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Stock market slump is no financial crisis

June 2, 2000

After the stock market briefly dipped below the psychologically important 300 level last week, Thai investors went berserk. Finance Minister Tarrin Nimmanahaeminda must also have had some sleepless nights. Suddenly, there were fears of a second round of financial crisis.

But there should not be another financial crisis, if crisis is defined as a negative economic growth rate or a currency rout. This conclusion followed a meeting last Friday between Tarrin and top officials from the Securities and Exchange Commission, the Bank of Thailand, the National Economic and Social Development Board and the Board of Investment. They viewed the fall of the Stock Exchange of Thailand index as driven by sentiment, a region-wide reaction to the fall of US equities. The Korean and Philippine markets have also lost about 30 per cent of their value since the beginning of the year, a drop similar to the Thai market's.


He was rather confident that the baht would continue to experience stability because the capital outflow over the past one or two months was due mostly to debt repayment - not an outflow into fixed income investment.

During the meeting, the officials assured Tarrin that they could not see another crisis coming if that was going to mean negative growth. This year, the Thai economy has been projected to grow 4.5 per cent by the Bank of Thailand and 5 per cent by the International Monetary Fund. If anything should go wrong with the US economy there would be a slowing of Thai growth, but the negative growth that we went through in 1997 and 1998 should not recur.

What then is the chance of a currency rout? Tarrin was told that the baht was likely to be able to maintain its stability. Although it hit 39 to the US dollar for the first time in six months, the baht's fall was in line with the plunge of other regional currencies. Higher US interest rates had made it more attractive to hold dollars.

Tarrin came to the opinion that the currency weakness was not a baht problem. Rather the whole episode was "a dollar problem", with adjustment in US markets impending.

He was rather confident that the baht would continue to experience stability because the capital outflow over the past one or two months was due mostly to debt repayment - not an outflow into fixed income investment.

Moreover, the capital controls that have been put in place would make it difficult to speculate against the baht. Foreign residents or banks have been barred from borrowing the baht to speculate against it. The most recent measure was a regulation preventing foreign firms, including their subsidiaries, from borrowing more than Bt50 million in a daily net position without underlying trade or business transactions.

Most Thais still have confidence in the Thai financial system and consequently have not been sending their money out of the country, which would cause financial bleeding.

Finally, the external debt of Thai banks and companies, which peaked at US$76 billion (Bt2.96 trillion) prior to the crisis, has fallen to $32 billion. This had made the Thai economy less sensitive to US interest rate rises.

After the market fall, local brokers and investors called last week for the government to come to the rescue of the stock market in one way or another. They wanted the government to pay more attention to capital market development, and for the finance minister and Bank of Thailand governor to stop fighting. Local investors, for their part, wanted the government to set up a support fund.

These calls fell upon deaf ears.

However, Tarrin believed that the single most important measure that would help shore up the stock market was low interest rates. This policy was all that was keeping the Thai economy alive.

Thai financial authorities were quite confident that they should continue to hold down domestic rates to support the economic recovery. They had four reasons to be confident.

First, loan growth has slowed down against deposit growth, a reversal from the pre-crisis days. This has created less pressure for banks to raise their rates.

Second, inflation remains subdued, and the authorities will try to keep it at 2 to 3 per cent in the medium term. Again, low inflation applies less pressure on the authorities to tighten monetary policy.

Third, with ample over-capacity, there would be room to inject more money into the system to stimulate growth without undermining price stability. Capacity utilisation of Thai industries was only 57 per cent as of April.

Fourth, US interest rates would create pressure for global rates to rise, but Thai authorities insisted they were closely monitoring capital outflows and external debt, both of which were still manageable.

But others argued that the stock market slump, if allowed to continue much longer, would undermine confidence in the strength of the economic recovery. The slump would make it difficult for Thai banks and other companies to raise capital, and this in turn might trigger another banking crisis. On this front, let's wait and see.




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