Duelling economists stake their case
February 10, 1999: Vatchara Charoonsantikul and Thanong Khanthong match up Finance Minister Tarrin Nimmanahaeminda and conservative macroeconomist Dr Virabongsa Ramangkura over their sharply divergent approaches to tackling the Thai economic crisis.
Opinions over how the Thai economic crisis should be tackled have become increasingly polarised inside Thailand between the advocates of the International Monetary Fund's support programme and the critics of the IMF.
In the official camp, Tarrin Nimmanahaeminda stands out as the staunchest advocate of the IMF's remedies. A monetary official was heard quipping: ''Nobody in this country believes in the IMF programme and follows its will more than Tarrin.''
But Tarrin has been arguing that since November 1997 he has been working closely with, not under, the IMF. And there have been significant modifications to the programme for Thailand after the stabilisation of the macroeconomic framework. The focus now is on microeconomic management.
The IMF officials, from Hubert Neiss, the director of the Asia-Pacific department to his deputy Anoop Singh, defend Tarrin as the most capable man for the reform job. Tarrin has been lauded as steering the country out of a complete catastrophe. In December last year, during the deliberation of the programme for Thailand by the IMF executive board, the IMF staff also fiercely defended Tarrin, who would like passage of the bankruptcy and foreclosure laws to be removed from the sixth letter of intent as performance criteria. The IMF staff argued that Thailand should be allowed the waiver of this performance criteria given its excellent track record in working with the IMF. Tarrin is by all accounts the darling of the IMF.
In the anti-IMF camp, Dr Virabongsa Ramangkura, the conservative macroeconomist, has established himself as a sharp critic of the IMF's reform programme. He has won followers among some members of the Senate and a growing body of Thai intellectuals, politicians, businessmen and financial executives, who have increasingly become more suspicious of the IMF's remedies. As a key adviser to the Prem government which played a role in the devaluation of the baht in 1984, Virabongsa started out as an IMF believer in 1997. He looked satisfied when he was dubbed by the press as ''Deputy Prime Minister for IMF Affairs'' during his brief stint in the ill-fated Chavalit government. He was one of the notable Thais who had urged the country in the middle of 1997 to seek a rescue package from the IMF at the height of the financial and political turmoil.
The following are Tarrin's and Virabongsa's differing views of the fundamental approach to handling the Thai economic crisis:
1. On the efficacy of the IMF's support programme
In his recent address in Japan, Virabongsa argued that the IMF programme for Thailand did not work. For the IMF has prescribed the wrong remedies by recommending severe austerity programmes that set back domestic demand and resulted in the inability to service debt by a large number of companies in the real sector. This he said, led to increasing non-performing loans in banks which forced them to squeeze credit to improve their capital base and enlarge provisions in line with the more stringent criteria set under the IMF package. The credit limitation, in turn, forced companies to cut back on capital expenditure and to reduce output, which put further obstacles in the path of economic recovery.
During the Chavalit government, Virabongsa projected the Thai economy to grow at 2.5 per cent in 1997, 3.5 per cent in 1998 and 6 per cent in 1999. Without naming names, Tarrin sharply attacked Virabongsa at a recent no-confidence censure debate by pointing out that the growth rate in 1997 was actually minus 0.5 per cent, in 1998 minus 8 per cent and in 1999 a positive 1 per cent. He implied that the Chavalit government's over optimism of the growth projections in 1997 led the IMF to overdo the support programme.
The IMF has admitted that it overdosed Thailand with tight fiscal policy and misjudged the financial market reaction in the initial stage of the programme due to over optimism over economic growth. But the IMF later defended its programme for Thailand as undergoing ''about right'' modifications to cope with the changing economic conditions.
Tarrin has admitted that the austerity programme from the initial period of the IMF support programme was counter-productive to tackling the Thai crisis, yet the programme was committed to by the Chavalit government at a time when Thailand had no one else to turn to. Thai financial institutions were falling like ten-pins at the time. The baht was facing a free fall and ultimate worthlessness. Hyper-inflation threatened to ravage the economy due to the sharp depreciation of the baht.
Since he took over the management of the Thai economy in November 1997, Tarrin has been trying to work with the IMF to win back confidence and modify the programme along the way as the macroeconomic conditions improve, from abolishing the two-tier system to relaxing fiscal and monetary policies. Growth will resume this year at 1 per cent, coming after a sharp economic contraction at 8 per cent in 1998. To him, the IMF programme is working, though not at the pace that most people would like it to.
2. On the baht policy
Virabongsa has been arguing that interest rates should be cut to help the real sector and that a weaker baht is better for Thai exports. His view on the baht, which appeared to receive initial support from Dr Supachai Panitchpakdi, the deputy prime minister and commerce minister, was that it should hover around Bt42-Bt45, a more appropriate rate to help Thailand earn foreign exchange. Who cared about the baht if Thai goods could not be sold in foreign markets. Besides, a high interest rate policy to defend the baht led to tight liquidity. At all costs, the real sector should have access to liquidity so that companies can continue to run their factories, employ their workers and sell goods to the market.
Keeping the baht stable was Tarrin's prime objective when tackling the Thai crisis from the outset. Given his position and authority, Tarrin would never allow the baht to sink like the Indonesian rupiah, the Russian rouble or the Brazilian real. Those countries would face a much more difficult task reviving the real sector than Thailand which is blessed with a much more stable currency and macroeconomic framework. If the baht is unstable, any attempts to reform the economy will be in vain. That is the reason why interest rates were kept high for a prolonged period to defend the baht, although the policy had been accused of deteriorating the recessionary conditions in Thailand.
It was not until August 1998 that Tarrin began to take a U-turn by relaxing fiscal and monetary policy in view of the sharp economic downturn and exarcebating external conditions. Tight fiscal and monetary conditions have been relieved to give the economy a shot in the arm. Short-term interest rates, which used to shoot up to 24-25 per cent to defend the baht, have fallen to 2-3 per cent. The baht has also stabilised from its rock bottom rate of Bt56 to the US dollar in January 1998 to Bt36-Bt37 at the present.
3. Can a weak baht help Thai exports?
Virabongsa believes that a weak baht can always help Thai exports, the only way Thailand can earn foreign exchange to help prop up the economy. ''Who says that a weak baht does not help us sell goods. If we price goods cheaper, we have a better chance of improving export prospects,'' he once said.
Thailand's current account has improved dramatically after the collapse of import demand. For over a year it has been running a current account surplus by about US$1 billion a month -- not because of export growth but because of the import collapse. This, he warns, will lead to further deflationary pressure in Thailand as companies will not be able to export in the future because, without fresh imports, they are using up their inventories.
Tarrin argued that a weaker baht does not necessary lead to export improvements due to the competitive depreciation of the regional currencies. The demand collapse in Japan and the neighbouring Asean markets also hinders the prospects of export recovery. On the other hand, a weaker baht will also hurt the economy considering the fact that Thailand still needs to import oil, pharmaceutical products and other capital goods and raw materials for exports.
If the baht weakens by Bt1 to the US dollar, Thailand's external debt of $80 will be increased by another Bt80 billion. How much can Thailand sell to offset the significant increase in the indebtedness by the weakening of the baht?
4. Financial sector vs real sector
Tarrin has been nagged throughout his present assignment that he pays more attention to tackling the financial sector at the expense of the real sector. But he argued that without a healthy banking system, there is no chance of economic recovery. The banking system plays a traditional role in financing Thai economic expansion. Bank lending last year still accounted for more than 100 per cent of the country's gross domestic product. If the banks do not function, there is no way to channel liquidity to the real sector. Most Thai companies are also tied to the credit system. If the credit system, at the heart of which lies the banking system, is not restored to health, the real sector will not recover.
Apart from the structural weakness in the banking system, Thailand has been suffered from over-investment, which has led to the rise of the non-performing loans to Bt2.5 trillion at present. And it takes time to sort out the viable companies from the unviable ones through debt restructuring.
Virabongsa wanted to forget the financial system and focus on reviving the real sector, which is the bread and butter of the economy. Now 80 per cent of the real sector is denied access to capital. The government must do everything in its power to make sure companies can continue to operate to save the economy. An equity fund should also be set up to invest in or give hand-outs to well-run companies to do their business. It takes time, if not years, to tackle the financial system, which should not be allowed to put a drag on the economy.
5. On banking standards
Virabongsa does not agree with the hasty move to strengthen the banking standard to bolster confidence. Stringent banking standards only weaken the bank at a time when banks are already suffering from an erosion of their capital base as a result of rising non-performing loans. He suggested that the three-month standard on missed payments, which should be classified by banks as an NPL, should be relaxed to six months.
Late last year at the Thammasat University's Faculty of Economics year-end seminar, he said China has poor banking standards, yet this fact does not affect confidence in the country. He said the government is trying to strengthen the banking system to woo investors when in fact investors are not going to make a comeback in the foreseeable future.
Tarrin's primary aim is to clean up the banking system. If Thailand is to have sustainable future growth, it must have a sound banking system. There will be no place for family banks. By improving the standards, banks will deal with their problems in the open instead of hiding them under the rug. He used to quote Banthoon Lamsam as saying that if the three-month standard of stopping accrued interest rates is not used, banks will anyway have to do it when a NPL reaches six months. The point is whether the banks have the courage to face their problems and deal with them in a straightforward manner. He also believes that foreign investors will make a quick comeback if conditions in Thailand have improved.
6. Capital control and free capital movements
Virabongsa agreed with Malaysian Prime Minister Dr Mahathir Mohamad's attempt to jam a brake on capital outflow by imposing capital controls. Last year Malaysia was facing capital outflow because its corporates or rich families were sneaking their money out of the country and parking it in Singapore. The capital controls were also aimed at putting an end to speculative attacks against the ringgit by hedge funds. Virabongsa argued that with the controls, Malaysia could hope to save its foreign exchange reserves of about $20 billion, which was necessary to help the country limp along during the regional financial crisis. At one point, he suggested that Thailand should adopt capital controls to save foreign exchange reserves.
Tarrin would never introduce any measures that turned away foreign investors. However, he is not a hard-core capitalist. Although he abolished the two-tier currency system, he still put some controls on baht speculation. Any baht transactions without underlying trade are limited at Bt50 million each. Since Thailand is following the IMF support programme, it is impossible for the country to introduce capital controls which go against the doctrine of free flow of capital of the IMF. Once capital controls are introduced, it will be difficult to restore confidence in view of the fact that Thailand will still need foreign capital in the future for sustainable growth.
7. On deflation
Virabongsa warned that there could be a second round of crisis if the deflationary cycle is allowed to continue. He outlined the causes as the devastation of the real sector as a result of fiscal and monetary austerity in the IMF plan, the collapse in demand at home and the region, the commodity crisis and the fall in production to only 50 per cent of total capacity. Deflation will deteriorate if the job market does not improve, if China cannot tackle its financial institutions and currency crises and if the slowdown in the US and Europe is significant.
Tarrin affirmed that there will be no deflation since Thai economic growth will resume this year at 1 per cent, provided that the domestic stimulus he is planning works and that the non-performing loans in the banking system are relieved.
8. On the present economic situation
Virabongsa said there are no signs of the economy picking up. A pick-up will take at least three to five years. Tarrin said signs of a pick-up are mixed, hopefully a turnaround will come in the second half of this year.