members and employees of the Sophonpanich and Chearavanont families were interviewed for this book in 2005 and early 2006, they were visceral in their loathing of Thaksin.69 It was a bad case of godfather jealousy and a harbinger of problems to come for the premier. Sondhi Limthongkun, the failed media tycoon who evangelised Thaksin early on, was to become the leader of the popular protests against him.
The trigger for Thaksin’s ouster was the sale of Shin Corp. to the Singapore government’s Temasek Holdings in January 2006. The sale was smoothed by stock market exemptions; the cabinet had approved an attractive new tax deal for the AIS mobile unit weeks before the sale; and an increase in the maximum equity ownership allowed to foreign investors in telecommunications companies came into effect one day before the deal was done. Moreover, US$1.9-billion proceeds – because they came from a share transaction – were tax free.70
To his godfather enemies, Thaksin added middle-class Bangkok, outraged both by the manoeuvres that had led to his cash windfall and by a sale to the widely despised Singaporeans.71 Street protests, drawing tens of thousands of people, occurred throughout the spring. In April Thaksin, sure that his rural support would deliver another victory at the polls, called an election as a referendum on his leadership. The opposition boycotted it. Thaksin tried other manoeuvres, including temporarily stepping down from the leadership. By summer it was apparent to Thaksin’s opponents in the old political and business élites that intervention by the army was unlikely to spark the kind of popular reaction in the capital seen in 1992 when people took to the streets in opposition to military intervention in politics. Former three-time military premier – and now adviser to the king – General Prem Tinsulanonda sounded out support among the old élite for a coup. This duly took place on the night of 19 September, while Thaksin was abroad, forcing him into exile.
The coup almost certainly signalled a return to the traditional division of labour between political and tycoon groups. It was proof, if proof were needed, that the godfathers are incapable of sustained co-operation. Thaksin brought the tycoons together for the Thai Rak Thai adventure, but when it became clear that he would be the major beneficiary, the arrangement fell apart.
This is not to say, however, that Thaksin actively impeded the post-crisis recovery of his peers. The banking families suffered considerably, as market forces in the financial sector were allowed to play out. But Dhanin Chearavanont, with constant cash flow from his agribusinesses, was able to sell off non-core companies, including brewing and motorcycle manufacturing interests in China and his Lotus supermarkets in Thailand, settle some of his debts and renegotiate others. By 2006, the CP Group was expanding again, opening scores of supermarkets in China and, with Thaksin gone, Dhanin was once more vying for the top godfather spot. He had competition from Charoen Siriwattanapakdi, another erstwhile Thaksin backer. Charoen’s revenues from his Thai whiskey and brewing franchises held up as well as those of any godfather during the crisis72 and he acquired many new businesses at a discount. By 2006, Forbes ranked him the richest man in Thailand, with net worth of US$3 billion. A paper by researchers at Hitotsubashi University in Tokyo in 2004 found the share of stock market capitalisation accounted for by the top thirty family conglomerates in 2000 was the same as it had been before the crisis.73
After the coup against Thaksin, the new military government launched several investigations founded on suspicions the former premier was guilty of corruption, but there was no question of raking over the affairs of other godfathers. The Thai Rak Thai party began to fall apart as soon as Thaksin disappeared, with scores of its members of parliament renouncing their affiliation. They waited to see what political incarnation elections promised by the military government would recommend. Whatever the answer, there was little doubt they would be looking once again for tycoon patronage.
The Doctor will See You Now
In Malaysia, the grip exercised by the United Malays National Organisation on political life meant there was no likelihood of a change in the relationship between political and economic power. The political response to the crisis played out within UMNO and godfathers dealt with the consequences. The group of proto-tycoons brought on by Anwar Ibrahim in the 1990s – such as banker and broker Rashid Hussain and Tong Kooi Ong, who put together a large banking, brokerage and real estate business74 – provided fodder for a government-led corporate consolidation exercise after Anwar was jailed. Daim Zainuddin’s would-be bumiputra godfathers were cast adrift when Daim was let go from government in 2001. As Mahathir crushed his political challengers within UMNO, and won a 1999 general election with support from ethnic Chinese voters afraid of big gains by Islamic parties, godfather well-being came down to relations with the good doctor. The big boys were all marked out by the fact that their rapport with him was carefully maintained.
Quek Leng Chan suffered a shock when his Hong Leong bank was not on the initial list of core institutions that would be allowed to survive bank consolidation; but after some intensive lobbying, his business was added to the list. Ananda Krishnan was saddled with vast foreign exchange-denominated debts because of purchases of imported telecommunications, broadcasting and satellite equipment. But he had unrivalled access to Mahathir. State oil and gas company Petronas came to Krishnan’s aid, buying out most of his interest in the mammoth Petronas Twin Towers and Kuala Lumpur City Centre real estate project. Deep-pocketed Petronas, it will be remembered, had already put up the cash to fund the project’s development. Krishnan had dug himself a big debt hole, but with Petronas – of which he was a founding director in the 1970s – acting more like a captive bank than an oil company, and constant cash flows from his gaming and broadcasting monopolies, as well as shares in de facto power generation and mobile telephony cartels, he was able to clamber out. He sold a third of his mobile telephone business to British Telecom in 1998 for cash, but managed to buy it back in 2001.75 As the economy recovered, Krishnan listed his telephony, broadcasting and satellite units and, together with the gaming and power plant business that was already quoted before the crisis, by 2004 he controlled public companies capitalised at more than US$10 billion. Among Malaysian godfathers he is an above-average manager (though not as good as he thinks), while the quality of the concessions he obtained from the state showed through.
Lim Goh Tong and son Kok Thay, with their casino monopoly, had little to worry about during the crisis. Malaysian punters kept gambling while gambling tourism – not least from China – was on the rise. The main issue was what to do with the cash. The Lims expanded into cruise ships, which also feature gaming tables, becoming the third-largest such business in the world by 2004.76 But Hong Kong-listed Star Cruises, which faces global competition, has not yet produced healthy returns and its stock price has languished. Better news came for the Lims in 2006 when a consortium they organised won a bid to build a US$3.4 billion gaming complex on Singapore’s Sentosa island. This led Macau’s gambling king Stanley Ho to give the Lims the right to operate a casino in booming Macau in return for equity in Star Cruises and hence access to the Singapore deal. Unfortunately, the Lims, unused to working with Harry Lee, had not thought this trade through. The Singaporean government quickly made clear it would not have the unsavoury Stanley working on its turf and the deal had to be unwound. It was probably just as well for the Lims, since Stanley’s attempts to work with other godfathers in the past – not to mention his sister Winnie – have been plagued by bitter acrimony and law suits. Separately, the Lim family acquired British betting chain Stanley Leisure in 2006, reinforcing a trend for the senior Malaysian tycoons to invest their economic rents in assets in the former colonial power.77
Like Ananda Krishnan, the Lims enjoy some additional guaranteed cash flow in Malaysia as independent power producers (IPPs). IPP contracts, given to the big godfathers without open tenders, run on subsidised gas from Petronas and produce electricity that state utility Tenaga is forced to buy.78 The biggest beneficiary of the concessions, and the first to be granted one, was Francis Yeoh’s YTL Corp., with nine power stations.79 The conservatively managed business was a case study of how tycoons with monopoly core cash flows actually benefited from the crisis. In 1997, as the crisis struck, Yeoh had money on hand. He moved in on Taiping Consolidated, an indebted bumiputra-controlled real estate business with prime assets in Kuala Lumpur. For MYR332 million – around US$80 million at the time – he picked up the capital’s prime shopping mall, a newer and more glitzy mall nearby, the five-star JW Marriot hotel and a 118-hectare urban land bank for development.80 It was a politically sensitive move for an ethnic Chinese tycoon to make – Taiping was a bumiputra showcase from the early 1990s – but Yeoh kept the former owner in as a shareholder and company chairman,81 and UMNO let the move go. Yeoh’s cash continued to pile up, but there were no more deals so sweet to be had in Malaysia. So in 2002 he raised US$1.8 billion and bought the British regional utility Wessex Water from failing US energy company Enron. Three years later he moved on power generating assets in Indonesia. These were transactions in the best tradition of Malaysia’s richest godfather, Robert Kuok. He too was quickly buying up assets – around the region and the rest of the world – during the crisis as his core cash flows remained intact. Kuok’s decades-long near-monopoly on Malaysia’s sugar industry, as mentioned earlier – based on an 85 per cent share of import quotas82 – survived the financial crisis, despite lobbying by other godfathers.
That little had changed in the economic structure was demonstrated by Mahathir who, having dispensed with some of the businessmen connected with Anwar and Daim, found himself a new ‘chosen one’. Syed Mokhtar al-Bukhary, a former cattle and rice trader (who, like Daim Zainuddin, was from the prime minister’s home state of Kedah), obtained his first audience with Mahathir as the financial crisis was breaking. Mahathir soon decided that Syed Mokhtar, whose background was less elitist than those of men like Halim Saad and Tajudin Ramli, was a genuinely gifted bumiputra businessman. Within five years, Syed Mokhtar became the single biggest independent power producer in Malaysia, was given government financing to build a new container facility at Port of Tanjung Pelepas (PTP),83 and had major interests in mining, plantations and hotels. Like Ananda Krishnan, who took Mahathir on holiday and looked after his children while abroad, or Francis Yeoh, who poured money into Mahathir’s beloved Langkawi island and other loss-leading but high-profile projects, Syed Mokhtar worked out how to press the premier’s buttons. He built an Islamic arts centre in Kuala Lumpur, replete with onion-shaped domes, fountains and white marble; Mahathir frequently turned up on site to check the progress. Syed Mokhtar then followed time-honoured tradition by selling concessions he acquired through private companies to listed vehicles, where he controlled the board, at rich prices. PTP was sold in 2002 for US$500 million, and a private firm with the rights to build a 2,100-megawatt power plant in Johore state was sold in 2003 for US$220 million. In effect, he was stripping cash out of the long-term, capital-intensive concessions granted to him by the government. It was Syed Mokhtar who lobbied the state, unsuccessfully, to give him a substantial share of Robert Kuok’s sugar monopoly;84 in 2006 he was attempting to take over publicly quoted Bernas, which holds the monopoly for rice importation and distribution. Along the way Syed Mokhtar also took on interests in failed government businesses – including an electrical appliances maker, Kuala Lumpur real estate developments and the dismal Proton national car project; contrary to Mahathir’s view, he looked to many like a new Halim Saad.
In October 2003 the doctor finally stepped down, after twenty-two years in power. His latest deputy, Abdullah Badawi, took over and, in May 2004, won a resounding national election victory. In the months before the election, Abdullah had launched a handful of corruption investigations against middle-ranking businessmen and cancelled some high-profile state projects associated with Mahathir – including, pointedly, a couple of concessions granted to Syed Mokhtar. Many Malaysians hailed a new political beginning. With the National Front coalition holding 198 out of 219 parliamentary seats, however, this was naïve. UMNO was more powerful than ever, and a rising generation of political aspirants – including the children of former premiers and ministers85 – jostled for power in the post-Mahathir environment. They demanded a fresh round of pro-bumiputra positive discrimination policy, traditionally the code for what Abdullah had condemned before the election as hand-outs to ‘greedy Malay rent-seekers’. The fervour for anti-corruption prosecutions and deregulation soon dissipated, big government projects were restarted, and the godfathers carried on business as usual. There was a break from Mahathir – testified by the doctor’s periodic public rants, sometimes to journalists summoned to his fishbowl office atop one of the Petronas towers, that Abdullah was not up to the job – but it was personal rather than systemic.
The Dark Arts
In Indonesia it is not possible to tell the post-crisis story of individual Indonesian godfathers with certainty because – as with most things in Indonesia – that story is extremely opaque. More than ever, tycoons who were at the heart of the region’s worst economic meltdown have sought to conceal their activities from public view. As one top-tier godfather who profited handsomely from the Suharto years laments: ‘You really don’t know who owns anything.’86 In broad outline, however, several things are clear about godfathers’ businesses after the crisis hit: they exported large sums of capital, particularly to Singapore, and managed to hang on to overseas assets; they handed over domestic assets of dubious quality to the Indonesian government in lieu of debts and then sought to buy back some of those assets for less than they had claimed they were worth; and, with respect to politics, the fall of Suharto was followed by a period of free-for-all corruption that even the old man would have blushed at. When the first family exited the presidency, incoming politicians’ first instinct was to lay their hands on the bounty that thirty years of Suharto ascendancy had denied them. This situation began to cool down only under the presidency of Susilo Bambang Yudhoyono, elected in the country’s first direct presidential election in 2004.
Sudono Salim – also known as Liem Sioe Liong – and son Anthony ran Indonesia’s biggest crony conglomerate – largely funded by Indonesia’s biggest private bank, Bank Central Asia (BCA) – at the time of the crisis. By some reckonings its consolidated turnover was equivalent to 5 per cent of GDP.87 The Salims, who fled to Singapore well before mobs overran their family compound in north Jakarta in the early summer of 1998, set the tone for their peers in their efforts to salvage as much as possible of their empire. When the dust settled, they owed the Indonesian Bank Restructuring Agency (IBRA) IDR53 trillion – US$6.6 billion at the average exchange rate in the five years from July 1997 – for credits that had been pumped into BCA by the central bank. In return for immunity from prosecution, the family handed over more than 100 domestic Indonesian businesses it said were worth IDR53 trillion. At the IMF’s insistence, the Salims lost their most lucrative monopolies and control of BCA, but they hung on to some 400 companies, including their flour milling business Bogosari, and Indofood, the country’s dominant noodle maker. In addition, the Salims retained control of their Hong Kong-based conglomerate First Pacific, which at the onset of the crisis accounted for 40 per cent of group revenues. IBRA slowly set about selling off the companies it had been given. When the agency finished its Salim disposals, it had raised just under IDR20 trillion, or about two-fifths of what it was owed. Despite this, there were no prosecutions, the government of Megawati Sukarnoputri announced the Salims had settled their debts and IBRA closed its doors in February 2004. The Salims’ position was that the assets they handed over were fairly valued and subsequently only lost value because of the crisis in the Indonesian economy. By 2005 Anthony was living back in the refurbished family compound in north Jakarta – where the mob had painted ‘Suharto’s dog’ on the gate. That was in reference to Daddy, who maintained his base at his house in Singapore.
The Salims were beneficiaries of relativity. Paying back two-fifths of the liquidity credits borrowed from the central bank in the last days of Suharto turned out to be well above average. The Indonesian government shelled out IDR650 trillion in bail-outs (of which temporary bank credits were a subset) – or about half of one year’s economic output – but less than a quarter was recovered. Sjamsul Nursalim, whose bank received IDR27 trillion, handed over assets, including his famous shrimp farm, which allowed IBRA to recover about 10 per cent of what he owed. Basing himself in Singapore – and styling himself at different times with three variants of his Chinese name: Liem Tek Siong, Lim Tek Siong and Liem Tjen Ho – Nursalim carried on business as usual. He expanded the Singapore-listed real estate and printed circuit manufacturing companies he controls, Tuan Sing Holdings and Gul Tech, as well as Habitat Properties, another Singapore real estate firm controlled by his family, and he acquired other businesses in the island state.88 He also extended his control of Grand Hotel Group, listed in Australia. Nursalim did not appear to want for cash, circumstantial evidence perhaps of the claim that godfathers used their central bank liquidity credits during the crisis to buy foreign exchange (thereby driving down the value of the rupiah) which was exported to Singapore and elsewhere. When, in 2003, IBRA sold two of Nursalim’s Indonesian businesses – tyre maker Gajah Tunggal and GT Petrochem Industries – to Singapore-based Garibaldi Venture, many observers suggested that Nursalim was behind the purchase. The fact that Nursalim’s son-in-law remains a director of Gajah Tunggal’s fast-growing China operation,89 which by 2004 claimed to be the country’s biggest producer of replacement tyres with revenues of over US$1 billion, makes it clear the family is far from out of the picture. ‘The structure of the recapitalisation allowed the big families to wiggle back in,’ says Michael Chambers, head of the CLSA Asia-Pacific Markets office in Jakarta, and one of those who believes Nursalim controls Gajah Tunggal again. He says the ruse was common: ‘The conversation goes: “Listen, Michael, don’t tell anyone but I just bought it back for 5 cents on the dollar.” It’s outrageous.’90
The Riady family was another accused of surreptitiously buying back assets on the cheap. Unlike most of the big godfathers, the Riadys were not blacklisted from owning a bank again. They found some additional capital for their Bank Lippo during the crisis and, thanks to close relations with Suharto’s immediate successor Habibie, secured most of a first tranche of state recapitalisation funds. The Riadys remained the largest private shareholders, with an official 9 per cent of the bank – the government held 52 per cent – and brought in ING-Baring as management advisers, in line with IMF requirements. From 2000 to 2003, however, the Riadys engaged in a series of infringements of stock exchange rules, including manipulation of the 2002 Bank Lippo annual report, that led to record fines by regulators and saw Bank Lippo’s share price fall dramatically. There were also revised audits that contained large downward revaluations of collateral assets on the bank’s books. Many people in Jakarta concluded that the Riadys were driving Bank Lippo’s stock price down ahead of the government’s sale of its equity. The curiosity was that the Riadys could have bid direct for those shares in 2004, but chose not to do so, despite their continuing involvement in Bank Lippo management and apparent desire to control the bank again. Instead, IBRA unilaterally narrowed down a group of bidders to just one, which bought the government’s stake in January 2004. The consortium comprised Austrian bank Raiffeisen and three investment funds. Critics said the Riadys were hiding behind the investment funds, one of which, according to Michael Chambers, is ‘run by Italian-Americans living above a shoe shop in Switzerland’.91
Reality is an elusive beast in Indonesia. Chambers’ view is that post-crisis: ‘Of the top ten families, nine of them are probably still top ten’ if one considers the assets they hung on to offshore and those they still control through nominees in Indonesia. Other seasoned observers believe there has been greater change. Gene Galbraith, a veteran Jakarta-based stockbroker and entrepreneur who was brought in to run Bank Central Asia after it was sold to American investors and the Hartono tobacco family, contends: ‘Almost all the old rascals are much reduced or frozen. They have retained much of their wealth, but their ability to operate is much reduced.’92 There is some truth in this. A decade after the crisis there is an uneasy stand-off between the government of Susilo Bambang Yudhoyono and several big godfathers. Prajogo Pangestu, for instance, a leading timber baron who was in business with several Suharto family members, has more than once been threatened with prosecution for past abuse of reforestation funds and other alleged crimes. Prajogo is concerned enough to keep a very low profile, yet legal action never actually takes place. He has been forced to sell controlling interests in his pulp manufacturing subsidiary to Japan’s Marubeni, and in his petrochemicals business to Singapore’s Temasek. Yet Prajogo and his son remain in management control of his flagship, listed Barito Pacific Timber, despite the fact that almost all the equity belongs in theory to his creditors. It is indicative of a complex situation that the man identified by Forbes as the richest Indonesian in 2006 – worth an estimated US$2.8 billion – is another Suharto-era timber tycoon, Sukanto Tanoto, whom state bank Mandiri in 2006 listed as one of its six biggest delinquent debtors; he subsequently negotiated a repayment schedule and was taken off the list.93 Tanoto is also under investigation for fraud at the bank he used to own.94 Needless to say, his Asia Pacific Resources International Holdings Ltd (APRIL) is run from Singapore.
One reason why the Indonesian government does not move more aggressively against the godfathers is the belief that by working with them flight capital from the crisis will be repatriated. Michael Chambers, basing his views on information from banking sources, believes that up to US$200 billion of Indonesian money is sitting in Singapore alone. In 2005 Indonesian vice president Jusuf Kalla met with a group of godfathers including Prajogo Pangestu, Anthony Salim and Tanoto, who promised a gradual repatriation of funds stashed overseas.95 The notion that negotiation between the state and godfathers is a substitute for the rule of law, however, is a dangerous one. It none the less typifies the way that Javanese political culture has always worked. The fully democratically elected government of Yudhoyono, which has brought back a measure of stability since 2004, is no stranger to this tradition. Jusuf Kalla and fellow cabinet minister Aburizal Bakrie are from major pribumi business dynasties that have long benefited from state concessions; one of the other people on Bank Mandiri’s list of leading recalcitrant debtors in 2006 was Kalla’s brother-in-law.96 Yudhoyono himself is a former Suharto general.
The most remarkable post-crisis Indonesian godfather story – and one that shows that even if the country is moving in the right direction almost anything is still possible for the tycoons – is that of Eka Tjipta Widjaya. The polygamist Widjaya, whose prized possessions include a great deal of jade and a well-worn belt with ‘Eka’ inscribed on it in diamonds, created the Sinar Mas group, second only to the Salim empire before the crisis. The sprawling Sinar Mas conglomerate’s biggest business is an integrated forestry, plywood, pulp and paper unit, many of whose assets are grouped under Singapore-based Asia Pulp & Paper (APP) and its numerous subsidiaries. The Widjayas are masters of the godfather arts of pyramiding listed companies and opaque interplay between private and public businesses. Before the crisis, they had their own bank, whose deposits they milked, and which fell into IBRA’s hands. But a local piggy bank was insufficient for Eka Tjipta Widjaja’s ambitions. In the 1980s and 1990s he became Indonesia’s corporate bond king, selling foreign currency-denominated debt through a host of subsidiaries. Major bond sales in the three years before the crisis were facilitated by APP listing on the New York stock exchange, at the height of Asia fever, in 1995. Then came the Asian crisis, which was followed by a dip in the international wood pulp price in 2000. In 2001, APP units called a moratorium on payments of interest and principal.97 It was then revealed that the group’s consolidated debt was a stunning US$13.9 billion.
In a functioning legal system, that would have been the end of APP, as bondholders would have taken charge of its assets in the wake of default and liquidated them. But for Eka Tjipta Widjaja and his family in Indonesia, it was game on. The first move, within days of the default, was an APP announcement that it had lost US$220 million in foreign exchange dealings and that its financial statements for 1997–9 ‘should not be relied upon’. APP then said it was having trouble collecting US$1 billion in receivables from offshore trading companies. The company insisted the British Virgin Islands-registered firms were unconnected to it or the Widjayas, but the Wall Street Journal found APP staff worked at them.98 Creditors condemned what appeared to be a move by the Widjayas to hide cash offshore. The view was reinforced when an outside auditor discovered that an APP unit had put US$200 million on deposit with a bank in the Cook Islands, in the south-west Pacific, that the Widjayas controlled. Two other Widjaya businesses that were not part of APP also had hundreds of millions of dollars on deposit.99 In New York, APP’s share price crashed to around 1 per cent of its peak, and in July 2001 the company was required to delist.100 Thereafter it stopped producing consolidated, audited accounts, putting creditors almost completely in the dark about what was happening in the business.
All this began a decline in the price of APP bonds outstanding in the secondary market, because of the reduced likelihood they would be repaid in full. In public, the Widjayas said they wanted a debt workout, but they showed little interest in negotiating seriously with creditors, who were now being paid neither interest nor principal. Instead, in 2003, two APP units started legal action in the Indonesian courts alleging that bond issues they had made were illegal under local law and the result of misrepresentation by international investment banks.101 Meanwhile, creditors casting a more careful eye over APP assets noted that the company’s pulp processing operations were largely hostage to Indonesian forestry concessions held privately by the Widjayas; even if pulp and paper factories could be seized, they might be denied their raw material. The price of APP bonds in the secondary market sank lower still. In 2004, local courts found in favour of both the cases by the APP subsidiaries; in one instance US$500 million of bonds were declared null and void.
The results of these shenanigans were three-fold: first, the Widjayas almost certainly stashed large amounts of cash offshore and out of the reach of creditors; second, the family’s hand in restructuring its overall debt load was greatly strengthened; and third, it became possible to buy up bonds that APP units had issued for pennies on the dollar. The family’s underlying strategy, as far as can be seen, was to split off the debts of its Indonesian businesses from those of subsidiaries overseas. With domestic demand in Indonesia decimated, other operations had better near-term prospects. In particular China, which began a period of rapid economic expansion in 2003, was producing strong growth for local APP units, which were expanding.102 The company also kept its repayments of Chinese bank loans fully up-to-date, despite its moratorium on bond debt. In 2003, the Widjayas proposed exchanging US$660 million of outstanding bond-based debt for 99 per cent of the equity of APP’s China operation, controlled via a Bermuda company. In the offer document, the Widjayas were said to own about 23 per cent of the bonds via the bank they control in the Cook Islands;103 three-quarters of the bonds by value would be required for approval. After what traders said was frenzied activity in the purchase and sale of bonds issued by the China unit, a vote was called in which bondholders representing 89 per cent of the value of bonds concerned, said they were in favour of the proposal. A Bermuda court approved the restructuring. The Widjayas had their deal. Unfortunately, there was then some rather negative publicity as the New York firm retained to run the vote tried to contact registered bondholders in order to send them shares in the China business. Around 150 bondholders, representing 19 per cent by value, were Taiwanese who submitted physical registration documents for the vote through Nomura Securities in Singapore, where APP is headquartered (institutional investors dealt with the registration electronically, which is now the norm). The Taiwanese all voted in favour of the restructuring; when the New York firm Bondholder Communications called the contact numbers given on their forms, some numbers did not exist, some were wrong and others were answered by people who refused to put the caller in touch with the named bondholder. Other respondents identified themselves as relatives of the bondholder, but said it was highly unlikely the person in question owned millions of dollars of investments – they were low-ranking employees of APP in Taiwan. In 2004 Bondholder Communications wrote to the Bermudan supreme court judge who approved the restructuring the year before to say it believed that up to one-third of registered bondholders by value may not have been the real beneficial owners; this was easily enough to make the difference between success and failure in the vote. APP did not deny that the registered bondholders were its employees but claimed in a written statement that, for cultural reasons, Asians do not like discussing financial matters with strangers and, by implication, the persons in question may not have wanted to admit to their large investments. Barring an unfavourable judicial review in Bermuda, which has not occurred as of May 2007, the Widjayas have their Chinese baby.
In Indonesia, the Widjayas secured an agreement in 2005 with respect to the US$6.7 billion of debt attributable to their Indonesian units. The terms looked pretty good from the family’s perspective. Only US$1.2 billion would be repaid in full. The rest of the debt was converted into new bonds – after a significant write-down of unpaid interest – with maturities as long as twenty-two years. Most creditors decided they had to accept the deal, which achieved the necessary two-thirds support, although the US Import–Export Bank and some American bondholders continue to pursue APP in the US courts. The continuing power of the Widjayas in Indonesia, and their ability to move cash in and out of their businesses at will, wore creditors down. Deutsche Bank and BNP Paribas petitioned a court in Singapore to appoint an administrator to run locally based APP instead of the Widjayas, but the court would have none of it.104 A March 2003 letter from the ambassadors of the US, Japan, Canada and eight European countries urging the Indonesian government to do something about APP’s treatment of creditors, as well as interventions by several heads of state, were ignored in Jakarta. Indeed, creditors will be lucky if they are even paid out on the terms the Widjayas agreed in 2005. In November 2006, the supreme court in Jakarta upheld one of the 2004 district court rulings that US$500 million of bonds issued by an APP unit were illegal and therefore need not be repaid.105
The Widjayas are untouchable. Their involvement in illegal logging in Indonesia has been proven by journalists and environmental groups on numerous occasions, but the government does nothing. While the family fended off creditors of APP after 1998, and retained control of all their pulp and paper businesses, its separate, vast interests in plantations entered a period of break-neck growth by virtue of the recent global commodity boom. The Widjayas, Indonesia’s leading international debtors at the time of the crisis, are today richer than ever. As Gene Galbraith puts it: ‘They made out like bandits.’106
It should also be noted that Indonesia fits the post-crisis godfather pattern not only because some big boys were unscathed, while a few actually benefited. In addition, the political and economic system produced new godfathers. The most feared of these is Tommy Winata, a businessman with close links to the military, including former armed forces commanders Edi Sudradjat and Try Sutrisno, and, critics allege, the criminal underworld.107 After the crisis, his Artha Graha conglomerate ballooned. ‘He is a top three real estate developer from nothing, the rising star of the Indonesian economy,’ says Philip Purnama, a senior executive working for Anthony Salim.108 Winata received licences to move into shipping, coal, financial services and many other new businesses. Tommy, like his recently released namesake Tommy Suharto, is not a man to be messed with. When Indonesia’s best-known news magazine, Tempo, aired a report in 2003 that apparent arson at a Jakarta market area that Winata was interested in redeveloping might be to his benefit, a large group of thugs with a police escort turned up at Tempo’s offices and proceeded to assault the chief editor.109
A less scary, but none the less mysterious, godfather on the rise since the crisis is Bambang Harry Iswanto Tanoesoedibjo, commonly known as Harry Tanoe. He bought control of the Bimantara conglomerate from Suharto’s son Bambang Trihatmodjo in April 2002. He also acquired valuable licences during the presidency of Abdurrahman Wahid, with whom both he and his father have long-standing relationships. Apart from Bimantara, Harry Tanoe’s major investment vehicles include PT Bhakti Investama. Inevitably, there is much speculation about how a businessman in his early forties acquired the financial heft to build up one of the largest business empires in the country in the past few years. Some say Harry Tanoe, an ethnic Chinese who converted to Islam (like Bob Hasan), is running on Salim cash, others that he is a new Suharto front. As ever in Indonesia, there is no shortage of conspiracy theories, any one or none of which might be accurate.
Sunny places, Some Shady People
The tycoon experience in Singapore and Hong Kong following the financial crisis was a relatively passive one. The city states’ domestic economies depend on growth in the regions around them, and the godfathers, whose wealth is rooted in banking and real estate, simply had to wait out the downturn. It was a long wait, but the local billionaires’ core cash flows are such that not one of them faced a serious threat of insolvency.
In Singapore, the dirigiste government of the Lee family was relatively more proactive than the Hong Kong administration in making policy adjustments, almost all of which coincided with the godfathers’ best interests. One decision was also of significance to the multinational-dominated export processing sector: the Singapore dollar was allowed to depreciate from 1.4 to the US dollar in early 1997 to a low of more than 1.8 after the crisis. This boosted the competitiveness of exports and limited the rise of unemployment. A quest for new sources of growth in the domestic economy – where tycoon concern is focused – turned up two bright ideas. The first, as mentioned previously, was to woo more international private banking business in a period when the European Union and the United States were trying to clamp down on tax evasion through other international financial centres, particularly Switzerland. After a series of regulatory changes that were crafted with the help of international private bankers, total funds under management in Singapore-based asset management firms increased from US$92 billion in 1998 to US$350 billion and rising at the start of 2005; of this latter total, more than a third was private banking money. The second change, also already discussed, was to licence two multi-billion-dollar casino resorts; one franchise went to Malaysia’s Lim family, the other to the Las Vegas-based Sands group.
On the back of scores of billions of dollars of Indonesian capital flight into Singaporean banks and high-end real estate – the Jakarta Post claimed in 2007 that 18,000 of an estimated total of 55,000 ‘super-rich’ living in Singapore were Indonesians110 – these two moves were a significant boon to local godfathers, who own prime real estate and stakes in the Singapore bank cartel. The government also began to woo private banking and investment money from wealthy Indians, although in this task it faced stiff competition from Dubai.111
Banking families in Singapore had had little chance to ruin themselves prior to the crisis because the government there mandates reserves of capital relative to assets that are far in excess of international norms. The big three privately held banks – OCBC, OUB and UOB – were constrained in their expansion but remained strongly profitable thanks to their membership of the small and cosy cartel. The real estate downturn after 1997 was pronounced, with commercial property prices and rents falling by around 40 per cent. But the top-end office and residential sectors in which godfather interests predominate were the most resilient and, by 2006, had surpassed the peak price levels of the boom years. The likes of Kwek Leng Beng and Ng Teng Fong did not suffer unduly, and had cash on hand to buy up assets that became available in distress sales. The major Singaporean godfather families either maintained their net worth or increased it somewhat. Meanwhile, the government showed little embarrassment at the lengthening list of Indonesian godfathers camping out in Singapore – many of them wanted in Jakarta for questioning in civil and criminal investigations. In October 2006 Indonesia’s Tempo magazine listed Sukanto Tanoto, Sjamsul Nursalim, Liem Sioe Liong and Eka Tjipta Widjaja – all major tycoons this book has dealt with – plus Bambang Sutrisno and Andrian Kiki Ariawan (both sentenced to life in prison by Indonesian courts for embezzling central bank funds),112 Agus Anwar (wanted for embezzlement and granted Singaporean citizenship in 2003),113 and several others as being holed up in the city state.114 In a surprise move in April 2007, Singapore did agree to an extradition treaty with Indonesia – though at the time of writing it had not been ratified and it was impossible to know how it would work in practice.
In Hong Kong, like Singapore, the godfathers saw the values of their listed businesses and real estate holdings tumble during the crisis – property values dropped by more than 40 per cent on average – but, again like Singapore, much of their private wealth had been recycled into investments in the United States, Canada, Australia and Europe and was thus insulated from the turmoil. The main difference in Hong Kong was that 1997 witnessed a transition from colonial rule to government by tycoon, as the nice-but-dim shipping heir Tung Chee-hwa became the territory’s first chief executive. Tung had been heavily backed by his fellow godfathers for the job – particularly Henry Fok and Li Ka-shing – and the plutocrats had high hopes for his administration. Perhaps conscious that he was seen by many as a tycoons’ marionette, Tung made early policy pronouncements which were pointedly populist. He called for a large increase in the supply of residential housing units and more bank support for small and medium-sized businesses. But it was not long before the godfathers’ interests were being met. In August 1998, the government sank US$15 billion of its foreign exchange reserves into equity investments to support the stock market; much of the money went on tycoon company shares. In 1999, Li Ka-shing’s son Richard Li was granted untendered rights to develop an enormously valuable parcel of land on Hong Kong island, the so-called Cyberport project. After this, there followed a series of grandiose and controversial development projects whose main beneficiaries would be the godfather class. The government rolled out plans for a vast new exhibition centre, a logistics park on Lantau island and new harbour reclamations for development in the central and Wanchai areas of Hong Kong island. In 2004, with the bottom end of the property market in the doldrums but the top recovering, the Kwok brothers’ Sun Hung Kai and Cheng Yu-tung’s New World Group, which had built 2,000 government-subsidised public housing flats in line with Tung Chee-hwa’s new housing policy, applied to tear them down and put up luxury condominiums instead.115 There was a public outcry. More indignation ensued when the Tung government tried to privatise shopping and parking facilities in public housing estates without seeking approval in the Legislative Council.116 The most contentious Tung project involved a plan to develop a vast site in west Kowloon which had long been promised as park land for the densely populated city. The administration said that instead of a park it would create a ‘cultural centre’. To most observers the plans submitted by tycoons looked much like any other high-rise real estate development, with a few public buildings in the middle. But the godfathers insisted culture was close to their hearts. The Kwoks put up a 10 metre by 16 metre stage curtain designed by Picasso in their IFC tower in Central and had French president Jacques Chirac unveil it. Li Ka-shing’s Cheung Kong took Hong Kong journalists on a trip to the Louvre.117 The public was unimpressed, and by Tung’s second term, which began in 2002, popular indignation was palpable.
The Tung regime suffered the same two problems as Thaksin Shinawatra’s godfather government in Thailand. First, it focused educated middle-class opinion on the nature of godfather economics as never before. It did not matter that the reality of colonial Hong Kong had been far removed from the official myth of a free market state presented by the British rulers. Once a tycoon was in charge – and in the midst of the worst economic downturn in a generation – questions of collusion between political and economic power were pushed to the forefront of public debate. The tycoons’ representatives who hold industry-based (and not popularly elected) ‘functional constituency’ seats in the Legislative Council did their best to present vast construction projects as the rational answer to economic malaise, but their popularly elected peers in the council were increasingly adept at drawing attention to the self-serving nature of the business lobby.118 Tung’s second problem was that his ascendancy stoked the latent jealousy and bitterness that exists between godfathers around the region. Unlike Thaksin, Tung was not himself a big financial winner from gaining power, but his tycoon pals were soon consumed with neurotic fury that he was showing favouritism among them. The 1999 award of the Cyberport franchise to Richard Li brought about an unprecedented stream of public denouncements by rival godfathers. Ronnie Chan, Robert Ng and Gordon Wu all condemned the failure to follow an open tender procedure. The latter, a failing infrastructure and real estate billionaire who competes with Ronnie Chan to vilify democracy as the enemy of development, moaned to the South China Morning Post in 2005: ‘Look at Cyberport and the West Kowloon cultural district project and you know only the mega companies would be qualified to play in Hong Kong … The business environment in the past years has been very bad.’119 By Tung’s second term, the public did not like him and most of the godfathers did not like him either. He stumbled on for another eighteen months before resigning on the grounds of ill health on 10 March 2005. China fingered a British-trained civil servant, Donald Tsang, to replace him.
The appointment of Tsang took some of the heat of public resentment off the godfathers. He is more politically astute than Tung and canned the former’s outstanding white elephant projects, notably the west Kowloon development.120 Instead of telling the public that Hong Kong had no need of a competition and monopolies law, Tsang said he would think about one and – to tycoon relief – has already been thinking for two years. The godfathers lined up to support his formal ‘election’ by an 800-member group of notables, most of them sanctioned by Beijing, in March 2007 and he duly won. It will not, however, be possible to put all Tung’s spilt milk back in the bottle. The politicisation of Hong Kong that occurred on his watch is deep-rooted and complex. As well as a rise in political consciousness among voters, the Tung years saw the blossoming of non-government pressure groups that are unprecedented in the region. Minority investor associations were organised to block many of the attempted tycoon privatisations described earlier and to put forward candidates for election to the board of the Hong Kong stock exchange.121 Independent think tanks, most notably Civic Exchange, produce a steady stream of reports highlighting the case for greater competition in the domestic economy and the conflicts of interest inherent in functional constituency electoral arrangements. The godfathers have been stirred if not impoverished – something attested by their increasingly frequent statements about the dangers of political reform.122 The big outstanding question, which is addressed in the final chapter, is whether the godfathers can hold the line until popular political momentum dissipates or whether the challenge to their way of life will increase further.
For now, the tycoons are in fine financial fettle. They were thrown some meaty bones by Tung Chee-hwa, while the trend of post-colonial government in Hong Kong is towards higher levels of capital expenditure – mostly on infrastructure – which will always benefit them. The local real estate market returned to 1997 price levels in 2006, and the stock market was at a record high in early 2007. Much of the time, the market still dances to the godfathers’ tune, even if they do face stiffer opposition from minorities. In 1999 and 2000, the leading real estate billionaires all spun out vapid dot.com subsidiaries in initial public offerings to take advantage of the US and European technology bubble. They were businesses without business, and soon on the skids. After the internet economy crash of 2001, the next fashion was listings of real estate investment trusts (REITs). The game here was for tycoons to sell low-grade property assets into new corporate entities, back-load the debt repayments of the purchaser and list them with the story that dividends in year one would be a guide to future earnings. As ever, K. S. Li was the ring-master-in-chief. His Cheung Kong Prosperity Reit in late 2005 raised HK$1.92 billion, offering an attractive yield of 5.3 per cent.123 But Prosperity’s debt structure was such that it paid no interest on its borrowings in year one. The listing followed the classic godfather curve. Sold at HK$2.16, the REIT’s price spiked 20 per cent on day one before going into steady decline despite a rising market; by March 2007 it was trading at HK$1.78. In early 2004, Li and his investment bankers pulled a similar stunt with a Hutchison spin-off into a company called Vanda Systems and Communications, which also flew briefly, and crashed, before being taken back into private ownership for half the listing price.124 Son Richard achieved perhaps the most savage drubbing of minority investors in Hong Kong history with his Pacific Century Cyber Works (PCCW) all-stock takeover of Hongkong Telecom during the internet bubble; the peak-to-trough drop in PCCW’s share price was 97 per cent. For good measure, the young Li followed up with a back-door listing of PCCW’s real estate assets that was also characterised by a big spike and crash in the stock price.125 Reflecting on the behaviour of Li Ka-shing, former Morgan Stanley managing director Peter Churchouse comments: ‘To me it is a totally cynical exploitation of a public that adores him but doesn’t know better.’126
Why people do not know better is hard to fathom. The Prosperity REIT was a quintessential case study of the kind of godfather business not to buy into. Li Ka-shing’s Cheung Kong retained an interest of only 18.6 per cent at listing, with Hutchison holding 10.4 per cent. This meant the boss himself would own only about 10 per cent of what he was selling, a powerful signal that the asset was overpriced. The few godfather businesses that have ever been worth buying into as a minority are the ones the big boss owns most of, because then he must share in any pain as well as any gain. It is not possible to protect small investors from their own poor judgement, but it is curious that more people have not grasped a simple rule such as this. Anson Chan, Hong Kong’s chief secretary under Chris Patten, lambasts Li Ka-shing for more than just his capital markets antics after the crisis. On several occasions, she says, he made threats to government officials and in public that he would pull his money out of Hong Kong if regulators acted against what he deemed to be the best interests of ‘business’. ‘I have very little respect for most of the [big] business people in HK,’ she huffs.127 But Li’s threats are nothing new. He made similar statements in 1990 when he needed special regulatory exemptions for Star Television, which he then controlled. Moreover, it is hardly plausible that Li is going to walk away from his dominant positions in the de facto real estate, power, retail and ports cartels in order to compete in more open markets. After Hutchison made a windfall profit of US$15 billion from the sale of its stake in the European Orange mobile telephony business in 1999, and immediately gambled the money back into a raft of 3G licences around the world, Li needed his Hong Kong cash flows once more to shore up a loss-making, capital-intensive business. If he had no such revenues, Li would quite possibly have had to write off his ‘3’ business in recent years.128
Instead, Li entered 2007 with his empire intact and expanding, and his name at the top of the Forbes list of the richest people in Asia. He was also, as of the 2006 list, estimated to be the tenth richest person in the world. Li’s personal fortune had increased by US$8.2 billion to US$18.8 billion since the last pre-Asian crisis rankings, in 1996. No other south-east Asian tycoon featured in the top twenty-five billionaires in 2006, and only two families – the Kwok brothers with US$11.6 billion and Lee Shau-kee with US$11 billion – were in the top fifty. (This, it will be remembered from the introduction, compares with eight godfathers in the global top twenty-five and thirteen in the top fifty in 1996.) The change, however, was not because the Asian godfathers had seen their wealth reduced. Rather, they have been overtaken by Europeans and Americans whose stock markets continued to prosper in the late 1990s and were only briefly set back by the worldwide bursting of the internet bubble in 2001.129 Looked at in terms of simple net worth, of the eight south-east Asians in the top twenty-five in 1996 Li Ka-shing increased his wealth substantially despite the crisis, four tycoons maintained it, one died and had his money split among his heirs, and two lost.130 The cumulative net worth of the top eight south-east Asian godfathers in 2006 was US$66.5 billion versus US$65.1 billion a decade earlier. Beyond the top eight in 2006, many other south-east Asian tycoons had increased their fortunes markedly through the crisis era. Among those featured in this book were Stanley Ho, whose gambling fortune increased to an estimated US$6.5 billion, and Malaysia’s Ananda Krishnan, whose net worth rose to US$4.3 billion by 2006. From a godfather’s standpoint, the Asian crisis – to put it mildly – could have been a lot worse.