The elusive crisis fix

May 29, 2000

Thanong Khanthong and Vatchara Charoonsantikul say the steely nerve of Finance Minister Tarrin Nimmanahaeminda is facing a tough test.

FINANCE Minister Tarrin Nimmanahaeminda would have to be either punch-drunk or out of his mind not to pay due attention to the free fall of the Thai stock market.

A brief slide of the composite SET index below the 300 psychological support level last Friday turned out to be a tough test of his steely nerve.

Yet still, after holding an emergency meeting with top officials from the Securities and Exchange Commission, the Bank of Thailand and the National Economic and Social Development Board, Tarrin emerged to reinforce his underlying conviction that the best way to win back confidence was to encourage private investment.

"The government will try to encourage private investors," he said. Tarrin added that he would raise the issue of the stock market slump at the meeting of the Council of Economic Ministers todayon Monday.

For almost two years Tarrin has been waiting for the return of private investment to give momentum to the economic recovery. But the magical "I" -- for investment -- has been elusive. Is it a mirage?

The four-cylinder Thai economic engine broke down in July 1997 in the middle of the global expressway.

Under the IMF's tutelage, Tarrin has been able to repair three of the cylinders -- exports, domestic consumption and government spending -- to keep the engine humming. But private investment remains to be fixed.

The prophecy of Dr Virabongsa Ramangkura, the nemesis of the Democrats, is still echoing in the chilly air. Virabongsa, who was accused of having poisoned the mind of the revered monk Luangta Mahabua over the controversial use of excess reserves, issued his warnings about his three "no's" -- no economic recovery, no return of foreign investment and no capital inflow.

Tarrin has narrowly defined his magical "I" as foreign direct investment in plants, in factories and in tangible businesses.

He has almost completely turned his back on the capital market, for he thinks that if foreign investors invest their money in Thai equities, they will want twice their money back the following day.

Yet foreign direct investment would never propel the Thai economy back to its glory days. During the economic bubble era, when the economy grew at 8-10 per cent a year, the economy was driven heavily by foreign borrowings -- not by foreign direct investment. That is why Thailand ran a huge current account deficit to the unsustainable level of 8 per cent of gross domestic product (GDP).

During that period, foreign banks financed the Thai current account deficit -- the gap between domestic savings and investment -- through bank loans.

All the Thai banks, not to mention all the banks with Bangkok International Banking Facility (BIBF) licences, sucked in cheap foreign-currency loans and re-lent them in baht for higher margins to Thai companies, which went on an investing spree. That investment has now become an overcapacity problem.

Foreign loans left Thailand quickly after the collapse of the Thai baht. Private external debt peaked at US$76 billion in 1996 and has now fallen to US$32 billion. These foreign bank loans, which have returned to the financial centres, will never come back to periphery markets like Thailand again, at least in the old form of crony lending.

"Can't the finance minister see that in the past, foreign direct investment was not the engine that drove the Thai economy.

"Instead it was the foreign money in the form of bank loans that were brought into the country to create the bubble. And this was reflected in the current account deficit," a former Bank of Thailand official, who asked not to be named, said. Vichai Punphocha, the outgoing general manager of Dresdner Bank, added:

"The foreign banks have also retreated from traditional banking to concentrate more on the dis-intermediary role.

"There is a huge amount of private capital floating around. Instead of putting their neck on the guillotine by taking money from someone else's savings and re-lending it to others, the banks are focusing on investment banking -- or bringing those who have the money to meet those who have the ideas or business but lack the money."

Increasingly banks are getting involved in investment banking and securitisation, or the act of buying securities backed by assets or loans.

Given the trend, it is impossible to expect foreign loans to return to Thailand in droves. Nor is it rational to expect foreign direct investment to help drive the Thai economy to a sustainable 4-5 per cent growth rate a year.

That leaves the finance minister the option of concentrating on repairing the Thai banking system so it can once again support small and medium-scale Thai companies. In fact, Thailand's domestic savings rate of 35 per cent of GDP is one of the world's highest. The problem is how to unlock savings from the banking system, so it becomes good credit to small and medium-sized companies, which will help the economy recover.

With non-performing loans at 37 per cent of total loans, the Thai banking system still has a long way to go before it can regain its solvency and extend credit again. A programme to gradually nationalise a portion of the bad debts in the banking system should start now before the finance minister even hopes to rescue the stock market.