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Academic 'mirror' fails to give clear reflection


The Thammasat economists are well wide of the mark in their calls for the government to tackle the economic woes, Thanong Khanthong argues.

The voice from academic circles has ostensibly been subdued in the face of Thailand's growing economic woes. But on Thursday, 14 economists from Thammasat University's Faculty of Economics went into a huddle to produce a manifesto calling for the government to adopt a more flexible foreign exchange regime to tackle the economic crisis. They argue that a less rigid currency pegging system would augment the government's fiscal and monetary policies, which have already been stretched beyond the limits.

While the academics' move to trigger a broader debate on the country's economic problems is welcome, their approach appears to be well off the mark. Thammasat University has been carrying a prestigious tradition as a mirror of Thai society, but this time its mirror is a bit dusty.

The immediate step the government must undertake now is to resolve the financial sector crisis. Any adjustment to the foreign exchange rate mechanism at this juncture would be futile as it would increase pressure on the baht at a time when confidence in the Thai macroeconomy is at its lowest ebb.

If the baht/US dollar band, as suggested by the Thammasat economists, is widened, investors would push the baht to the top of the band since there is a broad perception that the baht should become weaker. With its back against the wall, the Bank of Thailand has no choice but to staunchly defend the baht by keeping interest rates high and hanging on to the present foreign exchange rate mechanism.

Tackling the foreign exchange rate mechanism is not a priority. Rather the government should look at ways of cutting interest rates first. The Thai corporate sector will suffocate if it continues to be squeezed by tight liquidity and the prohibitive cost of funds. There is no way to salvage the sagging economy by pricing the cost of funds out of the reach of business.

Here lies a policy dilemma. The interest rate policy is tightly locked against the foreign exchange policy. A rate cut is likely to start another fresh attack on the baht, triggering an outflow of foreign capital essential to lubricate a capital-deficit economy such as Thailand. What the banking regulators fear most is a dwindling in the US$37 billion international reserves, all of which belong to foreign investors, since Thailand is not a capital surplus country.

Equally critical at this juncture is the imminent explosion in the financial sector. There is no way the rates can be cut if the government lacks a credible policy for dealing with the troubled finance companies. Cleaning up the mess in the finance sector should be given the utmost priority. Allowing the agony in the troubled finance sector to become a war of attrition would further undermine any chance of an economic recovery.

Already a fresh proposal on wholesale surgery for the finance sector has been submitted to Finance Minister Amnuay Viravan. Painful surgery is inevitable if the economic system is to rid itself off the tumor developed by the financial sector crisis.

The regulators have broadly classified the 91 or so finance companies into three categories the financially sound, the financially troubled and the financially bankrupt. There are some 20 financially sound companies, compared to 40 financially troubled and 30 financially bankrupt.

It is time the government accepts the stark reality that it won't have Bt300 billion to Bt400 billion in its pocket to bail out all the finance companies in the system. The financially bankrupt finance companies should be allowed to go under. Then and only then might the government have more resources to keep the good ones afloat.

The authorities' mergers and acquisitions package as announced in March to rescue the finance sector is fundamentally flawed. The package is aimed at rescuing the financially bankrupt as a priority instead of helping out the financially sound. Rescuing the financially bankrupt amounts to trying to whip up a dead horse. These financially bankrupt finance companies must be allowed to suffer their natural fate, otherwise they threaten to pull down the whole system with them.

The regulators have already committed a total of Bt178 billion to bail out Bangkok Bank of Commerce, not to mention another Bt8 billion to rescue Finance One Plc. The Financial Institutions Development Fund is running out of cash to bail out other finance companies. The fund is facing the prospect of building up the bad loans on its books from its venture to provide a universal rescue for all the finance companies in the system. Who, then, will take responsibility for the fund's bad loans?

A bail-out for BBC and Finance One provides a fresh dilemma for other troubled finance companies, most of which are lying to the public, claiming they are financially healthy. Some are weighing the ''early-bird" alternative. If they declare themselves technically insolvent now they may survive through a central bank bail-out. Late comers may be denied the chance of a rescue because by that time public opinion or political pressure may force the central bank to abandon its universal bail-out strategy.

The finance sector is about to be ripped apart by the finance companies' unrestrained lending to the commercial property market during the ''bubble era" of the Thai economy. The finance companies have together loaned Bt400 billion to the property sector. Most of these property loans have turned sour, threatening to bring down the financial system.

Panic over the property market collapse and the financial sector crisis have led to the capital market meltdown. Since most Thai finance companies rely on asset-based financing, their woes have been multiplied several fold by the capital market meltdown. Just take a look at Finance One, which fell to its knees because it tied its entire destiny to the free-wheeling stock market.

Rather than trying to save the bad companies, the regulators should extend their help to the good ones. In this case, Finance One should be allowed to be pulled under by market forces. The high-profile finance company embodied the free-market, capitalist system in the boom era of the Thai economy. Its shareholders have already made an outrageous amount of money from Finance One. So they not the public nor the system at large must be held accountable for the collapse of their firm.

Finance One should be allowed to collapse in the capitalist principle of survival of the fittest. BBC is another rogue bank that does not deserve a single baht of public money.

Certainly, shock waves will resound in the Thai financial system following the collapse of these bankrupt finance companies, but the initial shock would be quickly reversed because foreign investors will appreciate this painful step to restore order once and for all to the Thai financial system. Only the curable finance companies should have the opportunity for a second chance through a more credible mergers and acquisitions package.

If the regulators continue to adopt a go-go style in tackling the financial sector crisis, they risk bringing down the entire economy in a swoop. It's time to pull the plug on the life-support system maintaining the troubled finance companies, which are draining the fund's liquidity pool. Some are offering 21 per cent through their junk promissory notes. This high cost of funds is eating them alive at the cost of the taxpayers.

Only after the financial sector crisis is dealt with boldly can the regulators concentrate on cutting interest rates. An international investment banker based in Hong Kong said a stand-alone rate cut would not work because it would trigger another run on the baht unless it is accompanied by a comprehensive government package to put the economy back on track. He said the leadership must be strong enough to lend credibility to its package aimed at addressing the financial system, the property sector, privatisation, and investment over consumption.

Only then may confidence be won back at a dear price. And only then will there arise a window of opportunity for the central bank to adjust the currency pegging system.

A foreign banker in Thailand recommended that the central bank reduce the dollar weighting in the dollar-dominated basket of currencies in favour of a heavier yen weighting. This would add an element of uncertainty to the foreign exchange and discourage short-term capital from being brought in to arbitrage the high domestic interest rates.

Before the authorities reach the point where they might unpeg the baht from the US dollar, they have to muddle through the financial sector crisis.

There will be bloodshed on Bangkok's streets.



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