Push for reform package despite big boost to SET
A dramatic baht flotation amounts to an admission by Thailand that it is the first Southeast Asian country to stumble in the middle of the race to become an economic tiger, bankers and analysts said.
In the face of severe macro-economic distress, Thai policy-makers last week caved in to pressure to devalue the baht. Instead of announcing a devaluation, they elected to float the baht, passing the burden to revalue the local currency on to the markets.
The float has predictably led to a sharp depreciation of the baht against all major currencies. By cutting loose the baht, the Thai central bank released the final anchor of macro-economic stability which helped the Thai economy grow spectacularly over the past decade. The Thai economy has effectively revalued itself with a new, lower base.
From now on, the country will need to put its act together and rebuild from the remnants of the economic bubble. ''Well, it's time to start a new life," said Vichai Punpocha of Dresdner Bank AG. ''The foreigners who invest in Thailand have said yes to the baht float, that it is the day they have been waiting for. They immediately rushed to the stock market."
Over three days last week, the Stock Exchange of Thailand index rallied by a combined 129.62 points to close at 657.09, fuelled largely by buying support from gleeful foreign investors. In dollar terms, the already-depressed Thai stocks have become 15-20 per cent cheaper.
Other analysts warned that the stock market will not be going far because there is no fundamental change in the Thai economy. ''I think the rally is going to be short-lived because our economic problems are still the same," said a banker at one of the big banks.
Among the 52 emerging economies covered by UBS Global Research, Thailand's average gross domestic product (GDP) growth of 9.1 per cent between 1989 and 1996 was second only to China's 9.4 per cent. This spectacular growth is history.
After floating the baht, the banking regulators revised downward the country's GDP from 5.8 per cent to 4.8 per cent this year. This sharp economic contraction is far from tiger status, which normally registers 7-8 per cent annual growth. Former finance minister Amnuay Viravan tried to compromise by saying Thailand would sacrifice growth for stability by working to grow at 6-7 per cent.
According to Merrill Lynch, Thailand's per capita income now is about US$2,410 (Bt67,200), similar to Poland. Its urban population is similar to Sri Lanka. Its labour force is 34 million, similar to Mexico. Its energy use per capita is similar to Brazil. The challenge for the policy-makers is to maintain Thailand's standard of living, which, after the currency revaluation, will be threatened by runaway inflation, corporate bankruptcies and labour conflicts.
Virabongsa Ramangkura, a key proponent of devaluation, admitted that devaluation will lead to destruction of the Thai economy by half but at least it will save the other half. With no action on the currency, the entire country would have become another Mexico, he added.
However, Olarn Chaipravat, president of the Siam Commercial Bank and an opponent of devaluation, warned that a currency devaluation will not yield any policy objectives if not supported by a package of credible measures to reconstruct the economy.
He said inflation might get out of control, depending on the depreciation of the baht. If the baht depreciates by 6 per cent, this year's inflation will hit 10.8 per cent (6 per cent plus the previously estimated 4.8 per cent).
Since macro-economic management has been exhausted, Olarn called for the Thai private sector to undertake a micro restructuring by improving productivity, bringing in new technologies, industrial strengthening and producing value-added products to stay competitive.
''If we don't have measures to cure the economic ills, the baht float, which somebody called a de facto devaluation, will become meaningless," he said. He warned that companies will go bust, factories will be closing down, labourers will be laid off or ask for higher wages to cope with inflation and social problems will ensue if the country fails to tackle the present woes.
Dr Prasarn Trairatvorakul, the deputy secretary-general of the Securities and Exchange Commission, cautioned that floating the baht was necessary but it is not sufficient to mend Thailand's macro-economic woes.
''We still need to improve our technologies, try to sell more goods and educate our people," he said. ''That's the thing we have to focus on. I have heard that the jewellery industry has made some significant progress in improving its productivity over the past years. However, little has been done in the textile industry, in which some factories still operate using methods of 10 years ago."
Dr Surasak Nananukul, chief adviser to Prime Minister Chavalit Yongchaiyudh, believes the economic slump will continue for about a year before liquidity will improve and pave the way for recovery.
''The foreign investors will rush in to buy stocks and properties after the baht becomes more stable. Improved liquidity will bring down the interest rates, although inflation might flare up. Therefore, it is necessary to keep high interest rates for a while," he said in a leaked note sent to the prime minister.
Other bankers see the baht float as an entirely new ball game for the Thai private sector, who will now check the baht value first thing in the morning. The value of the baht will be determined by market forces, including exporters, importers, investors, banks and the Bank of Thailand.
''It is a completely new experience that the Thai private sector will have to get used to," said one banker. ''Even after the government fell and demonstrators stormed the streets, the Thai baht still stayed cool. Now the private sector must learn to live with a fluctuating baht."
BY VATCHARA CHAROONSANTIKUL and THANONG KHANTHONG