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Crisis of confidence as investors flee

May 11, 2000

Thanong Khanthong says another crisis of confidence is looming if the bleeding in the financial sector is not stopped.

International money managers and investors have packed their bags and pulled out of Thailand en masse, triggering yet another crisis of confidence. This is happening despite a report that Thailand is about to graduate from the support programme of the International Monetary Fund. Regardless, investors are apprehensive about the continuing bleeding in the financial sector, Thailand’s Achilles’ heel.

Make no mistake about the seriousness of the problem in the financial sector. New nonperforming loans (NPLs) and restructureddebtturnedNPLs have risen by a combined Bt200 billion. These new NPLs represent about 10 per cent of the Bt2 trillion in NPLs now afflicting the system. In short, investors are feeling that the old NPLs have already wreaked havoc on the economy, and the new ones may simply be the proverbial straw on the camel’s back.

As a result, the Thai stock market, the most important barometer of confidence, has plunged by more than 140 points – almost 30 per cent – from its yearend level of 480. At this point, foreign investors consider the Thai market to be in the same league as Indonesia and the Philippines. Forget about catching up with South Korea, Malaysia, Singapore or Hong Kong. The MSCI Index has almost dropped the Thai market from its listings for institutional investors, a move that would erase it from many international investment portfolios.

The implications are quite serious. Thai banks or companies will face extreme difficulty raising fresh money from the equity market, plunging them into another liquidity crisis. The banking sector is the main engine that finances economic growth, and if confidence in the financial sector – both in bank recapitalisation and in corporate debt restructuring – is not restored, there is no way that the real sector will experience a sustainable turnaround. If lending does not resume quickly, companies that have survived the crisis could succumb to a liquidity crisis.

The remaining private banks have been reluctant to sell off to strategic partners to strengthen their operations. They have also been reluctant to offer their public shares cheap for fear of diluting their holdings. The delay has closed their window of opportunity. The risk is growing greater for the indebted companies, which are buying time for the most favourable terms of debt forgiveness. If the banks and the indebted companies are not disciplined, they will continue to burden the economic recovery.

External factors are not helpful either. The US Federal Reserve is raising its sword high over its head ready to slay the inflation dragon. Its chairman, Alan Greenspan, has warned that the equity market should not count on him to come to its assistance should the market fall, because his job is to do everything necessary to bring the US economy to a soft landing. This means that the Fed will continue to raise interest rates until US inflation is subdued, which means that the US stock market likely will tumble sharply in the second half of the year.

If the US stock market should crash, the wealth effect will diminish. US consumers will save money and US companies will slow down their business expansion. Thai exporters, who sell about 25 per cent of their volume to the US, will be affected. Moreover, higher US rates will also mean a stronger US dollar. Already the baht is slipping, hitting a sixmonth low at Bt39 against the dollar as local corporations scramble to repay foreign debt. There has been speculation that the baht could fall below Bt43 by the end of the year.

The lower baht will complicate the monetary authorities’ management of price stability because it will drive inflation higher. Thailand cannot afford to allow interest rates to rise while the economic recovery remains fragile.

At this time, there are more questions than answers about the future of the Thai economy. But one thing is sure – prompt action is needed to restore confidence in the recovery.



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