Budget Deficits, Current Account Deficits, Substantial Foreign Investments (Helping the Market Rise)…What’s to Worry About? The 1997 Asian Financial Crisis as a Warning for the United States Today

A Decade of Blazing Investment Returns

Over the past decade, the United States stands alone as the clear-cut champion of investment returns. On the surface, the dominance of investment returns is an impressive accomplishment. That level of success over any sustained period is a rare feat. Yet, a level of concern is warranted, especially when investigating the factors at play that led to this event. Below the surface of investment return dominance lies a complex web of large deficits and hot money flows that have, up until recently, generated immense wealth and returns for US shareholders. That same combination is now generating concern for the return outlook for US equities. Why? What changed to potentially cause a shift in investment success? The fiscal and monetary policies of the United States of the past decade are starting to create stresses from the US reliance on debt and hot money. How similar are the comparisons between the Asian Financial Crisis during the 1990s and the current US position? Are we doomed to repeat history? What type of thought process is required to weather a potential storm? With history and economic principles as our guide, we will work to untangle the nuanced factors creating the current investment environment and discuss how to navigate turbulent times.

United States Investment Landscape: Looking Back and Ahead   

A Rising Debt Level with No End in Sight

As we close in on the midway point of 2025, the US economy has unprecedented levels of government debt, large external balances, and large current account and budget deficits. These large imbalances, combined with looming tax cuts, create concerns related to management of the debt and who will finance the increasingly large debt load of the US. Much of the current deficit is structural in nature: defense, entitlements, and interest payments consume a supermajority of the US budget. This challenge bears similarities to developing nations which, historically, allowed for increasingly large entitlement growth related to food and fuel subsidies, until a crisis arrived.

Historically, the US has not carried a large debt load. Post WWII was the last period with a debt load similar to the current level, which was related to the time and cost of fighting WWII. Thus, at that time, addressing the substantial debt load by cutting the government budget was a significantly easier task. Entitlements were virtually nonexistent, with Social Security in its infancy and Medicare and Medicaid not yet in existence. It was a very different world environment and an entirely different US government budget reality. Yet, some policymakers in the current administration support following the post WWII monetary and fiscal policy playbook of budget cuts and currency devaluation. The current much larger structural deficit challenge could make that strategy a loser’s game. Specifically, built-in inflation adjustments for many entitlements enter a feedback loop as costs increase. Rather than expecting the post WWII growth that the US experienced as the world’s superpower, we believe that the lessons of the Asian Financial Crisis seem more relevant. The biggest and most obvious parallel to the Asian Financial Crisis is the growth of foreign investments.

Growing Dependence on Foreign Investment

The biggest concern with the fiscal position of the US and the outlook for increasingly larger deficits, in our minds, is foreign buyers of US assets. A large negative foreign net investment position is not in itself a negative; it often means foreign investors are confident investing in a country. Yet, if sentiment changes and the assets are liquid, investors could rapidly pull money out of US assets and reinvest in another country or currency, creating a major challenge for currency and inflation in the US. Over the past decade, US net international investment position has gone from -39.9% of GDP to -89.9% of GDP (meaning foreigners have dramatically increased investment in the US). Over that period, some of the best companies in the world have operated from the United States, propelling stronger economic growth than much of the developed world. 

The three charts below substantiate our concern about US dependence on foreign investments and the potential for these investors to move quickly. The first chart below illustrates the liability side of the net investment position. Total Liabilities (top chart) are around 200% of GDP (record territory). The second and third charts breaks down what can be considered hot money: Liquid Debt Securities at around 50% of GDP and Liquid Equity Investments at around 60%. With “hot money” equaling nearly 110% of US GDP this builds concern that investments can be easily liquidated and reinvested abroad if foreign investors get nervous about the US debt and economic policies.

Deficits, specifically current account deficits and large net foreign investment deficits, were hallmarks of the Asia Financial Crisis and the US economy today. These issues, along with rapid growth in private credit over the past 5 years from $1 trillion five years ago to $1.5 trillion today (40% of borrowers who are cash flow negative), with much of the money coming indirectly from banks, is reminiscent of Southeast Asia in 1997.

The 1997 Asian Financial Crisis: Warning Signs Ignored by Political Obstinance

 

The Collapse of the East Asian Economic Miracle

From the mid-1970s to the mid-1990s, Southeast Asia and East Asia experienced what was called the “East Asian Economic Miracle”: decades of strong growth and economic stability. The “Asian Way,” as it was called, was viewed as an inherently superior structure of economic development, as demonstrated by greater investor returns and stability. The US, during the same period, was experiencing economic challenges of inflation and the savings and loan crisis.

Yet, this period of Asian exceptionalism began showing cracks, and from 1995 through mid-1997, several Asian economies showed clear warning signs of impending financial turmoil. Rapid economic growth in Thailand, Indonesia, South Korea, Malaysia, and the Philippines masked growing macroeconomic imbalances and financial sector vulnerabilities. Huge capital inflows - attracted by high interest rates and often short-term in nature - fueled credit booms and asset bubbles. Meanwhile, fixed exchange rate regimes kept currencies artificially stable (and increasingly overvalued) even as export growth faltered, leading to large external deficits. Early warnings were sounded by analysts and institutions about these risks, but complacency and political/institutional weaknesses hampered decisive action. By the mid-1990s, many Southeast Asian economies were overheating. High growth was accompanied by widening external imbalances and other macroeconomic warning signs.

Indicators Toward a Growing Crisis

 

Macro Warning Signs

Rapid growth in domestic demand and slowing exports led to sizeable current account deficits. Thailand and Malaysia ran deficits on the order of 7 - 8% of GDP by 1995 and 1996, while Indonesia, South Korea, and the Philippines also had deficits in the 4 - 5% range. These deficits indicated that investment was increasingly financed by foreign capital inflows rather than domestic savings. For perspective, deficits above 5% of GDP are often viewed as unsustainable.

To finance these deficits, countries accumulated large foreign debts. By 1996, Thailand's external debt had ballooned to over $100 billion, and Indonesia's total foreign debt was roughly roughly 55 - 60% of GDP. Much of this debt was private rather than public, driven by banks and corporations borrowing abroad. South Korea’s external debt rose especially fast: from $42 billion in 1992 to $157 billion by late 1997, with 90% owed by the private sector. Across the ASEAN-4 (Thailand, Malaysia, Indonesia, and the Philippines), the average foreign debt-to- GDP ratio climbed dramatically. One account estimates it rose from about 100% in 1993 to 167% of GDP by 1996, underscoring how leveraged these economies had become with foreign liabilities.

Most of these countries maintained fixed or tightly managed exchange rates, often pegged to the U.S. dollar. As the dollar strengthened substantially from 1995 onward (especially against the Japanese yen), Asian currencies effectively appreciated in real terms. This loss competitiveness hurt exports and slowed growth. Thailand’s merchandise export growth collapsed to 0.5% in 1996, from 23% in 1995. South Korea’s export growth fell to 4% in 1996, from 30% annual growth in the early 1990s. An IMF analysis noted that by mid-1997, the Thai baht was about 7% above its long-term real effective value, and the Malaysian ringgit about 9% overvalued. At the same time, these countries were running large external deficits. In short, the currency pegs kept exchange rates too high relative to fundamentals, contributing to trade imbalances. Weak export performance in 1996 - 1997, exacerbated by China’s 1994 renminbi devaluation and a glut-driven drop in semiconductor prices, worsened the current accounts.

While capital inflows initially boosted central bank reserves, these reserves came under pressure as external deficits persisted. In Thailand, the central bank spent billions of dollars in 1996 and 1997 defending the baht’s peg, including forward market interventions. By mid-1997 Thailand’s usable foreign reserves were nearly depleted, though this was not fully apparent due to opaque forward commitments. Similarly, South Korea’s reserves in late 1997 turned out to be largely illiquid; by the time the crisis hit, Korea’s usable reserves had fallen to only $9 billion against short-term external obligations of over $60 billion. In essence, reserve coverage of short-term debt had become dangerously low in several countries: a classic precursor to a balance-of-payments crisis. In Thailand, short-term foreign liabilities exceeded exceeded total reserves by early 1997, meaning the country could not even cover a year's worth of foreign debt coming due.

Overlooked Financial Sector Vulnerabilities

Underlying these macroeconomic trends were serious financial sector fragilities. Banks and finance companies in the region expanded rapidly during the boom, but often without adequate oversight or risk management.

The 1990s saw an extraordinary credit boom in Southeast Asia. Bank lending surged at double-digit annual rates, often outpacing GDP by a wide margin. Easy credit fueled soaring real estate and stock prices, creating bubble-like conditions. Property values and shared prices across Thailand, Malaysia, and Indonesia became inflated to unsustainable levels. Thailand’s real estate market experienced a huge run-up in the early 1990s, with a constructions frenzy; by 1996, oversupply was driving down property prices and straining developers. This boom-and-bust in assets meant banks were increasingly exposed once the bubbles began to deflate.

Financial supervision did not keep pace with the credit expansion. Prudential regulations were poorly enforced, and many banks had inadequate capital or provisions. In some cases, political interference directed banks to lend to favored industries or individuals. According to the IMF, lax oversight and government-directed lending led to a sharp deterioration in loan quality at banks and finance companies. In Thailand, dozens of finance companies had heavily funded speculative real estate projects; by 1996, cracks were showing as non-performing loans (NPLs) began to rise. Similarly, Indonesia had licensed many new banks in the early 1990s, but supervision was lax - many were effectively lending to cronies or engaged in risky ventures. These weaknesses left banks highly vulnerable if the economy slowed or capital flows reversed.

South Korea’s High Corporate Leverage and Chaebol Debt

South Korea’s financial vulnerabilities were somewhat distinct. Much of the risk resided in the heavily indebted corporate sector and merchant banking system. Major Korean conglomerates (Chaebols) had taken on massive debt to finance expansion. By the end of 1996, the average debt-to-equity ratio of the top 30 Chaebols was around 400% - roughly double internationally accepted norms. Some large firms (Hanbo Steel, Sammi, Kia) began to fail under debt burdens in early 1997, revealing serious loan quality problems in Korean banks. Korean banks themselves relied increasingly on short-term wholesale funding (often from foreign banks) to lend to the Chaebols, making them fragile. In short, fragile corporate finances and an undercapitalized banking system in Korea were major red flags. Observers noted that Korea’s seemingly low public-sector debt masked huge private liabilities and banking sector risk.

Throughout the entire ASEAN region, many banks and firms had accumulated a dangerous mismatch on their balance sheets - borrowing short-term in foreign currencies (mostly U.S. dollars or yen) while lending or investing long-term in domestic markets. This created two compounding risks: currency risk and maturity risk.

Banks and companies had large USD liabilities but local currency assets. They were betting implicitly that pegs would hold because any devaluation would sharply increase their debt burden. Indeed, East Asian borrowers were lulled by stable pegs into taking on unhedged dollar debt, believing the exchange rate was quasi-guaranteed. When the currencies eventually fell, these unhedged debts became devastating.

Much of the foreign debt was short-term, while the loans/investments it funded were long-term and illiquid (e.g. real estate developments). This maturity mismatch meant lenders had to roll over short-term loans frequently. So long as confidence held, that was manageable; but if lenders refused to renew credit, borrowers would face a liquidity crunch. In the mid-1990s, over 80% of capital inflows to Thailand were short-term loans or portfolio money. By 1996, roughly half of Thailand’s total external debt was short-term. In South Korea, short-term interbank loans likewise comprised about two-thirds of external debt by 1996. This left both countries extremely exposed to a sudden credit cutoff. In Indonesia and Malaysia, the private private sector’s short-term debt was also substantial (around one-quarter of total external debt in Indonesia by 1996 and about one-quarter in Malaysia by 1997), although their banks had somewhat more long-term loans than Thailand’s. Overall, these currency and maturity mismatches were a ticking time bomb - one that would explode when confidence evaporated.

An additional financial-sector issue was the lack of transparent data and disclosure. Banks and governments did not fully reveal the extent of problem loans, forward exchange commitments, or short-term liabilities. This made it difficult for investors to accurately gauge the mounting risks until it was too late. For example, Thailand’s true reserve position was opaque due to forward contracts, and the scale of Korean banks’ short-term debt was not widely appreciated until late 1997. This opaqueness itself became a vulnerability. Once markets grew suspicious, the uncertainty fueled a sharper pullback, since investors often assume the worst in the face of unknowns.

Capital Flow Dynamics: “Hot Money” and External Debt

By the mid-1990s, Asia attracted almost half of all capital inflows to developing countries. Investors were lured by high interest rates and the “Asian Miracle” growth story. Much of this money was short-term portfolio investment or interbank loans, often referred to as "hot money." In Thailand, interest rates were kept several points above U.S. rates, drawing in yield-seeking foreign funds. These inflows fueled domestic credit booms (as previously discussed), also propping up the fixed exchange rates (central banks used the inflows to build reserves, giving a sense of stability). However, such inflows can reverse on a dime, especially when driven by short-term profit motives.

A critical vulnerability was the degree to which Asian banks and firms had come to rely on short-term foreign loans. Banks would borrow from international credit markets (often syndicates of foreign banks) at relatively low rates and then relend locally. By 1996, short-term debt had grown to uncomfortable levels relative to both total debt and reserves.

Thailand’s short-term foreign liabilities reached about 50% of total external debt by 1996, exceeding the Bank of Thailand’s reserves on the eve of the crisis. This meant Thailand was extremely exposed to any withdrawal of foreign credit; a fact that speculators noticed.

As noted, roughly 2/3 of South Korea’s $120+ billion external debt was short-term by 1996, largely owed by Korean banks to international banks. This created a dangerous mismatch. At the end of 1997, South Korea’s short-term external debt ($64 billion) was seven times larger than its usable reserves ($9 billion). When foreign lenders refused to roll over loans in late 1997, Korea suddenly faced a liquidity crisis.

Malaysia and the Philippines had somewhat lower proportion of short- term debt. Malaysia’s external debt was mostly medium-term, with only about 24% short-term by 1997. Even so, both experienced large outflows of portfolio capital in 1997 as investor sentiment soured. The Philippines, which had liberalized its capital account in the early 1990s, saw inflows dry up by mid-1997; but crucially, it allowed the peso to depreciate early and raised interest rates, helping it avoid a full-blown default scenario.

Indonesia held massive private external debt (over $130 billion) but a significant portion was longer-term. Nonetheless, Indonesian corporations had accumulated short-term trade credits and bank loans that became problematic. By one estimate, about 25% of Indonesia’s external debt was short-term. When the crisis hit, Indonesia’s largely private short-term debt still required refinancing that the market was unwilling to provide, contributing to the rupiah's freefall.

The dominance of short-term, speculative capital meant the region was highly vulnerable to a sudden reversal of flows. Which is exactly what happened in 1997. International banks and investors were pouring money in during the boom (sometimes underestimating the risks), but once confidence wavered, they scrambled to pull funds out. The readily available data of Bank for International Settlements (BIS) had shown increasing short-term debt exposure, but borrowers and regulators largely ignored the warning, and inflows continued to rise. In hindsight, this was a major red flag: a volatile funding structure that could trigger a crisis of its own. As the BIS observed later, “in spite of the ready availability of data showing increasing vulnerability ... the volume of these [short-term] loans simply kept on rising," and obvious problems like growing current account deficits were “similarly ignored.”

A related indicator is the ratio of short- term external debt to foreign reserves. In the crisis countries, this ratio became very unfavorable by 1996 and 1997, effectively, a flashing red light for liquidity risk. Thailand and Korea, as mentioned, had short-term debt levels far above reserve levels. Malaysia and the Philippines maintained higher reserve coverage, but even for them, the sudden exodus of portfolio funds in 1997 quickly eroded reserves. This imbalance meant that once markets lost confidence, a self-reinforcing panic was likely: creditors would refuse to roll over loans precisely because they saw reserves were insufficient, thus draining reserves further. Indeed, by late 1997, Thailand, Indonesia, and Korea all had to turn to the IMF for emergency liquidity support to meet external obligations, having effectively run out of reserves.

The capital flow dynamics of the mid-1990s - a flood of short-term, reversible capital fueling external external debt - set the stage for a rapid financial contagion. The situation was described aptly by one economist as “just a big accident waiting to happen” once a trigger occurred.

Policy Failures Building to a Collapse

Fixed Exchange Rates and Policy Rigidity

A crucial contextual factor was the policy framework many Asian countries followed: most had some form of fixed or pegged exchange rate, often implicitly tying their currency to the U.S. dollar. While these regimes had benefits early on (low inflation, investor confidence), by 1995 - 1997 they had become a major vulnerability and hindered timely policy responses.

Thailand had pegged the baht to a basket (dominated by the USD) for over a decade; Malaysia's ringgit and the Philippine peso were also de facto pegged to the USD, and Indonesia managed the rupiah in a tightly crawling band. These quasi-fixed regimes encouraged complacency. Borrowers assumed the exchange rates would not move significantly, treating the peg as an implicit guarantee. This was a key reason banks and firms felt safe taking unhedged foreign loans - the stable exchange rates created a false sense of security for dollar borrowing. It was a classic moral hazard: investors and local firms underestimated currency risk, which led to excessive exposure to foreign exchange risk in both financial and corporate sectors.

By keeping their currencies pegged to the strong USD, these countries experienced a real exchange rate appreciation in the mid-1990s. As noted, the USDs rise (and the 1995 yen depreciation) made Asian exports pricier on world markets. Yet policymakers were reluctant to devalue or adjust the peg, partly out of fear of losing credibility and sparking panic. This rigidity contributed to export slowdowns and widening trade deficits. Malaysia and Thailand saw their export growth slow markedly in 1996, but maintained their pegs, resulting in even larger current account gaps. In essence, the fixed rates prevented natural adjustment: normally, such countries might have let their currencies gradually weaken to correct the deficits, but the commitment to the peg delayed this, allowing imbalances to grow.

The pegged exchange rates also limited monetary policy's flexibility. With capital freely flowing in, central banks were often hesitant to raise interest rates aggressively to cool overheating economies. Higher rates would attract even more inflows under a fixed currency, putting upward pressure on the exchange rate. Meanwhile, keeping rates low (to support growth or troubled banks) encouraged more credit expansion. This policy dilemma contributed to overheating. The IMF later pointed out that the prolonged maintenance of pegged rates, in some cases at unsustainable levels, “complicated the response of monetary policies to overheating pressures”. Authorities found themselves defending the peg when speculative pressure arose, rather than proactively tightening policy to rein in credit booms. In Thailand, the central bank intervened heavily and even raised overnight rates briefly to defend the baht in late 1996 and early 1997 but was ultimately reluctant to hike rates enough to stem domestic credit growth, for fear of harming the economy and due to political pressure.

As pressures mounted, policymakers doubled down on defending their fixed exchange parities. Thailand, in particular, spent a huge portion of its reserves in futile interventions to save off devaluation in late 1996 and the first half of 1997. Similarly, the Philippines initially raised rates and used reserves to defend the peso’s band in early 1997, and Malaysia’s central bank intervened to buy ringgit. These actions bought time but at high cost - they depleted precious foreign exchange reserves. When Thailand finally ran out of ammunition and was forced to float the baht on July 2, 1997, the currency collapsed, triggering the regional crisis. The policy of delaying devaluation as long as possible arguably made the eventual adjustment much sharper (a sudden 15 - 20% drop rather than a gradual slide). In hindsight, the rigid defense of fixed rates was a warning sign: it indicated that the exchange values were fundamentally misaligned, and it left countries highly vulnerable once reserves ran low.

More broadly, the fixed exchange regime was emblematic of a policy framework that had become inflexible. Even as evidence of overheating and asset bubbles emerged, authorities were slow to tighten fiscal or monetary policy. Many believed their economies were different (“decoupled” from problems) due to past stellar performance. Thai authorities were reluctant to raise interest rates or let the baht weaken in 1996, fearing it would prick the property bubble or reveal weaknesses, and they waited until the crisis hit to take serious measures. In Indonesia, policy tightening was also modest and late (the central bank initially defended the rupiah within its narrow band until it no longer could do so). In South Korea, needed financial reforms (like strengthening bank capital and closing weak merchant banks) were postponed, and the won was only allowed to gradually depreciate in early 1997 despite obvious signs of stress (corporate failures and export losses). This slow response was often due to political calculations or over-optimism. The bottom line is that rigid policy frameworks - especially fixed currency pegs - and inertia in adjusting policies were key warning signs. They indicated that when a crisis hit, authorities might be caught off guard or “behind the curve,” as indeed happened.

International Warnings and Ominous Signals

In the years and months leading up to mid-1997, several warnings were voiced by international organizations and some economists, highlighting the aforementioned vulnerabilities. The International Monetary Fund had begun flagging concerns in its consultations. In Thailand, the IMF staff privately warned Thai authorities in early 1997 that a foreign exchange crisis was looming if policies didn’t adjust. They pointed to the large current account deficit, the pressure on the baht, and weak financial sector fundamentals. However, these warnings were not made public (to avoid causing panic) and were initially downplayed by Thai officials who were confident due to Thailand’s long record of growth. Similarly, the World Bank and Asian Development Bank had published analyses warning that high investment rates were yielding diminishing returns and that credit booms carried risks (the World Bank’s 1993 East Asian Miracle report praised the region but also noted the need for continued prudence). The BIS (Bank for International Settlements) also provided data showing the rapid buildup of short-term debt; data that, as noted, clearly signaled vulnerability. In retrospect, the BIS has referred to this as a missed warning: the information was available, but “the use made of information” was lacking.

A number of economists and analysts started raising red flags by 1996 and 1997. For example, some academic studies prior to the crisis identified real exchange rate overvaluation and credit growth as reliable crisis predictors. Those indicators were blinking red in Asia. Economists such as Paul Krugman questioned the sustainability of the “Asian Miracle” as early as 1994 (arguing it was driven more by input growth than efficiency, thus prone to slowdown). In mid-1997, as Thailand’s troubles mounted, several observers (both inside and outside the region) correctly diagnosed the problem: a fixed currency under speculative attack due to weak fundamentals. In Thailand, a few prominent local economists and and technocrats warned about the property bubble and the strains on the peg in 1996, but their warnings were largely ignored during the boom. Internationally, some investment bank analysts also grew bearish on Thailand and Korea in 1996 (for instance, reports noting the sharp rise in short- term debt and slowing exports). These analyses, however, often did not grain broad traction until the crisis was already underway.

There were also some market-based warning signals as well. In late 1996, credit rating agencies began expressing concern. Moody’s downgraded Thailand’s short-term sovereign credit rating outlook as short-term debt piled up and reserves came under strain, a clear sign that external financiers were uneasy. Similarly, spreads on some Asian sovereign and corporate bonds started creeping up in early 1997, indicating rising risk premiums. In South Korea, the failures of large companies (like Hanbo Steel in January 1997) alerted some investors to weaknesses in the financial system, leading to a gradual withdrawal of credit by some foreign banks even before the full-blown crisis. The Korean won also came under speculative pressure in spring 1997, forcing the central bank to intervene repeatedly, an early market signal that all was not well. Notably, long-term sovereign debt ratings remained investment-grade and largely unchanged through mid-1997 for most of these countries, which suggests that many observers (including rating agencies) underestimated the severity of the risks until the crisis hit.

Research into early warning indicators of crises was underway in the mid-1990s, specifically work by Kaminsky and Reinhart published in 1996. These pointed to indicators like growing current account deficits, a rapid increase in external debt, and real exchange rate appreciation as warning signs. Asia exhibited every indicator. However, one reason the Asian crisis surprised many is that traditional signals like high inflation, large fiscal deficits, or low growth were absent. In fact, by conventional metrics, these economies looked healthy, with fast growth, low inflation, and fiscal balance. Early warning models at the time also focused on sovereign debt metrics, not fully accounting for huge private-sector debt and banking contingent liabilities. This may explain why warnings were not more strident. Even so, some observers (notably at the BIS and a few contrarian economists) did emphasize the composition of capital flows and debt as a serious problem; essentially warning of a looming banking-currency crisis. In June 1997, just weeks before the crash, the IMF's Article IV report on Thailand reportedly urged stronger measures to shore up the financial system and reconsider the exchange rate regime. The warnings were there, but often behind closed doors or drowned out by optimism. Those who did predict trouble generally pointed to the very factors described previously.

Political and Institutional Factors

Political and institutional weaknesses in the affected countries further hampered their ability to prevent or respond to the crisis, and in some cases these factors contributed directly to the buildup of vulnerabilities. A significant red flag was the prevalence of crony capitalism - where business and political elites were closely intertwined, leading to nepotism in lending and investment decisions. In Indonesia and Malaysia, a portion of the heavy investment boom went went into projects controlled by politically connected individuals (“friends and family” of those in power). Development funds were often allocated to cronies rather than the most efficient projects. This led to inefficient investments and declining marginal returns on capital. Essentially, lots of borrowing was funding projects that would not be profitable enough enough to pay those loans back. Weak corporate governance meant that risky ventures ventures and excessive leverage went unchecked. When growth slowed, many of these politically favored firms could not service their debts, and their collapse added strain to the financial system. In Indonesia, President Suharto’s family and associates controlled major banks and corporations; loans were often made based on connections, resulting in a high volume of non-performing loans when the economy hit trouble. This systemic moral hazard was widely recognized in hindsight, but even before the crisis some analysts had tagged several Asian economies as having low transparency and governance scores, which should have been a warning sign.

 

In countries like South Korea (and to an extent Thailand and Indonesia), government industrial policies had encouraged banks to lend heavily to certain sectors or big companies, sometimes with an implicit guarantee. The Korean government’s past support for Chaebols created expectations that bad loans would be bailed out. Such implicit guarantees distorted incentives. Banks underpriced risk and companies overborrowed. Moreover, financial regulation was compromised by political considerations; regulators were reluctant to crack down on powerful borrowers or to intervene in failing institutions. The result was a build-up of systemic risk. An IMF review noted that "inadequate supervision, coupled with government-directed lending practices," lead to deteriorating bank loan quality across the crisis countries. When the crunch came, these bad loans undermined confidence in the entire banking sector.

Institutional weaknesses were also evident in the lack of transparent economic data and timely disclosure. Thai authorities hid the extent of reserve loss by using forward contracts, and Korea did not promptly reveal the true state of its reserves and banking sector in late 1997. This lack of openness delayed corrective action and meant that when the truth came out, it shocked investors, making the panic worse. It was an institutional failing that even the IMF later highlighted - calling for better data dissemination standards as a lesson from the crisis. Before the crisis, however, this opaqueness was itself a warning sign: savvy observers knew that official numbers might be masking deeper problems. For example, rumors abounded in early 1997 that Thai finance companies were in trouble and that the central bank was intervening heavily, but the full picture was unclear until the baht fell.

The political environment in some countries reduced the capacity to respond effectively. In Thailand, the government changed hands in late 1996, with a new administration under Prime Minister Chavalit Yongchaiyudh, and was politically weak and hesitant to take painful measures before the crisis. Throughout early 1997, there was policy paralysis as officials debated how to handle the baht speculation and the failing finance companies, with fear of backlash if things went wrong. This delay proved costly. In South Korea, 1997 was an election year. The government was initially slow to seek IMF help or impose austerity for fear of political fallout; only after the situation worsened post- election did the newly elected President Kim Dae-Jung adopt drastic measures. In Indonesia, President Suharto’s long-standing authoritarian regime actually contributed to initial investor confidence and stability. Yet, when the crisis hit, Suharto’s health issues and refusal to enact IMF reforms, such as closing insolvent banks linked to his family, led to a collapse of credibility. The inability or unwillingness to act decisively (due to political calculations, denial, or authoritarian opacity) was itself a warning sign. In fact, as the IMF noted, problems of governance and political uncertainty “worsened the crisis of confidence,” fueling capital flight when the crunch came. Once doubts emerged, foreign creditors were reluctant to roll over loans in countries where they perceived leadership was corrupt or unstable.

Institutional Capacity for Crisis Management

Prior to the crisis, there were also signs that the institutional framework for managing financial stress was underdeveloped. Few of the affected countries had effective bank resolution mechanisms or lender-of-last-resort frameworks for a scenario of system-wide distress. Bank regulators were inexperienced with handling large Non Performing Loan (NPL) crises. When smaller financial hiccups occurred - the 1996 closure of Bangkok Bank of Commerce in Thailand or the mid-1990s property downturn in Malaysia - authorities responded ad hoc; often propping up or merging troubled institutions rather than developing robust systemic safeguards. This lack of preparedness was a warning sign that if a bigger shock came, the policy response might be chaotic (which indeed happened in Indonesia’s case, where bank closures and reforms were delayed and then done haphazardly). Moreover, political interference often trumped technocratic solutions; in Indonesia, Suharto repeatedly reversed agreed reforms due to pressure from his inner circle, undermining confidence further. While these specific actions occurred during the crisis, the underlying political economy, concentrated power, lack of accountability, was in place beforehand and was a root cause of why warning signs weren’t heeded.

Governance problems, policy inertia, and political constraints amplified the other warning signs in the lead-up to the Asian Financial Crisis. The combination of strong headline growth with weak underlying institutions was treacherous: it delayed recognition of the problems and then impeded a swift, credible response when trouble hit. Investors eventually grew wary of these issues, which is one reason that once Thailand’s devaluation occurred, they rapidly reassessed other countries’ prospects. After all, “if it could happen in Thailand, it could happen elsewhere”. The crisis fed on a regional loss of confidence in not just economic fundamentals but also institutions and governance.

Lessons from the Asian Financial Crisis

By mid-1997, the warning signs in Asia had coalesced into a clear alarm: overextended external positions, fragile banks, and rigid policies in an environment of mobile global capital. In hindsight, the major red flags (high current account deficits, surging short-term foreign debt, property and credit bubbles, and fixed exchange rates divorced from reality) were unmistakable. Some experts and officials did see the danger, but their warnings went unheeded in the exuberance of the moment. When the reckoning came, it started in Thailand but quickly spread, exposing the common vulnerabilities outlined above. The Asian Financial Crisis offers a cautionary tale of how macroeconomic imbalances and financial excesses, if left unchecked, coupled with institutional weaknesses, can culminate in a sudden and severe economic crisis. The period from 1995 to mid-1997 was essentially the last clear chance to act on these warning signs. Unfortunately, the needed adjustments were delayed delayed until market forces made them brutally unavoidable.

TODAY: Historical Rhymes, US Concerns, and Investing Implications 

As we look at the debt load of US companies and the US government, we see many parallels with the Asian Financial Crisis decades ago, raising concerns. The US has already stretched public finances running large twin deficits: Federal and Current Account deficits. While personal balance sheets are strong in the United States, corporate and government balance sheets are giving warning signs. The chart below, “Public Debt Net Interest Payment to GDP,” showing interest payments on US government debt as a percentage of GDP. The US percentage of public debt net interest payment to GDP is at almost 4.5%; nearly double the next nearest OECD member, Greece. The chart is a chilling documentation that without a quick reversal of interest rates moving lower, or spending reductions, the US is nearing a point of unsustainable interest payments. As discussed earlier, much of this debt is held by foreign investors who not only demand higher interest rates because of the current US debt load but if the USD enters a depreciation cycle, foreign investors will also demand a premium to accommodate the depreciation. The concern of hot money exiting putting further pressure on the USD will ultimately raise the US refinancing costs. We are hearing the historical echoes of the Asian Financial Crisis, warning the United States today.

Another issue reminiscent of the Asian Financial Crisis is the changing makeup of US government. Over the past decade, the US has greatly increased short term debt as a percentage of total US government debt. While certainly not the same situation as the governments of Southeast Asia in 1997 it does reduce room to maneuver in case of any economic surprises. Having so much debt to refinance leaves the US at risk of economic surprises (and again creating a debt spiral like Southeast Asian nations in the 1990s). As we move into 2026, we expect the US will need to refinance and issue a combined $10 trillion USD of debt; making the US susceptible to any downside surprise on growth. The chart below shows US debt percentages by maturity comparing 2015 with 2025. The data highlights the changing nature of US debt maturity exposure, while also highlighting the dramatic increase in the debt level from just under $13 Trillion to almost $29 Trillion. Not only has the debt level exploded, but the percentage of short-term debt has essentially doubled and in dollar amounts has quadrupled; thus, exposing the US government to a much higher risk of rapidly rising interest payments. Over a period when the debt level more than doubled (and the short-term debt quadrupled), the US GDP growth was slightly over 50%. In 2015, T-Bills were about 8% of US GDP; in 2025, T-Bills are now 20% of GDP. This growth in debt and change in composition of US debt creates another reason for concern.

			5/30/2015	4/30/2025
	US Debt          ($ Trillions)	% of Total Debt	US Debt          ($ Trillions)	% of Total Debt
T-Bills (1 Year Maturity)	1.445	11%	6.059	21%
T-Notes (1 - 10 Years)	8.256	65%	14.902	52%
T-Bonds (> 10 Years - 30 Years)	1.63	13%	4.948	17%
TIPS	1.09	9%	2.027	7%
Floating Rate Notes	0.233	2%	0.618	2%
Total Outstanding US Debt  ($ Trillions)	12.654	100%	28.554	100%
(Excludes Intergovernment held debt)

Another uncomfortable comparison between the United States now and Southeast Asian nations in the 1990s is the rise of opaque debt. Over the past few years, we have seen the rise of private credit in the United States. As discussed earlier, much of that debt is loaned to cash flow negative companies and often involves unclear connections to banks’ lending through private credit vehicles. The growth of an opaque area of the credit markets (combined with increasingly poor governance in this corner of the financial markets) does bring back memories of 1997. 

In a direct comparison to Southeast Asia, the US is in a better position; US debt is denominated in its own currency. This does give flexibility; but only to the extent that markets will still buy US debt without capital flight. As discussed above and shown in charts, we have seen a large jump in “hot money” over the past decade - just like Southeast Asia in the early 1990s. Just like Southeast Asia, “hot money” was investing in economic exceptionalism that had existed before the crisis. Just like Southeast Asia, the US corporate debt has grown and much of that growth has come from opaque areas of the financial markets (which in the US is private credit). Finally, as more problems mount, we are seeing growing political inflexibility for reform. While we are not predicting an imminent crisis it does give us pause considering the debt load, the cost of debt, and political intransigence and the possibility of a false sense of overconfidence of the fickle mistress of “hot money.”

How do we invest?    

Taking these factors into account (combined with lower debt loads and reforms overseas), we are continuing to add to foreign investments. These investments encompass both equity and debt, since most foreign governments are in better financial shape than the United States. Also, the PE ratio differential between foreign and US investments is substantial, with the US currently around 22x with most foreign markets between 12-15x. Considering our concerns about US debt, we have been increasing our exposure to foreign investments, precious metals and safe-haven currencies since late 2024. This is not to say we have given up on the US; but if the current challenges persist, the pull of foreign investments, precious metals, and safe-haven currencies will likely grow.