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IMF may be prescribing wrong medicine for Thailand


The IMF could be prescribing the wrong medicine for Thailand which is facing insolvency rather than liquidity problems, write Vatchara Charoonsantikul and Thanong Khanthong.


After overdosing on IMF drugs for the past five months, Thailand has found that the treatment is not curing the disease. There must be a fundamental rethinking of the the US$17.2-billion bail-out package for Thailand. For the baht has continued its rapid free fall, losing one or two baht a day against the greenback and already crashing below the Bt50/US dollar mark. Economic growth will be slipping into negative territory this year. Asset deflation is accelerating and threatening to wipe out Thai financial institutions in one stroke. At the same time, liability inflation -- Thailand's total external debts are about $90 billion -- is skyrocketing due to the collapse of the baht.

Finance Minister Tarrin Nimmanahaeminda will be travelling to Washington DC this month to seek a revision of the IMF's policy conditionalities for Thailand. It has emerged that the IMF package, which essentially provides Thailand with balance-of-payments support through standby credit, is far from adequate in restoring confidence. Although Thailand has been strictly following the IMF's tough medicine, which requires fiscal and monetary tightening and the permanent shutdown of 56 insolvent finance companies, it appears that these measures do not address the real problems.

First, the IMF's policy conditionality which requires the Thai government to achieve a budget surplus equal to one per cent of the gross domestic product, is unattainable. There will be a shortfall of at least Bt100 billion from the 1998 budget due to severe tax collection disruptions. Thailand's fiscal position is backed against the wall and it is almost impossible to undertake further spending cuts, which would send the economy into a faster tailspin. Earlier, Michel Camdessus, the managing director of the IMF, argued that Thailand was not facing recession but stagflation, which is a combination of slow economic growth and high unemployment. But the Thai economy is heading toward a complete meltdown if the deterioration is not arrested.

Monetary tightening to defend the baht has repeatedly failed. The financial markets keep on talking down the baht, Bt55/US dollar or Bt60/US dollar if you will. There must be a way to bring down interest rates, otherwise liquidity will not improve and give the corporate sector some breathing space. The way to do it is for Tarrin to seek an enlargement of the standby credit from the IMF. The larger the amount, the better.

There has been talk that the IMF's standby credit may come in the form of ''cross default''. Under this standby arrangement, if Thailand defaults on its foreign debts, the IMF will also automatically default. This would help assure foreign lenders that their loans will be honoured and that they should help relieve the problem by rolling over some of them. If confidence creeps back, it might not be necessary to disburse the standby credit at all.

The Bank of Thailand should also seek more foreign borrowings to bolster its reserves, which would make it possible to print more money to put into the system. So far, the central bank has not worked hard enough in trying to source more foreign loans to strengthen its reserves, making it tough to stick to another IMF policy conditionality -- to maintain a foreign reserves of at least US$24 billion.

The IMF must be bewildered by the speed with which Thailand's problems have grown. The country is just dropping like a stone. One of the problems is that both the IMF and Thai finance and monetary officials underestimated the country's financial crisis. The IMF programme projected a reduction of the current account deficit of US$8-$9 billion. With a financial bailout package of $17.2 billion, there would be about $8 billion extra which would be available to finance increases in reserves and repay foreign debts.

But the financial markets quickly realised that the IMF package was far from adequate since Thailand's total short-term debts were about $39 billion as of the end of 1997. The markets also speculated that most of the central bank's $30 billion in foreign exchange reserves were plummeting to dangerous levels, either through massive capital outflow or the $24.3 billion in forward contracts intended to defend the baht. So the baht kept on weakening, triggering further dollar buying panic among Thai companies to hedge their dollar-denominated borrowings.

''The assumptions by the IMF were wrong,'' said Supachai Panitchpakdi, the deputy prime minister and commerce minister. He added that the situation had changed since the $17.2-billion package was approved in August last year. ''The effects from the implementation of the IMF measures have been worse than expected and confidence has not yet recovered,'' he said.

The IMF's present position is that only a minor adjustment to its programme with Thailand is needed, according to Dow Jones Newswire. It expects only ''evolutionary'' revisions, to reflect developments that have occurred since the initial accord was reached last August. A monetary official said there would likely be ''a change in some of the numbers, not the policies'' embodied in the IMF's program with Thailand.

However, the IMF has been receiving harsh criticism over its formula in dealing with the financial crisis. Steve Hanke, an applied economist at Johns Hopkins University, sharply rebuked the IMF in an interview granted to Forbes (Dec 29, 1997). ''The IMF is set up to deal with liquidity crises. This is not a liquidity crisis. It is a solvency crisis. A lot of money borrowed by the Thais and the South Koreans went into bad investments -- luxury apartments with no tenants, unprofitable semiconductor and car plants,'' he said.

Hanke also said the IMF was prescribing the wrong medicine for Thailand and South Korea. Both countries are facing problems with their private debts, not government debts. ''The IMF is applying an external bandage to patients who have massive internal injuries. Illiquidity is when you have good assets but are short of cash. Insolvency is when your liabilities exceed the value of your assets. What is the IMF going to do about that?

''It's a tricky problem when you have virtually no financial disclosure as we know it and no one exactly knows what the real balance sheet values are. Internal injuries require the likes of Al Dunlap [chief executive of Sunbeam Corp and a corporate turnaround specialist] and the reorganisation or liquidation of sick companies. The IMF is just not designed to deal with that. By bailing out the governments and the bankers who made the mistakes, the IMF is setting things up for the next, even bigger, crisis.''

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