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'Two-tier' or not 'Two-tier'

 

Rational decisions could lead to the end of the one-country, two-tier system, says Thanong Khanthong.

The longer this Chavalit government stays in power, the stronger the image of Thailand as a country with a two-tier system will be reinforced.

When Gen Chavalit Yongchaiyudh swept to the highest executive office in the land in December 1996, he was immediately looked upon as a hopeful leader who would play an honourable role in instituting political reform and reviving the economy following the bursting of the bubble.

After six months in office, it is clear what the prime minister has in mind over this two-tier agenda. He has thrown his weight behind political reform, presumably in a fashion that will smoothen the transition of his power into a new political framework. Chavalit has been so out of touch with economic reality that he is not focused enough to provide the leadership necessary to put the ailing Thai economy back on track.

Without any hope from the political establishment, the Thai public at large has been plunged into the dilemma of having to determine which course of action is more important for the country as a whole political reform or economic salvation.

Since Thai politics and economics are so divided, nobody hopes the two objectives could be delivered simultaneously, if at all.

When a former prime minister was asked to pick between political reform and economic salvation, he did not reply directly, but said, ''I think the economy will go bankrupt first."

Since Chavalit has little interest in presiding over the reconstruction of the Thai economy, he has gladly agreed to share some of his power with Chatichai Choonhavan, the Chat Pattana Party leader.

With the growing prominence of Chatichai in the corridors of power, it is clear that the prime minister's ''divide-and-stay-put" strategy has created a two-tier economic management team one group headed by Finance Minister Amnuay Viravan, and the other led by Chatichai.

Since Amnuay has already claimed the ''Dream Team" label for his people, Chatichai can only register another patent perhaps the ''Awe-ful Team"?

While Amnuay has won international respect for his conservative yet easy-going style, Chatichai has revived the image of big business, the main constituency of the Chat Pattana.

Amnuay prefers to follow the technocratic path laid down by the finance and banking authorities, who have provided him with measures poorly-conceived albeit well-intentioned to stop the nation going down the tube. The measures to bail out property developers and finance companies have mostly proven ineffective because they did not have time to carefully consider the consequences.

Chatichai's agenda is an enigma because he and his Chat Pattana advisers are good at attending parties and running a growing economy, but not at resurrecting an ailing economy.

With fiscal constraints and dwindling tax revenues, Chat Pattana will quickly find it is not equipped to manage economic stability. More importantly, the party will no longer be able to squeeze the ailing goose that used to lay the golden eggs, except by slashing its throat for one last feast.

Already the two-tier economic management team has given rise to a two-tier fiscal consolidation policy.

Korn Dabbaransi, the industry minister and a key Chat Pattana chieftain, would like Amnuay to back-paddle his heavy-handed taxation measures against two-stroke motorcycles, marble and granite, and batteries. If Korn's demands are not met, Chat Pattana will further rock the boat or force Amnuay out of their way.

Concern over the health of finance companies has led to a flight to quality, hence creating a two-tier financial system. Thai people have shifted their deposits from finance companies to banks in the general belief that banks are financially safer. This flight to quality has drawn a line in the sand between banks, with combined assets of Bt5 trillion, and finance companies, with combined assets of Bt1.4 trillion.

Finance companies, which have saddled themselves with a mountain of non-performing loans, are counting their days. Between 1987 and 1995 their stocks carried a premium over bank stocks. With the collapse of the bubble economy, the finance companies no longer have access to hot money to pursue their asset-inflation game.

Now, finance companies are considered a cancer in the financial system. Through the mergers and acquisitions package, the finance and banking regulators are planning to uproot them. Weak finance companies will be allowed to go under, while stronger ones will be encouraged to merge or be taken over by their peers.

Those which meet the official criteria will automatically be awarded bank licences. Phatra Thanakit Plc, National Finance & Securities Plc, Krung Thai Thanakit Finance & Securities Plc and Nava Finance & Securities Plc are the four leading finance companies in line to receive bank licences since they have been tagged by the regulators to become core companies in the mergers and acquisitions process.

The nervousness of foreign investors over the health of the Thai financial system led to the attack on the baht in mid-May. The foreign exchange crisis is a by-product of the financial crisis, defined as a loss of confidence in the financial system, a breakdown of the payments system and a contraction of the gross domestic product to the level supported by cash in the economy.

Scrambling to defend the baht, the Thai regulators have resorted to hardball tactics by closing down the foreign exchange swap market. This has effectively created a two-tier foreign exchange system onshore and offshore. Foreign currency players who attack the baht will not have access to the local currency unless they deposit an amount equivalent to the baht they have sold short in non-resident baht accounts.

Yesterday, the dollar was traded at Bt24.35 in the offshore spot market, compared with Bt24.80 at the close of trading on Friday. In the onshore spot market, the dollar was quoted at Bt25.83, compared with Bt25.80 at the close of trading on Friday.

The closing of the onshore baht market in the faces of foreign speculators has triggered a sharp debate over the ramifications of the Thai regulators' policy. One camp is concerned that the drastic action makes it look as if Thailand is withdrawing into its shell and discouraging foreign investment.

''Are we going to become another Burma?" asked a former finance minister.

Another camp said if Thailand had not closed down the swap market, it would have exhausted its entire US$37 billion reserve in a futile defence of the baht from speculative attacks. The result would have been disastrous, with the central bank being forced to devalue the currency. However, the measures are meant to be temporary.

Following the baht attack, confidence in the baht has reached its lowest ebb. The uncertainty surrounding the Thai foreign exchange policy has resulted in foreign investors parking their money offshore instead of channelling it into the Thai money market or equity market to take advantage of the wide interest rate differential. This is the most critical problem facing the Thai economy.

Without the foreign capital, the Thai financial system is facing a credit crunch. Thai corporate borrowers are not willing to borrow US dollars from offshore, fearing foreign exchange risks. Instead, they have turned to borrow domestically, and are therefore fighting each other for scarce resources.

Under the circumstances, interest rates cannot be brought down to spur the economy. If the rates are on the rise as the commercial bankers say, the Thai economy is further doomed.

Even within the Bank of Thailand establishment there are two schools of thought over the country's foreign exchange policy. The conservative bloc argues for the continuation of the fixed exchange regime as it provides a safe haven for local and foreign investors, who do not have to worry about exchange risks.

The more progressive bloc advocates a free-floating baht to bring an end to currency uncertainty. Since the fixed regime pushed Thailand into a bubble economy, it should be abolished for a more flexible system whereby the value of the baht is determined by capital inflows and outflows and in proportion to the weightings of Thailand's trading partners.

Amid the economic dislocations, rural people have to bear the brunt of problems they sadly have had nothing to do with causing. Bangkok-based property developers, financiers and central bank policy-makers are the main culprits, who unwittingly ushered Thailand into the bubble era. When the bubble burst, the entire economy plunged into a tailspin. As a result, all Thais are paying a dear price.

Chavalit had to personally travel 200,000 miles before his ad hoc New Aspiration Party had built up a sufficient political base in the northeast to capture the central government machinery. ''It's time all the people live well and eat well," Chavalit told Isaan during the last general election campaign.

Alas, neither the urban rich nor the rural poor are going to live or eat very well if the economic situation continues to deteriorate. They cannot look at the future because the past is pulling at their legs. Thailand is sacrificing its future for the mistakes of the past.

It's time the prime minister relies on rational rather than superstitious decisions to tackle the problems. He also has to shed his military image as he is now a civilian leader. Sometimes he makes people feel like he is trying to militarise Thailand.

If he can do that, it would at least be a good start to an end to the one-country, two-tier system.

 

 

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