Doom and gloom or a ray of hope?
Whether the financial institution package will be a shot in the arm or a nail in the economy's coffin will soon become clear, with the announcement only a week away, warn Vatchara Charoonsantikul and Thanong Khanthong.
Will next Wednesday be a day of deliverance or one of utter despair for the financial system? This will hinge on whether the comprehensive package to tackle the ailing financial institutions is credible enough to win back confidence from foreign creditors, foreign institutional investors and the public.
If the public feels that their money in the remaining finance companies and banks is not safe because they do not believe the package will work or trust the government to deliver on its promise, Oct 15 may be doomsday. Another round of deposit runs could close the window of opportunity to salvage the economy.
Even Prime Minister Chavalit Yongchaiyudh has tacitly admitted that if the package fails to ring the bell, his coalition government will certainly collapse.
The International Monetary Fund and the World Bank, which are helping Thai regulators draft the package, are banking their hopes on the creation of a deposit insurance corporation and a Royal decree guaranteeing the entirety of public deposits in the remaining 33 finance companies and 15 banks.
They believe that confidence in the corporation will cause the turmoil to subside, leading to a more stable baht and a return of deposits to the financial system.
The problem is whether the public will buy the deposit insurance corporation idea in a political atmosphere that remains fragile and volatile. There is a growing systemic risk if confidence is not renewed through a radical political change.
The government has to handle the domestic public, as well as foreign creditors and institutional investors with caution in the domain of confidence. The differences in the degrees of confidence held by the three groups in the Chavalit administration's economic management was once widely divergent, but those differences converged to become no confidence at all after the baht devaluation.
The public began to lose faith in the government's ability to turn the economy around two years ago during the Banharn administration. At that time, foreign investors still gave the Chavalit administration the benefit of the doubt, largely because then finance minister Amnuay Viravan made a good impression. Amnuay's abrupt departure signalled an end to their confidence in Thailand and led to a second round of attacks on the baht in May.
Ever since, foreign investors have had only bad things to say about the country and the region. The baht has lost more than 40 per cent of its value since the July 2 flotation.
There is no hope of winning back confidence from institutional investors, who have left the capital market almost completely.
Foreign creditors, who have loaned US$3 billion to the 58 ailing finance companies ($2 billion of which has gone to 19 of them), have made noises over what they consider to be the inequitable treatment of their creditor rights vis a vis the Financial Institutions Development Fund. This is significant because this group normally will not speak out unless their interests are dismally treated.
It is this constituency that the government must handle very carefully as it holds Thailand's destiny in its hands. About US$30 billion in short-term debts, US$16 billion of which are owed by financial institutions, are due this year. If a significant portion of this amount is not rolled over, the country will be declared bankrupt.
There have been suggestions that the government must focus on tackling the micro problems surrounding the financial system. A team of debt negotiators should be set up to negotiate debt reschedulings with foreign creditors. Financial institutions and companies do not have the money to service their foreign debts anyway, so creditors should be brought to the negotiating table to reschedule the debts with new business plans.
If creditors insist on getting their money back, they will certainly have to go to court, a process which would take at least seven years. This is one of the flaws in the financial system, which provides almost no way for bad assets to be dismantled in a more timely manner. In the US, bankruptcy cases may be settled in a single year. In the absence of an effective bankruptcy law in Thailand, financial institutions are forced to sit on their non-performing assets longer than they should with the combined effect of deteriorating balance sheets.
The situation is grave, but with Oct 15 on the horizon, even pessimists can take solace in the fact that at least the danger is clear and present.