Ammar urges end to deficit spending

May 31, 2000

WELL-KNOWN economist Dr Ammar Siamwalla has urged the government to abandon fiscal deficit spending designed to stimulate the economy, arguing that the deficit has led to an artificial strengthening of the baht which makes Thai exports less competitive.

The weight of government spending in the Thai economy, once the fiscal consolidation takes place, will be offset by increased earnings from exports, a major engine driving the recovery process, he told a gathering of the American Chamber of Commerce.

Fiscal deficit strengthens the baht because it somehow forces the government to borrow. The inflow from government borrowings creates a stronger currency.

Ammar said the Thai currency at Bt36-Bt37 to the US dollar is too strong in terms of a real effective exchange rate. However, he is now rather comfortable with the baht at more than Bt39 to the US dollar, a level that should boost export competitiveness.

At present, the Thai economy is run by three engines, namely exports, domestic consumption and government spending. Private investment has yet to make any significant comeback to power the momentum of the economic recovery because the banking system remains in a shambles.

Relying heavily on the export sector to lead the recovery might run into a snag in the event of a slowdown in the US economy or a recession. But Ammar said the US bubble, if it is to pop out or go bust in a big bang, will create another set of economic problems for Thailand and the rest of the world.

He also called for a consolidation of the government's fiscal position, which has gone into deficit over the past two fiscal years, because of rising public debts.

The reality check for Thailand is how it is going to pay for the bills to the tune of Bt800 billion-Bt1.2 trillion, created by the government's bailout of the financial system.

Ammar pointed out that a present reading of the Thai economic situation shows an interesting paradox. If one confines the perspective to the flow of business, one gets the impression that things are actually improving.

He produced three charts showing improvements in the quarterly growth of the non-agriculture gross domestic product growth, private consumption of electricity and non-food manufacturing index.

That is the good news.

But if one were to turn to the stock market, the picture is quite messy. The stock market no longer serves its function as a conduit for companies to raise money.

Ammar said the stock market is sick because some 95 per cent companies' balance sheets are weak.

In his opinion, there are four dominoes - the corporate sector, the banking sector, the Financial Institutions Development Fund and the government sector - that need to be observed.

"The corporate sector is very sick. We know that from their balance sheets, because they have become the NPLs of the banking sector," Ammar said.

The problem is that the NPLs have not been tackled or reduced but have been stretched out. They are returning to haunt the Thai banking system, as evidenced by their re-entry.

Probably due to social or cultural reasons, it is extremely difficult to reform the corporate sector even though the bankruptcy and foreclosure frameworks have been introduced. Ammar said it is time-consuming to restructure the corporate sector.

Unlike in the case of bankrupt US companies, the equity holders will be wiped out. The employees suddenly see a new management team show up. And things move on as usual.

"That's why we're stuck where we are," Ammar said.

If an angel of death were to pass through the city of Bangkok and rewrite the balance sheets of Thai companies to reflect the present discount values or the real ownership, Ammar said, Thailand will be completely cured from the crisis overnight. The problem now is how to sort out the balance sheets and all the expensive carrying costs.

That is the first domino as far as Ammar is concerned. The second domino for Thailand is the banks. So far banks have been reluctant to write down their assets because they will come under pressure to recapitalise.

Ammar could not think of a way out but suggested that there should be some other way around the banking system to channel money from the savers to the investors.

The third domino is the mountain of debt on the shoulder of the FIDF, Ammar said.

The Finance Ministry believes that the FIDF's debt obligation should eventually stand at Bt800 billion, while the Bank of Thailand has put the figure at Bt1.2 trillion. This does not include the Bt500 billion in compensation to the 56 defunct finance companies.

Overall, the obligation of the FIDF stands at Bt1.7 trillion. Assuming an interest rate of 5 per cent, the annual carrying cost of the FIDF is Bt85 billion, which is equivalent to 2 per cent of the gross national product or GNP.

To finance this huge bill, the best way is to grow the economy to take care of the problem debts and to increase the government's tax revenue.

But Ammar said the government also has room to raise taxes to finance the FIDF's debt.

The final domino in his eyes is the government. With the upcoming election, he does not think that a miracle will happen. The only political issue that matters is how the government will foot the public debt bills.

And Ammar does not believe that a Thaksin Shinawatra government will make any difference.

BY THANONG KHANTHONG