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Liquidity and currency await sound measures

 

BY tackling the ailing finance sector with a surgical knife, Dr Thanong Bidaya, the finance minister, and the banking regulators have cleared the first but very crucial hurdle on their way to winning back confidence and restoring macroeconomic stability.

Yet it has taken more than six months for the politicians to finally break the bureaucratic gridlock and give Thanong the ultimate authority a privilege Dr Amnuay Viravan, Thanong's predecessor, did not enjoy to embark on surgery of the ailing finance sector.

Rerngchai Marakanond, the Bank of Thailand governor, also appeared to have overcome his ''Hamlet" syndrome a costly indecisiveness that has triggered a vicious web of consequences and has almost ripped apart the Thai financial system. Had Amnuay and Rerngchai employed their surgical knives three to four months ago, the situation would not have been as desperate as it is now.

It was only last Thursday that Gen Chavalit Yongchaiyudh, the prime minister, was informed by Thanong of the impending wholesale surgery of the finance sector. A total of 16 finance companies would be singled out from the list of 91, so that the public could differentiate the good ones from the bad ones.

Otherwise, doubts would persist over the health of the finance sector. The capital market meltdown and the subsequent baht attack were by-products of the financial crisis.

There was an immediate outcry from some of the owners of the 16 blacklisted finance firms. They said they had been unfairly singled out. They never mentioned that operationally they were dead meat because they would fall on their knees on day if liquidity support from the Financial Institutions Development Fund did not come.

At this point, investors should give the Bank of Thailand the benefit of the doubt that they have correctly marked the heads of the beleaguered finance companies. The banking regulators have all the figures in their hands. To prevent the generalisation that all Thai finance companies are financially rotten from gaining ground, they have separated the bad companies from the good.

If the regulators cannot be trusted this time around, who else can the public trust? They have been assured that another 26 finance companies have overcome their shaky status by agreeing to raise fresh capital and that two companies are under negotiations with their foreign partners to form joint ventures.

Thanong and Rerngchai have also embarked on the right path by specifically stating a time-frame within which the surgery will be completed. Amnuay's biggest problem was that he never spelled out when he actually hopes to complete his repairs to the finance sector.

The 16 finance companies, which include top names such as Finance One Plc, Thana One Finance & Securities Plc, CMIC Finance & Securities Plc, General Finance & Securities Plc, and International Trust and Finance Plc, have been ordered to close their doors for business for 30 days, during which time they'll have 14 days to work out a rescue plan for themselves.

If they fail to produce an acceptable rescue plan, they'll be ordered to write off their bad debts with their entire equity. Then they will be forced to enter the purchase and assumption programme under which their good assets will be acquired by their stronger peers and their bad assets will be assumed proportionately by the major shareholders, the creditors and the Financial Institutions Development Fund.

For Thanong and Rerngchai, the greatest challenge now is to make sure that this task is completed and to prevent further bleeding in the Thai financial system. The regulators should press further ahead with their public relations campaign to calm public nervousness.

The financial markets will be closely watching this crisis management, which must lend credibility. So far they have given the authorities a big vote of confidence.

The next step will see Thanong and Rerngchai handle the equally complicated task of liquidity management. Liquidity has dried up in the Thai financial system because of capital outflow. The baht attack in May also dramatically pushed up the balance of payments deficit to Bt112.3 billion in May, almost equivalent to the amount of US$4 billion the central bank spent from its reserves to defend the baht.

The BOT's international reserves stood at US$33.3 billion in May, igniting fears that the authorities might have less ammunition to defend the baht in the next round of baht attacks.

Former Finance Minister Tarrin Nimmanahaeminda, who is now a Democrat MP, gave sound advice last week. He said the government and state enterprises should move swiftly to prevent a further drain in liquidity by going out to the international financial markets to raise fresh capital.

Private corporations no longer want to bring US dollars into the country because they don't know exactly what is going on with Thailand's foreign exchange policy. Last week Chumpol Na Lamlieng, the president of the Siam Cement Group, blasted the banking authorities for their failure to provide a clear direction to the private sector over the interest rate or foreign exchange policies.

Without a clear direction, the private corporations don't know how to mark their costs. So everybody is waiting. That is the main reason the credit system has collapsed.

Moreover, with the weak, poorly-rated private sector, which can hardly raise foreign capital at a decent cost, it is time for the public sector to show the way. Fresh foreign capital raised by the Finance Ministry or the blue-chip state enterprises will partially help offset the capital outflow over the coming months, which will have downward pressure on the Thai currency.

''I don't care if Thailand borrows in an official or unofficial way, just as long as we do," Tarrin said.

If the wholesale surgery of the finance sector is successful even to a certain extent, that will yield some stability. Combined with the inflow of foreign capital raised by the public sector, domestic liquidity will improve. This will pave the way for interest rates to fall.

Now the Thai financial institutions are shouldering interest costs of 15 per cent. If interest rates do not fall, they won't be able to tackle their bad assets because under this present economic climate, nobody is making more than 15 per cent.

Once liquidity has improved, Thanong and Rerngchai will have more room to tackle the currency the ultimate problem causing the present macroeconomic instability. Dr Virabongsa Ramangkura, a former finance minister, has publicly called for a baht devaluation as a decisive move to end the uncertainty surrounding the baht.

Yet neither he nor other devaluation advocates have come up with a convincing argument that after devaluation, capital will flow back into the country. Thailand is a capital deficient country which needs foreign capital to finance its huge current account deficit.

''If we devalue the baht, and there is an overshoot that sends the baht to Bt35 to Bt40 a dollar, what will happen then? If capital does not flow in for five to six months, then we'll all be dead," said a former bank executive.

Rather than focusing on the devaluation question, Thanong and Rerngchai should discuss a comprehensive package that will sustain Thailand in the aftermath of their change to the foreign exchange policy. Altering the foreign exchange policy without sound support measures is a recipe for disaster.

To fix the exchange regime, however, automatically amounts to an admission that the Thai baht must be devalued. Thailand's present economic fundamentals do not support the current level of the baht, but the country cannot afford to undertake a one-time devaluation and go down the torturous Mexican path.

There are three options for the alteration of Thai foreign exchange policy. First, the baht may be unpegged so that its value is freely floated and determined by market forces. Yet in this real world, there is no perfect market. The officials will still need to intervene in the baht unpegged system to ensure that the value of the baht stands in a range that can sustain Thailand's overall economic system.

Second, the regulators may opt to alter the weightings in the basket of currencies, which is now dominated by the US dollar by around 80 per cent, the yen about 12 per cent and the mark about 7 per cent. Some have suggested that the weighting should carry more yen, to reflect Thailand's growing trade relations with Japan.

The alteration of the basket of currencies will create more baht volatility, making it more risky for foreigners to do interest arbitrage.

Third, the regulators may elect to expand the band within which the baht is traded against the dollar. The current band is four satang, a rigidly fixed system that led to massive capital inflow and a bubble era in the early 1990s.

Some have suggested that the band should be widened, without the Exchange Equalisation Fund's having to quote the mid-rate. Again, this will create an element of uncertainty and deter the hot money from flowing into the Thai financial system.

All three methods will lead to a weakening of the baht, yet they are preferable to a one-time devaluation. Only then will Thailand's macroeconomic stability be restored.

 

BY VATCHARA CHAROONSANTIKUL and  THANONG KHANTHONG

 

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