Thailand bids adieu to IMF programme
June 19, 2000
THERE is a mixture of relief and lingering agony as Thailand today formally graduates from the three-year International Monetary Fund support programme.
It is a relief because Thailand has now regained full sovereignty over its economic and financial policy management. It no longer has an IMF boss telling it what to do.
But the country is still confronting the unfinished business of financial sector reform and corporate debt restructuring. This financial mess, in both the banks and the corporate sector, will be with Thailand for the next five to 10 years. Restructuring both the banks and the corporate sector represents a dual task that must be pursued vigorously if Thailand ever hopes to regain its economic health.
Today's graduation ceremony from "IMF University" is only symbolic, however. Thailand has not withdrawn a loan from the IMF's US$17.2-billion (Bt673-billion) rescue package since June last year. This means that for more than a year the country has achieved a satisfactory degree of macroeconomic stability, which was the most important policy objective set forth in the IMF support programme.
The baht is now relatively stable. Interest rates are at historic lows. The current account is recording a surplus of $800 million to $1 billion a month. Inflation is well under control. People have more confidence in the banks.
Most of the tough fiscal and monetary conditions or other major structural reform tasks were done between August 1997 and the early part of 1999. They were aimed at stabilising the financial and banking turmoil, restoring confidence and putting the country back on the growth track. The next step for Thailand, which has borrowed some $14 billion from the IMF programme, is to proceed on its own to lay down a foundation for a sustainable economic recovery.
For Finance Minister Tarrin Nimmanahaeminda, in particular, graduation day is not a cause for celebration, despite his being considered the darling of the IMF and despite former managing director Michel Camdessus' awarding Thailand the IMF's highest honour, summa cum laude. Politically Tarrin could not declare victory against the economic crisis, which has been deep and severe. Even the most pessimistic were caught off-guard by the crisis. And there will be no quick fix, despite recent signs of economic recovery.
When asked how he would observe the country's commencement ceremony, Tarrin quipped, "We are not out of the programme yet -- we still need to repay the loans." Over the next three years Thailand will be repaying its $14 billion in loans back to the IMF and the participating countries that came to Thailand's rescue in 1997.
When a country has to be rescued by the IMF, it normally suffers from a balance of payments crisis. In the case of Thailand, capital was pouring out of the country in late 1996 and the early part of 1997, simultaneously putting pressure on interest rates and exchange rates. It was a crazy scene when frenzied investors tried to convert their baht assets into US dollar assets and shift the money out of the country.
Fundamentally, the Thai crisis was a crisis of confidence -- investors lost faith in the country's ability to bring down its high current account deficit, defend its currency, restore solvency to its banking system and put the economy back on the growth track. In fact, Thailand was then an over-leveraged economy. This eventually led to a collapse in domestic demand and consumption, thus creating a huge over-capacity that would ravage the balance sheets of Thai corporations and banks.
By continuing to defend the fixed exchange rate system, Bank of Thailand officials quickly ran out of foreign exchange reserves and were forced to devalue the baht on July 2, 1997.
From more than $30 billion at the end of 1996, foreign exchange reserves were almost depleted by the time Thailand, under the Chavalit government, sought the IMF's help in August 1997.
The crisis of confidence from the outside forced Thailand to go through an abrupt adjustment in its external accounts. A country which needed foreign money to finance its over-investment by 8 per cent of gross domestic product, Thailand was forced to revalue its currency and export its way out of the crisis. Now it is running a currency account surplus.
During this turbulent period, the IMF's standby credit helped cushion the balance of payments crisis. The money, borrowed on a quarterly basis, was parked at the Bank of Thailand so that investors could convert baht assets into dollar assets whenever they wanted to. In the meantime, in return for this bailout package, Thailand was obliged to go through financial, economic and structural reforms.
Some policy flaws
Essentially, the IMF support programme set out to accomplish two crucial tasks: to restore macroeconomic stability and bring back confidence in the financial system. With the benefit of hindsight, several policy conditions in the support programme were difficult and misguided. Critics of the IMF programme have listed their missteps as follows.
First of all, the IMF made a mistake when it ordered the closure of weak finance companies, which led to Bt800 billion in bad debt hanging over 56 finance companies. Many people now argue that it would have been better to merge the companies and gradually run down their assets rather than keep them dormant for more than a year before beginning to auction off the assets. During this time, the country faced a severe credit crunch.
The second mistake was the fiscal consolidation in the face of the collapse in domestic demand. Thailand was required under the IMF programme to run a budget surplus to address the current account deficit and the restructuring costs of the financial institutions. This budget surplus -- which should have been reversed to a deficit -- added to the forces of recession already at work. When a country faces an economic crisis, a consequence could well be a social crisis. The government in power must quickly go deficit spending to strengthen the social safety net to prevent the outbreak of social turmoil, as in the case of Indonesia.
The third mistake lay in a preoccupation with high interest rates to defend exchange rates, which had been floated. Interest rates were kept high for most of post-crisis 1997 until July 1998. It was not until this time that Thailand began to shift away from the tightened fiscal and monetary policies and adopt a more relaxed stance in order to jump-start the economy.
The fourth mistake was the rush to adopt international regulatory and supervision standards to the Thai banking system in the middle of the crisis. There was no capital in the country to cope with the enormous recapitalisation needs and the massive write-off of bad debts. The only way to have met these international standards would have been to sell off all Thai banks to foreign banks or to depend on the mercy of capital inflow. But the foreign money wasn't coming back.
However, Thailand has been relying on a combination of market-oriented measures to deal with the banking crisis. First, it guaranteed all the deposits in the financial system. Second, it closed down financial institutions that were not viable. Third, it intervened in cases of weak financial institutions, merged them and unveiled plans to privatise them later on. Fourth, it set up a banking restructuring scheme to help the banks recapitalise with official money.
The focus was on the capital side, trying to make sure banks operate with a capital adequacy ratio. But the plan did not deal adequately with the asset side.
The auctioning style of the Financial Sector Restructuring Authority has created a moral hazard -- debtors could negotiate indirectly for lower debts. The result was a widespread non-payment culture that could be extremely difficult to correct. Even worse, the country did not have a bankruptcy and foreclosure framework in place, not to mention a secondary market, to deal with the problem assets. The government programme let the banks handle most of their own bad debts, which at their height reached 60 per cent of the entire financial system. In the end, the bad debts were transferred from the big corporations of individual clients straight into the government's books.
From miracle to crash
During this turbulent period, the economy, which averaged 7.6 per cent growth between 1996 and early 1997, slipped into a severe recession. In 1997, the economy slid into negative territory as gross domestic product declined more than one per cent. In 1998, GDP shrank by more than 10 per cent. It was not until 1999 that the economy returned to growth, expanding more than four per cent. In 2000, the growth rate should continue at 4.5-5 per cent. In the medium term, Thailand will try to maintain this rate of economic expansion.
To be fair to Tarrin and the Thai people, this has been the best they could do, given all the political, social, economic and cultural constraints. The next challenge is for the country to foot its public debt bill, which has risen to 60 per cent of GDP. In certain other developed countries, it took 30 years to arrive at this public debt level. It took Thailand only three years of economic crisis to suffer this badly.
BY THANONG KHANTHONG