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Compromise appointment

 

There will be no legacy left for Chaiyawat Wibulwasdi to carry on at the crumbled Bank of Thailand, which must rise from the ashes, Vatchara Charoonsantikul and Thanong Khanthong write.

Newly appointed Bank of Thailand Governor Chaiyawat Wibulswasdi, a hawkish central banker who whole-heartedly embraced the fixed exchange regime until its demise on July 2, is by all accounts a compromise choice between the New Aspiration Party and the Chat Pattana Party.

Although Thanong Bidaya, the finance minister under the NAP quota, did not have high regard for Chaiyawat and vice versa, he was obliged to go along with the conservative macroeconomist. Chaiyawat and MR Pridiyathorn Devakula, president of the Export and Import Bank of Thailand, were the two candidates for the governorship put forward by the Chat Pattana camp, which is the second largest coalition bloc with 57 MPs.

Thanong reportedly admitted he had come under tremendous pressure from Chat Pattana to remove Rerngchai, who nonetheless had not concealed his intention to step down due to the pressure of the high office. Chat Pattana's stand was that Pridiyathorn would be a favourite choice and if something happened to him, Chaiwayat was still around as a back-up. If Chaiyawat fumbled in the high office, the BOT would then have nobody capable or prestigious enough to carry the torch.

Either way it would be a win-win situation for Chat Pattana since both candidates would have left their imprints. Chaiyawat was Vijit's protege.

Thanong and the NAP camp did not hold Chaiyawat as their first choice, viewing that the beleaguered institution could not afford to come under the leadership of yet another insider. Advisers to Prime Minister Chavalit Yongchaiyudh appeared to favour Ekamol Khiriwat, a former deputy BOT governor and secretary-general of the Securities and Exchange Commission, and Somchai Richuphan, director-general of the Excise Department.

Chavalit did approach Ekamol to take up the BOT governorship, but he declined the offer. Besides, Ekamol is still caught in a legal battle with Vijit Supinit, a former BOT governor, who is now, along with Surakiart Sathirathai, a de facto adviser to Chat Pattana. Ekamol would be the last person on earth Chat Pattana would like to have at the BOT.

Succeeding Vijit last year under the tidal wave of Bangkok Bank of Commerce scandals, Rerngchai was not actually up to the task. Nobody questioned his integrity, but seven years of idle deputy governorship in charge of the printing office turned him into a rusty administrator. He came to the high office at a time when the bubble economy was about to collapse, triggering an imminent financial and foreign exchange crises.

Rerngchai formed a disappointing duo with Amnuay Viravan, the former finance minister. While the financial crisis was aggravating the Thai economy, Rerngchai and Amnuay could not break the bureaucratic and political hurdles in a timely manner to prevent a full-blown catastrophe. The baht attack in May turned the duo into a punching bag.

As far back as early this year both Amnuay and Rerngchai agreed the need to do something about the baht. Amnuay at times hinted about the possibility of making the management of the Thai currency more flexible. Rerngchai shared the view. But he also believed that the crisis in the finance companies had to be tackled first, otherwise the central bank would be fighting a war on two fronts.

The currency peg system, which encouraged hot money to flow into Thailand in unsustainable magnitudes, had outlived its usefulness and had been identified as the root cause of the bubble economy. However, Amnuay would not move on the sensitive currency unless Rerngchai brought forward the signal. He had full confidence in the governor.

In five secret meetings on the currency issue, Chaiyawat, then manager of the Exchange Equalisation Fund, on each occasion opposed any attempts to cut the baht loose. He argued that his macroeconomic model showed that the baht was only 5 per cent overvalued. If the BOT, backed by the creation of the two-tier currency system, could stave off George Soros' attack it would survive the currency war, Chaiyawat argued.

As a conservative economist, Chaiyawat was not a believer in the financial markets. He lived in a well-protected academia. The markets would always be wrong and had to be dictated to by central bank policy and guidance. The fixed exchange regime was his obsession as it was one of the only tools left that could provide stability, if not certainty, in the BOT's macroeconomic management.

The currency peg system was an anchor of Thailand's spectacular economic growth during its golden era. Since the baht had been kept largely stable, it automatically helped bring inflation under control. The last thing on Chaiyawat's mind was a trade-off between macroeconomic stability and the currency peg system. Unpegging the baht amounted to an invitation for uncertainty and chaos to enter the Thai economy, well protected over the past decade.

Rerngchai could not match Chaiyawat's technical knowledge, so he did not dare to make any decisions on the baht. He was, in effect, suffering from a ''Hamlet complex" an indecisiveness that would plunge him further into trouble. The prevailing attitude inside the central bank was to protect the baht until the last dollar left in the international reserves.

When Soros and his pals launched a sustained attack against the baht in mid-May, hoping to reap profits from a forced devaluation, the central bank's dealers went after him in a frenzy. They were tested in a smaller battle in February and walked away the victor.

But Soros and other hedged fund managers did not believe that the baht, pegged to the US dollar, would hold up under Thailand's deteriorating macroeconomic conditions. They would come back at the first sign of a crack in the Thai citadel.

In mid-May they did return, laying siege to the baht with some US$6 billion (Bt192 billion) in a bloody battle. They were also buoyed by rumours of Amnuay's resignation. The BOT's army fought back fiercely, both in the spot market and the three-month forward market. The central bank's war council switched to a tactic that caught the foreign speculators completely off-guard. It ordered a shut-down of the local foreign exchange swap market, effectively creating a two-tier foreign exchange market to prevent the foreign speculators from getting hold of baht.

Some of the foreign hedged funds suffered heavy casualties, losing $40 million to $50 million in a matter of days. They could not get hold of baht to cover their short baht positions. If they wanted to avoid a default, they had to settle for the baht short-term rates of 1,000 per cent. All the foreign speculators became blood-soaked; Soros, who also attacked in the three-month forward market, would lie cool for the following months.

The name of the game was who would be the last to fall; Chaiyawat believed that the speculators would be wiped out. As it turned out, the Thai central bank also suffered equal casualties. Their dealers, inexperienced in a full-scale war, unwittingly spent out their dollars. One report had it that the central bank unleashed $12 billion from its reserve stockpiles.

Instead of battling Soros in the spot market, backed by high domestic interest rates, the central bank dealers adopted a grander strategy, matching Soros dollar-for-dollar in the three-month swap market. The result would be disastrous.

Amid the currency battle, big Thai businesses with close ties to the political establishment began to shift their money out of the country. The capital flight, also complicated by the financial crisis at home, would drain the BOT's remaining reserves. The situation was like the final days of internal turmoil before Ayutthaya was sacked by the Burmese in 1767.

Chaiyawat was startled when he eventually discovered the extent to which the BOT's reserves had been depleted. He was the one who told the prime minister that the BOT would have no choice but to float the baht a de facto devaluation. On July 2, the BOT officially caved in by abandoning the currency peg system in favour of a managed float system.

In the end, the market was right and Chaiyawat wrong. Soros had the last laugh, although one of his chief aides made it sound like they were ''kicked in the butt" by the Thai central bank. In currency jargon, Soros was immediately ''deep in the money" after the flotation. The baht devaluation gave him more baht to settle his previous short baht positions.

Soros bought baht when it was trading in the range of Bt26.50 to Bt26.60. When the baht was floated from its last level of Bt25.70, it quickly dropped to Bt28.60 and is now trading in the Bt31 to Bt32 range against the US dollar.

Rerngchai made several mistakes in dealing with the ailing finance companies, whose problems threaten to tear the financial system apart. Apart from pumping billions into the rogue Bangkok Bank of Commerce, he tried to save Finance One Plc by giving it Bt40 billion in liquidity support.

These two failed financial institutions have drained most of the ammunition out of the Financial Institutions Development Fund. Rerngchai ordered the Fund to provide universal protection to the finance sector, ending up spending as much as Bt320 billion in total.

Part of this amount was borrowed directly from the Bank of Thailand, hence a flouting of monetary discipline at a time when the central bank had been calling for the government to tighten its belt. International Monetary Fund officials have expressed their deep concern about this double standard.

The IMF said it would be understandable if the BOT wanted to protect depositors, but extending the protection to the shareholders and creditors of finance companies would send the wrong signal to the financial markets. It has urged the BOT to try and recover as much money as it can from the troubled finance companies.

Most of money lent by the Fund is unrecoverable, which has turned the Fund into the financial institution with the largest amount of bad debts in its books. Who will take responsibility for this predicament now?

Chaiyawat will have a tough time restoring confidence in the once prestigious institution. As one of the country's few macro-economists, the Massachusetts Institute of Technology graduate represents the conservative camp at the BOT. He is not known to be a person of strong conviction, preferring to remain neutral in times of controversy and to keep personal conflict at the BOT under wraps.

The only blotch on Chaiyawat's record occurred during the Banharn administration when he was forced to take over the finance portfolio. He agreed to be finance minister on the condition that he would be allowed to return to the BOT once the general election was held.

Chaiyawat went along with Banharn's trick to cover the budget deficit with the oil fund a practice that that left Amnuay with a low opinion of him. If Amnuay had not helped, Chaiyawat would not have been restored to his original office.

There is nothing left of the legacy for Chaiyawat to carry on. The BOT is about to be dismantled. Since the central bank began deteriorating in the Vijit era, it has failed to restructure from within so it will be forced to change from without.

Sharp-tongued critics like Rangsun Thanapornphun, a Thammasat economist, and Dr Ammar Siamwalla, the country's leading economist, have called for a wholesale restructuring of the BOT to make its policy objectives more accountable to the public.

One of the proposals is to take away the power of supervising the financial institutions from the BOT. Efforts are already under way in the Chavalit administration to create a General Controller Office, attached to the Finance Ministry, which will take over the supervision and examination of financial institutions.

The Financial Institutions Development Fund will be dismantled in favour of a Depository Insurance Corporation, similar to the US institution. Banks and finance companies will be allowed to go under if they are poorly managed. Only depositors will be protected under the Depository Insurance Corporation scheme.

In effect, if Chaiyawat stays long enough, he will be presiding over an entirely new central bank. The institution will be stripped of most of its power, so that it may focus exclusively on managing monetary policy, looking after the money supply, setting interest rates and keeping prices under control.

The BOT has plumbed new depths and the only direction for the institution under Chaiyawat should be up.

 

 

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