Virabongsa, Ammar agree to disagree
October 26, 2001
Nowadays, Dr Virabongsa Ramangkura and Dr Ammar Siamwalla hardly discuss economics with each other. When they meet, they just talk about their children, or something else.
So, it has reached a point where the two old friends now agree to disagree in economic thinking. They now stand at opposite ends of the spectrum.
Over the past two decades, Virabongsa and Ammar have towered over the Thai economic scene. They both correctly argued for the baht to be devalued at the height of the currency crisis in 1997. Virabongsa beat out Dr Olarn Chaipravat and Dr Chaiyawat Wibulsawasdi on the exchange rate policy. Ammar appeared on an iTV programme with Suthichai Yoon and said the banking authorities had no choice but to let go of the Thai currency. The following day on July 2, 1997, the central bank floated the baht.
When you refer to Thai economists, you cannot avoid talking about these two people, who have played such a key role in shaping economic policy in Thailand.
While Virabongsa has become a guru of the Thaksin government, Ammar has turned into its sharpest critic and incurred the wrath of the prime minister. Recently he said he was shocked by Thaksin’s “one vision a day to keep the problems away”. For it gave him one nightmare a day too.
It can be said that when it comes to economic matters, Prime Minister Thaksin Shinwatra listens quite attentively to Virabongsa’s advice. Before his arrival as an advisor to the prime minister in the middle of this year, the Thaksin government did not have – believe it or not – a macroeconomic framework.
This was quite irresponsible with regard to public policy making. Most economic crises occur because of macroeconomic imbalances. In other words, if a country fails to pursue sound macroeconomic policy, the financial markets will force it to change, mostly in a brutal and painful way as Thailand experienced in 1997.
Virabongsa came to the rescue of the Thaksin government by helping to put together its macroeconomic framework. By midJuly 2001, the Thaksin government for the first time spelled out its macroeconomic objectives. It pledged to cap public sector debt at 60 per cent of GDP, achieve a balanced budget by 2006, rein in public debt repayment at 16 per cent of the total budget spending, and keep inflation at 2 per cent.
In late May, after sacking MR Chatu Mongol Sonakul as governor of the Bank of Thailand, Thaksin would have liked Virabongsa to become the central bank chief. Virabongsa did not take the job. He passed it on to MR Pridiyathorn Devakula instead. Finance Minister Dr Somkid Jatusripitak would have liked to put Olarn at the central bank, but the prime minister had the final say.
Virabongsa’s view that most influenced this government was his advocacy for an aggressive interest rate rise to defend the baht during the transition at the central bank. Virabongsa, who has a leaning toward a fixed exchange rate policy, signalled that economic stability must precede economic growth. Obviously, he was worrying about the wobbling baht and the stability of foreign exchange reserves. Insofar as money continued to flow out of Thailand, the economy would never recover.
Pridiyathorn also shared this belief, having argued earlier for the banking authorities to nudge up shortterm rates to make the baht more attractive for investors to hold and to prevent capital outflow. No sooner had he assumed the central bank governorship than he ordered an increase of the repurchase rate by one full percentage point.
Pridiyathorn defended his action by saying that he was not an “alter ego” of Virabongsa so he would stop at the one percentagepoint interest rate increase. But the bond market collapsed believing that he should hold a firmer grip on his monetary policy.
Virabongsa did not believe that strong reform would put the Thai economy back on track. He urged instead for the authorities to relax all regulations from banking to corporate debt restructuring in order to save businesses or banks from further insolvency. If the government just managed to maintain the macroeconomic balance, the Thai economy would recover – without bankers or corporate debtors having to suffer further pain – when the time came. He did not know, however, when the recovery would come about.
Virabongsa viewed that the situation would be comparable to the baht devaluation in 1984. After a while Thailand began to take off again when the global environment improved, although its financial system was in a shambles.
Ammar believes in a strong reform agenda. The Thai reform movement just dropped dead after Tarrin Nimmanahaeminda, the former finance minister, barely managed to pass the banking and foreclosure laws in April 1999. When the Thaksin government came into office in February 2001, it did not follow up on the reform agenda, carving out its own policy platform largely through pumping liquidity into the rural sector.
Ammar has been arguing against an interest rate rise, which added more costs to both the corporate sector, which borrows money through corporate bonds, and the government which also borrows money with government bonds. He said insofar as businesses have failed to restructure or to bring down their high level of indebtedness, there would never be new investment coming into the economy.
Ammar called for the government to reverse its policy by reining in its spending to bring its financial house in order because its debt to GDP ratio is approaching the ceiling of 60 per cent of GDP. Then the government can release its monetary policy to stimulate the economy, although that will result in a weakening baht.
“Since the economy is suffering from a weakness of growth, to achieve economic stability is to have high growth,” he said.