Thaksin and the delicate art of tightrope walking

March 23, 2001

THANONG Bidaya, one of Prime Minister Thaksin Shinawatra's advisors, was caught offside when he publicly indicated that he would like the baht to weaken by about 5 per cent, or Bt2 to the US dollar, a year to boost exports and keep the trade account in surplus. At one point yesterday, the baht was traded at Bt44.470 to the dollar.

When a man of Thanong's stature makes a comment about movements of the exchange rate, it gives rise to further currency speculation, for the financial markets immediately set out to test the limit of the exchange rate to realise a self-fulfilling prophecy. Then the currency might overshoot, by which time Thanong or other authorities would be deprived of a last line of defence.

Contrarily, MR Chatu Mongol Sonakul, the Bank of Thailand governor, has been doing quite a good job in keeping the baht stable or in fooling the financial markets about his next move. In spite of his outspokenness in other matters, he has sealed his lips tightly about the exchange rate. Although the baht should have weakened further in view of the regional trend and the downward pressure of the Japanese yen, it has managed to trade relatively firmly against the dollar.

That's precisely because Chatu Mongol belongs to a school of thought that prefers a rather strong baht to accelerate foreign debt repayment. Foreign debt, particularly short-term debt, has been reduced rather significantly to the extent that Thailand is now less vulnerable to external shocks. The governor would also like local manufacturers and exporters to strengthen their competitiveness by cutting costs or increasing the value-added to their products rather than depending on repricing of the baht alone.

Keeping the baht weak to boost exports is one strategy to help the Thai economy weather the global storm.

But the downturn in the US and Japanese markets means that some Bt200-Bt300 billion in export earnings will not be forthcoming. That will see a big loss of opportunity for the Thai economy this year, which is expected to face a bumpy landing.

The task ahead for the Thaksin government is going to be tough. It's going to be a year of hard work. The critical issue is to come up with an appropriate macroeconomic framework. Appropriateness is an elusive term in this regard. The National Economic and Social Development Board has adjusted downward its forecast for growth this year to 3.5-4 per cent. It is now working on its model to help the government stimulate the economy to achieve the appropriate target.

The macroeconomic dilemma is that if the growth rate is too low, it will continue to weigh on the recovery and prolong business insolvency. The prime minister has already complained that 3.5-4 per cent is too low a growth rate for this year. Earlier, Dr Supavudh Saicheua, another advisor to the prime minister, indicated that in the worst case scenario of a hard economic landing in Japan and the US, the economic growth rate in Thailand could be wiped out by two percentage points to 1.5 per cent.

On the other hand, if the growth rate was too high, say five or six per cent, it would risk affecting the current account balance. For every 1 per cent of gross domestic product growth, there is an element of import growth. At this juncture, Thailand cannot afford to face a current account deficit. If the deficit is allowed to run for three consecutive months, it would trigger panic. You know the rest of the story.

Fortunately, the preliminary trade figures in February appeared to show a reversal in the trade account, with a surplus of about US$100 million compared to a deficit of US$400 million in January. Going forward, Thailand cannot afford to allow this erratic performance of exports to railroad confidence.

It remains questionable whether the Thaksin government really understands the macroeconomic dilemma it is confronting. It will have to proceed cautiously, walking the middle path by stimulating the economy to achieve the satisfactory growth rate while keeping the current account in surplus. This is quite an artful job.

BY THANONG KHANTHOG