March 3, 1999 -- Thanong Khanthong and Vatchara Charoonsantikul wrap up the first-ever round-table discussion between Stanley Fischer of the IMF and Thai academics.

IF anyone expected to hear some apologetic words from Stanley Fischer, the first deputy managing director of the International Monetary Fund, over any deficiencies or short-comings of the Thailand support programme, they were in for a disappointment.

For Fischer focussed most of his debate on the efficacy of the reform efforts under the IMF's guidance, making assurances over the macro-economic stabilisation that Thailand has achieved 18 months into the crisis and asserting that the reform package is alive and kicking.

Yet to his more pessimistic Thai academic counterparts, who encountered Fischer over the weekend for the first time in the first-ever round-table discussion, doubts still linger over the prospects of economic recovery.

The IMF has been wrong several times in its economic forecasts, so how can it manage to get it right this time? Are we really on the right growth path? Thais have been asked to go through painful reforms, but is the pain worth the exercise if the economy still muddles in a deep-seated recession? What's the point of hastening the reforms -- from banking recapitalisation, corporate debt restructuring to legal and other structural reforms -- when it would make no difference in the foreseeable future?

These were troubling questions that were raised and vigorously debated during the encounter between the No 2 man at the IMF and the Thai academics, led by former finance minister Dr Virabongsa Ramangkura, Dr Ammar Siamwalla of the Thailand Development Research Institute, Dr Kosit Panpiemras of the Bangkok Bank, Dr Pasuk Pongpaichit of Chulalongkorn University, and Dr Medhi Krongkaew of Thammasat University.

To give the debate a more lively touch, the forum also included representatives from the Thai private sector, including David Proctor of the Foreign Bankers' Association, Chulakorn Singhakowin of the Bank of Asia, Chumpol Pornprapha of SP International, Dr Viphand Roengpithya and Prasert Mangkornkarn -- both of the Federation of Thai Industries.

It turned out to be an intellectual and lively debate, capturing the heart of the crises that have gripped Thailand and the global financial markets since the Thai authorities devalued the baht on July 2, 1997. The debate also provided insights into the working of the US$17.2-billion IMF support programme.

From the outset, Fischer staunchly defended the overall IMF programmes that have helped restore confidence in South Korea, Thailand and the Philippines as evidenced in their stable currencies and subdued inflation. Indonesia is still facing difficulties due to its political problems, but it has also achieved a degree of stabilisation.

Reform for recovery

''The critical first stage of the reform process in the region has been achieved. The same applies to Malaysia,'' he declared.

Fischer pointed out that the Asian crises, unlike any other crisis that had happened before, were deep-rooted in the financial and corporate sectors, which had built up unsustainable external debts until the problem spread into the foreign exchange sector.

The IMF programmes, he argued, had been designed with flexibility to tackle the deficiencies in the financial and corporate structures and had not followed the blueprint of the Latin American stabilisation packages as widely misunderstood.

Central to his message was that Thailand, which has experienced currency stability, low interest rates, subdued inflation and comfortable foreign exchange reserves, would achieve a degree of recovery this year. The IMF's initial projection for Thailand is a 1 per cent growth rate for 1999. Thai growth will be aided by a more fiscal expansionary programme, which will also be adopted by other regional economies.

''Although the US economy is extraordinarily healthy and the prospects are still for it to continue, European prospects are less certain. However, this year should mark the bottom of the recession for the region. It's difficult to say precisely when the turnaround will take place,'' Fischer said.

But more reforms need to be accomplished by the Thais themselves to make the recovery possible, from undertaking banking reforms, corporate debt restructuring and legal reforms. This was the message he could not emphasise more.

''If you decide only to stop or slow down the long-term restructuring process after stabilising the macro-economic situation, the inflation rate, and exchange rate and interest rate, you will be in the crisis much longer. This is a crucial period,'' Fischer said.

''On the banking system's level of restructuring, it's been pretty reasonable. It's a difficult process because it normally involves changing management teams or severe dilution of existing shareholders' equity.

''It's very unpleasant for those who own the banks, and of course they will fight to the end politically. In terms of incentives and social justice, it's important that the previous owners are not the beneficiaries of government funds, which are intended to get the economy restarted by helping the banking system,'' he added.

Regarding corporate restructuring, the process is lagging behind schedule. Fischer said: ''For the good of the economy, it's necessary to get the balance sheets of companies in the real sector healthy again. The temptation is to wait and wait.

''This is the process that is lagging now. Legislative processes for passing the necessary restructuring laws in Thailand have also been delayed. If these processes are not approved quickly, the economy may continue to improve but the recovery will be slower.''

Reform to what end?

The Thai academics were less impressed with Fischer's report card on the Thai progress. Except for Mehdi, who is more optimistic over the Thai recovery, Ammar, Virabongsa and Kosit questioned the pace, if not the need for, the structural reforms to further punish the banking and corporate sectors when recovery is not in sight.

''We have seen signs that the worst is over. Monetary policies have stabilised the exchange rate and the government is planning to expand fiscal policy,'' Mehdi said.

But Ammar said not only is the reform not making any progress, the IMF's requirement for Thailand to embark on a wholesale change for its financial system is questionable. Ammar said there was a typical financial culture in Thailand, which worked over the past 40 years. But suddenly, Thailand was told that its financial system was simply a disguise of crony capitalism and must be wiped out.

Kosit and Virabongsa argued that it is a legitimate question to ask whether the pace of reform must be quickened when the process is not going to lead to any recovery.

''We were told not to wait in implementing reforms. We were told the longer we wait, the more harm we will do to the economy. On the other hand, we have also been told that there would be no recovery without the Japanese economy recovering,'' Kosit said.

''All other countries in the region were also told to expect the same. The question is should we quicken our reforms here or should we make it very clear that we should consider first, the situation around us in Asia. I think the pace of reform is a very legitimate question. What's so special about completing the reforms by the year 2000? Will the world break down after that?''

Virabongsa also called for relaxation of banking standards on either capital adequacy requirements or loan-loss reserve provisions because it is impossible for the Thai banks to raise adequate capital. ''Asking the Thai banks to recapitalise is like asking someone to jump across the Chao Phaya River,'' he said.

Kosit questioned whether improvements in macro-economic indicators can be the ultimate goal if they are not accompanied by improvements in the economy. ''Although inflation was only 3.5 per cent year-to-year in January, the non-food part increased by 10 per cent. Therefore, we are asking whether this achievement is really a policy achievement or it is something to worry about,'' Kosit said.

The Harvard-educated Ammar took on Fischer by questioning the accuracy of the IMF's economic forecasts, which have been in error all along. ''I have some less optimistic conclusions about what has happened to the Thai economy as a result of the IMF-approved policy reforms,'' he said.

''You mentioned that you expect the Thai economy will bottom out some time this year, but I think you would agree that the bottom will be much lower than the IMF previously predicted.

''My concern is that IMF forecasts have been continuously over-optimistic. Each letter of intent with the government has adjusted forecasts downward. What's been wrong? Some people say that the IMF had different objectives for the programme.''

He also doubted that the financial reform was making progress. Ammar said since the non-performing loan figures are still rising -- touching Bt2.73 trillion, or 45.9 per cent of total loans, in the latest Bank of Thailand report -- and have not yet stabilised. As a taxpayer, he said he was concerned about the level of government bail-outs in the financial system because eventually the taxpayers will have to foot the bill.

Virabongsa, who has emerged as the staunchest critic of the IMF, put it more bluntly that the Thailand programme was failing to deliver. He did not foresee any recovery this year, saying the problem is worse than anybody has expected. He criticised the IMF for not foreseeing the inter-relationship between the financial sector and the real sector.

''The Thai economic problem spilled over from the financial sector into the real sector. The Bank of Thailand's reports on the economy showed that it kept on getting worse. The real sector's problems were exacerbated after the 58 finance companies were closed down. I think the government's IMF-proposed policies did not foresee the linkage between closing companies in the finance sector and its serious effect on the real sector,'' he said.

Virabongsa also blamed the IMF for not moving quickly enough to relax Thailand's fiscal and monetary policies in March and April 1998 when the macro-economic conditions achieved a level of stabilisation for the first time since the crisis broke out in July the previous year. The delay in changing of the guard had aggravated the real sector, which had also been denied credit from the collapsing banking system.

Viphandh of the Federation of Thai Industries supported Virabongsa's views, making use of an analogy to describe the failure of the financial sector policy. ''As canals and rivers are the life blood of Thai agriculture, so the finance companies are the life blood of Thai industries. When you closed the 58 finance companies and several local banks, you didn't provide alternate lenders to the industries. What happened then?'' he asked.

''That financing again was the life blood of exports. That's why I think your advice hasn't resolved Thailand's economic problems. The real sector has really suffered during the financial crisis,'' he added.

Fischer replied that in a weak or strong economy, the reform process should continue unabated. ''I don't see much difference in what should be done in a strong or weak world economy. We hope for a strong economy but I don't see why it would help Thailand to slow down the current reforms if the world economy slows down.

''I don't think Thailand should do much different from what it is doing now. The reasons for fixing the financial system are very important. The lower interest rates indicate that monetary policies are working,'' he said.

Chulakorn of the Bank of Asia shared Fischer's view that the reform process must go on in earnest. ''There's no need to worry that bad borrowers will be at an advantage over good borrowers. Some borrowers always want a deal.

''From a bank's perspective, we always extract our pound of flesh. There are different ways of restructuring loans. Debt restructuring doesn't mean bad companies are put back on their feet. Illiquid companies may be helped. We may lengthen or extend payback periods to accommodate their cash flows,'' he said.

''But this is to answer the question of slowing down reforms. Without addressing the question of non-paying culture, I assure you that we will not have a viable financial system in the future. I think that some Thai businessmen currently believe there's no social stigma or little financial risk under today's legal structure for not paying back loans. This situation has to be reversed with effective new legislation. If there's no real effective legal reform, then I would think there would be a very, very slow recovery.''

Weaker baht and fiscal expansion

With the weak fundamentals and uncertainties in the global outlook, the Thai academics moved on to suggest that the IMF should consider using the exchange rate policy as a weapon to stimulate Thai growth. This, apart from the fiscal expansionary programme, can be pursued by making the baht weak to increase Thai export competitiveness.

Fischer frowned at this blasphemous proposal, of course. To him, the baht, which is hovering at Bt36-Bt37/dollar, has already weakened by more than 20 per cent against the dollar since the crisis broke out. Besides, exchange rate movements are the workings of macro-economic conditions, which in the case of Thailand reflect the reversal of the current account from the deficit to a surplus. Foreign exchange reserves have almost hit $29 billion, compared to a net $800 million in August 1997.

''The stable exchange rate is driven by the current account surplus, a macro-economic factor. You must remember that your currency has had a real depreciation of 20 per cent since the crisis. Fiscal policy should be used to stimulate the economy. It's one way of proceeding,'' Fischer argued.

Ammar, Virabongsa, Kosit and Phasuk advocated the weak baht policy, looking at it as the most viable tool to sell Thai goods overseas, keep Thai factories humming and safeguard employment at home. Virabongsa and Phasuk added that the baht should be made weaker to boost Thai exports at a time when the real economy is badly in need of a shot in the arm.

Kosit said compared to South Korea, Thailand has a larger agricultural base. ''What's happened to commodity prices in the past few months? I don't think I have to go into it in much detail. The question is how much time do we have before we must adjust the exchange rates,'' he said.

The Asia region has embarked on a fiscal expansionary programme to stimulate the domestic economy. With hopes of a Japanese recovery, strong US growth and a somewhat uncertain outlook for Europe, there's hope in the eyes of the IMF for the region to recover. It was not until August 1998 that the IMF decided to go in reverse, shifting from a fiscal tightening to a fiscal deficit policy -- the mistake that has allegedly deepened the crisis in Thailand. Thailand was required under the policy conditionalities to raise value-added tax from 7 per cent to 10 per cent as part of the fiscal consolidation.

''It seems to me that the IMF has completely reversed its policy objectives for the Thai government. First, you told us to limit our fiscal deficit. Now you're telling us, we have to spend more. These policies have severely affected the average Thai person. Can I ask you how the IMF can be accountable to the Thai people for the pain and suffering caused by this apparent policy error?'' said Phasuk.

Mehdi called for tax cuts as the key element in the fiscal policy. He urged the authorities to consider slashing the VAT from 10 per cent to 5 per cent -- a drastic action to create a real psychological impact. ''I think it would improve consumption dramatically. The government is very reluctant to do that because it feels that the loss of revenue may be too much to bear,'' he said. ''The point is how can we put money into the hands of the people so that they can spend.''

Proctor of the Foreign Bankers' Association suggested a number of steps that need to be taken for the economy to recover. First, the banks have to be recapitalised. Second, Japanese banks have to be recapitalised. The implication is that they have 50 per cent loan exposure in Thailand. Third, creditors have to help work out an arbitration mechanism to facilitate debt restructuring. Fourth, a credit bureau will have to be set up. Fifth, an independent mediation panel must be formed to help accelerate debt restructuring. And sixth, since Thailand is facing a private sector problem, not a public debt problem, it needs mechanisms focusing on corporate debt restructuring.

He also said NPLs are not a foreign bank problem, but largely a Thai bank problem, judging by the fact that Bank of America's NPLs are only 6.5 per cent. He immediately got a comment from Chumpol of SP International. ''Mr Proctor, you talk about the foreign banks having much less Thai corporate debt on their books than local banks. But the important thing often is who, no matter how small it is, is owed to. Even small amounts could trigger defaults and completely wipe out an NPL debtor.''