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Amnuay's resignation triggered chaos in financial market


The fourth part in the series on the central bank's policy on defending the baht focuses on how the then finance minister Amnuay Viravan was left to fend for himself and what happened in the aftermath of his resignation. Vatchara Charoonsantikul and Thanong Khanthong report.

In late May 1997 Stanley Fischer, the first deputy of the International Monetary Fund, returned to Bangkok for a second time to assess the crisis in Thailand. He wanted to know what decisions the Thai authorities were taking to contain the crisis amid the onslaught on the currency.

At that time, the then Bank of Thailand governor Rerngchai Marakanond and his team presented the then deputy prime minister and finance minister Amnuay Viravan with three key policy options over the foreign exchange regime. The Thai policy-makers seemed incapable of making any hard decisions, except buying time.

First, widening the baht/US dollar trading band to between 10 per cent and 15 per cent? The band at which the baht was then being traded against the US dollar was plus or minus two per cent, amounting to the Bank of Thailand's guarantee of foreign exchange risks. Widening the trading band would have made the baht more flexible, although the baht would certainly have been driven to the top of the band due to growing lack of confidence about its stability.

Second, the central bank could opt for an upfront devaluation by between 10 per cent and 15 per cent as the financial markets believed the baht should go, followed by widening of the trading band.

Third, the Thai policy-makers could take a big leap of faith by floating the baht outright.

Fischer was asked about his opinion. He went for the second option.

Dr Chaiyawat Wibulswasdi, the then deputy governor, still had deep reservations. With the currency regime under intense pressure and the private sector's debts at more than US$60 billion, Chaiyawat was afraid that letting the fixed exchange regime go would turn Thailand into another Mexico.

He asked Fischer about the ramifications of the financial turmoil that could occur if the central bank were to surrender its foreign exchange regime. Fischer had no answer to that but said that if he had the choice, he would go for an upfront devaluation, followed by a widening of the trading band.

Amnuay shared the same view and promised to look into the matter seriously before taking any action.

However, Rerngchai's top aides still could not reach a consensus, but were inclined to embrace the floating exchange rate regime if worse came to worst.

Rerngchai immediately assigned Chaiyawat to study a new foreign exchange regime. Chaiyawat's team consisted of Dr Siri Garnjaroendee, the assistant governor; and Thanya Sirivedhin, another assistant governor; Bandid Nijathaworn, the director of the Banking Department; and Kleo-thong Hetrakul, the director of the Research Department.

Unfortunately, Amnuay's status in the Chavalit government was already very shaky at that point. The Chat Pattana Party, the second largest coalition partner, had been pressing for his resignation, so that they could take control of the finance portfolio.

The Chat Pattana also wanted to take charge of all the economic and financial affairs. Korn Dabaransi, the then deputy prime minister, reversed Amnuay's fiscal tightening proposal to raise excise tax on two-stroke motorcycles, granite and batteries, snubbing the finance minister in the bargain.

Amnuay's lack of political leverage also jeopardised a plan to solve the financial sector mess through the legislative body.

As a matter of principle, Amnuay could not stay on. He also heard that there was a secret scheme to oust him through a no-confidence debate during which the coalition partners would betray him by abstaining from giving him support.

Amnuay decided to resign on June 19, sending a sharp reverberation throughout the financial markets. For Amnuay had been recognised by the financial markets as a staunch defender of the baht.

Confidence evaporated. In less than 10 days the BOT lost more than $4.3 billion alone as a consequence of Amnuay's departure.

Thanong Bidaya, the president of the Thai Military Bank, was quickly sworn in as the new finance minister on June 20. Four days later the Cabinet passed a finance sector reform package, which included establishment of a loan securitisation arm. It also allowed greater foreign participation in finance companies.

On June 27 Thanong closed down 16 finance companies, which included Finance One Plc, the country's largest financial house.

''A week after my appointment as finance minister, Khun Rerngchai came to me with the documents and said, 'Here you are, you need to make a decision [on the baht policy and closing down the 16 cash-strapped finance companies],'' Thanong recalled.

At the Bank of Thailand's Fish House overlooking the Chao Phya River, Rerngchai and Chaiywat briefed Thanong on the crisis of the foreign exchange reserves and the huge swap obligations.

It was inevitable at this point that the central bank had to surrender the currency peg system because it was losing between $400 million and $500 million a day from its reserves, which could be drained to the last dollar soon.

Chaiyawat proposed that the announcement of the float exchange rate system be announced on July 4 -- right after the first half of the year -- so that Thai corporations would not mess up their accounting books.

On July 1, Rerngchai, Chaiyawat, Thanong went to report to then prime minister Chavalit Yongchaiyudh at Government House, who had just finished a Cabinet session, on the crucial decision to change the currency regime. Only a day earlier Chavalit had assured the nation in a televised address that there would be no devaluation of the baht.

Bhokin Palakul, then PM Office minister and Chavalit's right-hand man, was also present at the meeting. Rerngchai and Chaiyawat were uncomfortable with Bhokin's presence because the minister did not have any jurisdiction over the top-secret affair.

But Chavalit brushed their objections aside. [Bhokin told Parliament later that he was not privy to the knowledge about the baht float, a conflicting statement to Rerngchai's testimony to the Nukul committee].

Chavalit agreed to go along with the plan to float the baht and received a file of documents to advise other ministries to prepare for the baht flotation. But rumours about a possible collapse of five commercial banks put added pressure, forcing Rerngchai to act quicker.

On July 2, the Bank of Thailand announced that it would change its exchange rate mechanism to a managed float from the 13-year old policy of pegging the baht to a basket of currencies dominated by the US dollar. The announcement effectively devalued the baht by between 15 per cent and 20 per cent in one day.

Tomorrow: How a delay by one month and a week by Dr Chaiyawat Wibulswasdi, the then deputy Bank of Thailand governor, to make any decision on the foreign exchange policy led to another big run-down of the central bank's reserves.



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