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A casualty of independence

May 30, 2001

Bank of Thailand governor MR Chatu Mongol Sonakul's dismissal yesterday came as no surprise in light of the rising tension and deteriorating relationship between him and Prime Minister Thaksin Shinawatra ever since the new government was formed in February.

The last straw came on Friday when Chatu Mongol launched an Internet war against the Thaksin government after it had ordered him to review the central bank's low interest rate policy.

Chatu Mongol fired off an e-mail to investment analysts worldwide subscribing to the Bank of Thailand's research reports. In it, he asked for their opinions on the central bank's low interest rate policy in what came across as a high-handed tactic to lobby international support for his cause.

Word of Chatu Mongol's action greatly upset the prime minister and his team of advisers. On the same Friday of the Internet war, Thaksin issued a statement from Government House justifying the government's interference in the central bank's affairs.

Under the present law, the government - through the finance minister - can appoint or dismiss the governor, whose role is limited to providing policy suggestions or technical advice to the government.

Thaksin's statement was aimed at quelling the conflict between the government and the central bank over the appropriate level of interest rates. The prime minister would like to see deposit rates raised to deter capital outflows and allow fiscal stimuli and other social platform measures of the government to work.

Yet Chatu Mongol, with support from the International Monetary Fund, viewed the low interest rate policy as correct under the circumstances. To stimulate the economy, the governor argued, the government should instead focus on its own fiscal stimulus measures so that companies and factories operating at only 60 per cent of actual capacity can step up production and get the economy going again.

Over the weekend, Finance Minister Somkid Jatusripitak and the prime minister discussed the possibility of removing Chatu Mongol and replacing him with MR Pridiyathorn Devakula.

It was believed that they would wait until June 4, when the governor was due to present his financial models on low and high interest-rate scenarios as a basis for government decision. When Chatu Mongol met with the prime minister and his top-level advisors on May 21, he said he needed two weeks to study the pros and cons of monetary policy adjustments.

Yet the governor's e-mail was the last straw. Before going into a Cabinet meeting, Thaksin said rather impatiently: "The management of monetary policy should be conducted on economic principles rather than on lobbying efforts. I don't have the time to waste on this kind of conflict."

He then went ahead and sacked the governor, following a suggestion from Somkid, who said the firing "was necessary in view of the need to improve the efficiency of the central bank".

Earlier Somkid also shook his head at Chatu Mongol's controversial e-mail manoeuvre. "The governor likes to go international," he quipped.

Chatu Mongol quickly left central bank headquarters in Bangkhunprom in the afternoon after he was informed about his discharge. Refusing to comment in detail, he simply said: "Since they're no longer paying me a salary, I don't want to talk."

Chatu Mongol's removal was inevitable, given the litany of policy and personality conflicts between him and the prime minister and his advisers.

First, Chatu Mongol did not agree with the Thaksin government's policy to set up the Thai Asset Management Corporation to buy out bad assets from the banking system. He viewed this policy as replicating the corporate debt-restructuring effort that had already been well under way. Moreover, most of the debt cases were locked in the courts of justice.

But the corporation represents one of the key policy proposals of the Thaksin government, which would like to put a quick end to the bad-debt situation and get the banking system moving again.

At a workshop held in Cha-am in late February on how to fix the financial system, Chatu Mongol's role was downgraded while Thaksin appeared to assign broader responsibility to Somchainuek Engtrakul, the permanent secretary for finance.

Second, when the baht began to waver in March and April - following the regional trend and the weakness of the yen - the government wanted the central bank to do something proactive to halt the rapid slide in the currency.

But Chatu Mongol came out strongly against the government, arguing that government figures should not make public comments on foreign exchange policy, which might affect market sentiment. He also would like the market to determine the value of the baht, although the central bank would intervene from time to time to limit its volatility.

At one point, Chatu Mongol declared that the central bank had intervened in the offshore markets to rein in the baht, shocking financial markets with his candid remark. His revelation came out just one day after Somkid went on record to state that the government had no policy of intervening in the foreign exchange market to support the unit, but would rely on the market to decide its value.

Third, there had been quiet discussions over how the banking system should be salvaged. The government would like the central bank to rethink the capital-adequacy ratio standard as recommended by the Bank for International Settlements (BIS). Banks are required to maintain, at a minimum, capital at 8.5 per cent of risk assets to encourage prudent lending practices. If the BIS standard were relaxed, it would give the banks more room to extend loans.

But the central bank governor saw differently. Since the Thai economy is caught in a liquidity trap, with companies operating at only 60 per cent of capacity, banks are unwilling to lend money. Scaling back the banking standard would give them little impetus to build up their loan portfolios.

The banking system already has Bt600 billion in excess liquidity. In the meantime, the central bank let banks buy foreign-currency securities as a way to park their excess funds.

Fourth, Thaksin's advisers also favour a re-pegging of the baht, as fiscal stimulus measures would not work if capital continues to flow out of the country and the central bank continues to maintain a floating exchange-rate regime. Keynesian fiscal stimuli will only work in a fixed exchange-rate environment.

But Chatu Mongol believed that the country should not repeat the past mistake of pegging the currency, which was proven unsustainable by the currency crisis of 1997. The floating exchange-rate system suits an open economy like Thailand's, he believed.

Finally, Thaksin had ordered the central bank to review its low interest rate policy. The government would like to stimulate the economy through fiscal spending, yet doing so at the same time capital was pouring out of the country would be akin to flushing money down the drain. If the level of domestic interest rates were kept up at least as high as US dollar interest rates, it would help stabilise economic conditions.

Then fiscal policy could be effectively put into action, coupled with support from the economic and social programmes of the Thai Rak Thai to rescue the economy from the liquidity trap.

But Chatu Mongol insisted on keeping interest rates low, a signature BOT policy since late 1998. Low interest rates not only helped corporations reduce their foreign-debt load, they also facilitated debt restructuring and kept the cost of carrying bad assets of banks and the Financial Institutions Development Fund down.

All of these irreconcilable differences led to the release of the governor yesterday, paving the way for the prime minister to consolidate his power and allowing him to manage monetary policy more in tune with fiscal policy - and ultimately with the Thai Rak Thai's social agenda.

Anorma Srisukkasem,

Thanong Khanthong

See also PM cuts loose



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