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Unwelcome intervention rocks bourse


The economic crisis is continuing unabated as the prime minister finally agrees to address the issue, Thanong Khanthong and Vatchara Charoonsantikul report


Over the weekend Prime Minister Chavalit Yongchaiyudh finally acted as if he understood the economic crisis. He pledged to personally supervise, on a day-to-day basis, the task of putting the Thai economy back on track. His move, however, is not only long overdue but also hardly the act of a statesman.

The stock market yesterday crashed further below the 600 mark to set a record low of 592.18, reflecting investors' indifference to Chavalit's remarks. They have waited for so long, yet the whole apparatus of government is not responsive and efficient enough to deal with the crisis.

Chavalit should have made Thailand's economic slump his top policy concern on day one of his taking office in December last year. Back then he did promise to put together what was to become known as an ''economic dream team" to tackle the economic problems which had been deteriorating from the bursting of the bubble economy. Dr Amnuay Viravan, his long-time confidant, was to head the team, which would be responsible for turning around the economy.

As it turned out, Chavalit had to step a long way back to compromise for his political survival. The administration failed from the start to form the dream team, which would have run all the key economic portfolios with a unified strategy. Amnuay could only find an ally in Dr Narongchai Akrasanee, the commerce minister. The Industry, Transport and Communication and Foreign Affairs portfolios had to be awarded to the Chat Pattana Party as a trade-off in the complexities of coalition politics.

Although Amnuay is also deputy prime minister and chairman of the Council of Economic Ministers, his measures to solve the economic problems so far have been limited to the jurisdiction of the Finance Ministry. Now the problems have spilled over into the real sector, beyond the authority of the finance minister to tackle alone.

Amnuay has virtually no political leverage to seek cooperation from the Chat Pattana Party. It is convenient to find a scapegoat in Amnuay during this time of financial crisis, but most of the measures he has introduced so far to cushion the property market and the financial institutions are sound in the medium term.

There is no evidence that the Chat Pattana ministers have contributed to any substantial economic restoration programmes. They are only good at going after big projects and spending money. Much worse, members in the New Aspiration Party did not welcome Amnuay in the first place.

Chavalit's mistake has been to allow Amnuay to work in isolation for almost six months. The prime minister appears to have paid more attention to political reform, national security and other basic issues. He is sometimes described as a very intelligent person, who quickly grasps complicated problems. So it is a big surprise that he has ignored the economic agenda until now when it has developed into a crisis.

Last week, rumours intensified that Amnuay would be fired as a scapegoat, for failing to cure the economic ills. The Chat Pattana Party, for the first time, has admitted openly that it would like Amnuay and Narongchai out. Its leader, Lt Gen Chatichai Choonhavan, was to have held talks with the prime minister today to discuss the possibility of shaking up the Cabinet ministers.

On Saturday Surasak Nananukul, the prime minister's chief economic adviser, emerged, almost out of the blue, to air his view over the the stock market's distress. Surasak's appearance further confused the financial markets and added weight to the speculation that Amnuay would be fired.

Surasak would not come out publicly to indirectly discredit Amnuay if he had not received a signal from the prime minister. When asked about Surasak's comment, Amnuay reacted saying: ''Surasak who?"

Certainly, Surasak is not big in Amnuay's eyes. Amnuay was serving as executive chairman of the Bangkok Bank, while Surasak was a vice president in charge of computer affairs. Much to Amnuay's frustration, however, he decided to leave for Japan over the weekend to attend a conference sponsored by the Asian Development Bank.

Most of the officials at the Finance Ministry were not aware of his abrupt schedule, but Amnuay contacted Rergnchai Marakanond, the Bank of Thailand governor, and asked him to stand by in case the prime minister wanted to consult him over a fresh course of economic management.

Chavalit has travelled a long way or 200,000 miles in his own words before arriving at the highest office of the land by mustering his political base in the Northeast. His New Aspiration Party is an ad hoc political party, set up by one man with the aim of taking over the government machinery.

It is an enigma as to what kind of leadership he perceives himself to represent, but Chavalit is certainly not moulding his image to become a statesman in the model of Gen Prem Tinsulanonda, who was Thailand's prime minister between 1980 and 1988. Thailand's only other statesman has been Pridi Phanomyong, a towering figure in Thailand's democracy.

Prem left behind the legacy of an honest government, supported by a contingent of efficient technocrats. He was willing to bite the bullet during Thailand's economic hard times. Faced with a budget deficit and fiscal cash deficit, Prem agreed to go along with a zero-growth budget, hinged on revenue collection. He even went further to deepen the spending cuts by another 5 per cent so that the government would not have to breach fiscal prudence by raising taxes in a weakened economy.

Zero-growth budgets were also introduced in subsequent years during the Prem administration. When it was inevitable, Prem agreed to have the baht devalued in 1984 to jump start exports. The austerity programme Prem laid down formed a platform for the economy to take off in grand style in 1987. Prime Minister Chatichai inherited an economic growth rate of more than 10 per cent during his heyday, apparently a Prem legacy.

After a decade of spectacular economic growth of at least 8.5 per cent, the economy went bust last year on the back of the property market crisis and stock market meltdown. The economy had been over-leveraged more than most people had realised. Corporate debts mushroomed and profits were wiped out in the market meltdown.

As prime minister, Chavalit cannot deny his responsibility. His priority is to provide leadership and restore sagging confidence to the management of the economy. How can he do it?

First, the prime minister's immediate problem is to find ways to bring down interest rates, which are damaging the economy. There is a danger that the Thai economy might plunge into a recession if the rate continues to remain prohibitive.

Interest rates have been kept high since 1994, first to combat capital inflow and inflation and now to defend the baht. Following the crash-landing of the economy last year, the authorities' objective was to forget growth and focus on achieving stability. Stability was defined as a more manageable current account deficit and inflation. This objective has been achieved, albeit at a very high cost to business. There is a danger that the austerity measures introduced to achieve stability are overdone. If so, the economy might risk being plunged into a recession.

Former finance minister Tarrin Nimmanahaeminda sternly warned about the looming economic crisis, triggered by the property market slump and the financial system collapse. He attributed the mismanagement to the Finance Ministry's and the Bank of Thailand's stubborn policy of keeping interest rates high.

He told Independent TV that high interest rates were punishing investors. Investment had reached the lowest point in four years. ''The government should abandon the interest rate-led policy in tackling economic problems. It won't be able to solve the economic problems," he said. Tarrin blamed the government for failing to coordinate with the private sector or to come up with a comprehensive set of measures to deal with the situation.

Second, the prime minister must follow the cardinal doctrine of maintaining a balanced budget. There are signs that the 1997 budget might run to a deficit. A budget deficit will create a ''triple deficit" apart from the trade and current account deficits which will further add to Thailand's macro-economic pressures.

In February, foreign speculators attacked the baht because they saw cracks in the fiscal budget. Flouting fiscal discipline amounts to an invitation to speculators to start another attack on the baht, which might wreak havoc with the country's entire macroeconomic management system.

The Bank of Thailand has revised 1997's economic growth forecast to 6 per cent, but this 6 per cent growth comes with a condition that interest rates must come down by one or two percentage points. However the BOT is reluctant to cut interest rates because it is not certain that the government can balance its cheque book.

Here lies Chavalit's leadership decision. Somehow the budget must be balanced at any political cost. The government must show the way by further tightening its belt rather than by raising taxes, which might inflict more harm to the already weakened economy.

Amnuay is aware of all of the problems but he cannot tackle them because he lacks the political power to make things happen. Chavalit has the power to make things happen. Interest rate and budget policies, if handled successfully, will be the first step to curing the country's economic ills.

If Chavalit fails to restore confidence quickly, the crisis will reach a point of no return over the next two or three months when companies begin to report financial losses in the first half, when banks and finance companies post losses and higher bad debts and when speculators find a window of opportunity to attack the baht again.



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