June 26, 2001
The history of the Thai financial crisis is the history of a current account crisis. Whether the present weakness in the current account - which covers the import and export of goods and services - will deteriorate into a deficit and into another economic crisis depends on how the Thaksin government seriously addresses this important problem.
Not until recently has Dr Somkid Jatusripitak, the Finance Minister, begun to shift gear backwards. He has pledged to pay closer attention to economic stability than to economic growth. When he talks about stability, he means exchange rate stability - not inflation. For Thailand, unlike Latin American countries or Europe after World War II, has never suffered from runaway inflation.
A classic Thai or other emerging-market crisis is the typical foreign exchange crisis, driven by a current account deficit and capital outflow.
Already, Thai exports have begun to sputter due to shrinking demand from major trading partners. If exports head for a fall, the whole economy will risk facing a prolonged crisis.
From a trade surplus of about US$1 billion (Bt45 billion) a month over the past three years, which matched the capital outflow of about the same amount to pay down the foreign debt, the monthly surplus has been narrowing to $200 million to $300 million. In some months - in January and April of 2001 to be precise - the trade balance suffered a deficit.
From the perspective of MR Pridiyathorn Devakula, the Bank of Thailand Governor, this outlook is quite worrisome. For Thailand has been continuing to pay down its debt at a rate of $800 million to $1 billion a month. If the current account runs into deficit, confidence in the baht will evaporate.
Where in the world will Thailand earn its foreign exchange to pay down the outstanding debt of $76 billion? If the answer is not clear, the only way for the baht to go is downhill. In other words, capital flight will continue.
For all the criticism, one of the contributions of former finance minister Tarrin Nimmanahaeminda and former central bank governor MR Chatu Mongol Sonakul to the economy was their efforts to pay down the country's external debt, which peaked at around $112 billion before falling to $76 billion.
This has made the baht less vulnerable to external shocks. Nevertheless, it is not yet out of the woods.
For this reason, Pridiyathorn scrambled to tighten the short-term rates to defend the baht in the first week of his appointment as central bank governor. As a foreign exchange expert and a veteran deal-maker, he must have detected something seriously wrong with baht exchange rates, which have suffered from arbitrage.
While he tries to hold the baht stable, he has signalled to Somkid and the government to do something about the current account - the same signal that his predecessor Chatu Mongol sent out to the government. But it is not certain whether the government has seriously got the message because it is too busy fulfilling its social platform programme.
The situation is complicated by the poor balance sheet of banks and corporations, impairing the ability of the economy to pull itself out of the quagmire.
Only hard currency from tourist revenues is now providing a life-support system for the economy, helping to cushion the current account from plunging into deficit. Tourist earnings are flowing in at the rate of $600 million a month.
Bangkok has become a shopping haven for foreigners, helping retail sales and related businesses to prosper.
But most Thai people - barring the rich - are feeling hard-pressed by the deteriorating economic conditions here. The pressures on their lives will continue as time goes by.
A current account deficit and a budget deficit - the so-called "twin deficits" - are a prescription for economic disaster.
Over the past three years, Thailand has been able to run a budget deficit to accommodate its economic weakness because it enjoys a current account surplus. But if the twin deficit does occur, the baht will come under selling pressure.
Importers and exporters also understand the situation pretty well. It's a simple cash-flow story for the country. If there is more money flowing out of the country than flowing in, the baht simply cannot hold. They have already cooked up their invoices to speculate over exchange rates.
Tightening the short-term rates will only help the baht in the short term. But in the medium term, it is likely to come under selling pressure, with several research houses from Goldman Sachs to Deutsche Bank expecting the baht exchange rate to hit Bt47-Bt48 before the end of this year.
If the baht hovers around that level - or Bt50 - for quite some time, Thais, who have taken stability for granted most of their lives, will start to feel the pinch. For the price of gasoline, electricity, pharmaceutical products, fertiliser and all other basic necessities will go up under inflationary pressure.