Somkid battles now to prop up the baht

April 6, 2001

FINANCE Minister Dr Somkid Jatusripitak is confronting a very grave situation. The baht debacle is returning to haunt Thailand, reminiscent of the financial crisis three years ago.

The crisis situation will certainly deprive him of the time and energy needed to reform the Thai economic structure the way that the Thai Rak Thai Party promised during the election campaign. He will be required to work closely with the Bank of Thailand to look after the financial markets on a day-to-day basis. Somkid is now trying to tackle the Thai economy clumsily through a sectoral approach.

The situation now is as precarious as the life-and-death period of December 1997 and January 1998. Then Somkid's predecessor, Tarrin Nimmanahaeminda, played a poker game to try to halt the baht from a free fall. The baht would hit rock bottom at Bt56.50 to the dollar in January 1998.

Tarrin primarily focused his task on confidence building. He worked hard behind the scenes, talking it over with players in the financial markets and leaders of the G-7 countries about Thailand's commitment to financial and economic reform. The credibility of the Chuan government was also helpful in the international community. The low public debt also gave Tarrin ample ammunition to tackle the financial crisis.

After a visit of US Deputy Treasury Secretary Lawrence Summers to Bangkok during that period of 1998, the baht began to stabilise. Bank runs also began to subside. But interest rates were still kept exceptionally high to defend the baht. It was not until August that both the fiscal and monetary policies began to ease to pave the way for recovery. But the damage had already been done from the financial crisis, triggered by the baht devaluation in July 1997. The Thai financial system had collapsed like a heap of rubble.

Tarrin then spent the next two years and a half trying to pick up the pieces of the Thai financial house. He would be charged for not acting decisive enough in his attempt to clean up the banking sector. Another criticism was that he spent most of his time tackling the financial system without paying due attention to the real sector. With all the political and cultural constraints upon him, Tarrin argued that he had done his best to save the country from a complete meltdown.

It will be the task of historians to judge Tarrin's performance. But the historians will also need to look toward Japan, which is still grappling with a banking crisis 10 years after the burst of its own economic bubble.

If recent history is any guide, Somkid will need to work very hard to restore confidence. For the baht is now facing a free fall. Nobody knows where is the bottom. On top of risky external factors, the financial markets have been very concerned about Thailand's rising public debt, the bad debts in the banking system, the deteriorating trade account and, more recently, the trial of Prime Minister Thaksin Shinawatra in the Constitutional Court.

So far Somkid has moved toward the right direction in trying to curb unnecessary imports to keep the trade balance in surplus. The March figure, quickly released yesterday to show a trade surplus of US$400 million, was helpful.

Somkid also signalled to the financial markets that the Thaksin government would cap public debt to GDP at 60 per cent. This is a very positive signal yet he has to follow through with this promise by making sure that all the government populist programmes from the universal health care coverage to the Thai Asset Management Corporation do not create an off-balance-sheet liability to the government beyond that 60 per cent level. Nobody believes that this can be done, so his actions will have to be convincing.

The prime minister's trial in the Constitutional Court is embarrassing. But the Thais had been told in advance before the election about Thaksin's soft spot, which could have damaging political consequences. This is another open game, beyond Somkid's or anybody's control. The impeachment of Joseph Estrada cost the Philippines dearly. The Thaksin trial is not helpful to the baht's stability either, because if Thaksin is to go, the entire Cabinet will also lose their jobs.

Technically, Somkid will need all the help he can get from MR Chatu Mongol Sonakul, the Bank of Thailand governor, in managing the baht's stability. Since taking office in mid-1998, Chatu Mongol has been working to strengthen the shield which protects the baht from excessive volatility. Measures have been introduced to curb baht speculation. Additional restrictive measures should be introduced soon if the baht continues to slide.

Yesterday Chatu Mongol surprised the financial markets by admitting that the central bank has intervened in the spot and swap foreign exchange markets to keep the baht stable. It was only Wednesday that Somkid told reporters that he was not aware about the central bank's intervention to prop up the baht. Chatu Mongol's remarks always keep him one step ahead of the government. Somkid's job appears to be very lonely at this juncture.

THANONG KHANTHONG