Outspoken economist Vira-bongsa Ramangkura is leading a revolution in Thai monetary policy, defying the orthodox prescriptions of the International Monetary Fund (IMF) and the Bank of Thailand's mainstream economists.

At no other time in Thai history have the ideas of one economist come to so powerfully dominate macroeconomic policy. Virabongsa's contrary views - calling for interest rates to rise to stem capital outflows and better achieve macroeconomic stability - have shocked the IMF and the Bank of Thailand establishment.
Over the past three years he has been bashing both the IMF and the previous Democrat government for prescribing the wrong medicine for Thailand. The Democrats view him as one of their bitter enemies.

However, Virabongsa's views have the ear of Prime Minister Thaksin Shinawatra. His policy recommendations were quickly put to the test - and inevitably led to a confrontation with the Bank of Thailand. Eventually, he played a key role in picking MR Pridiyathorn Devakula to succeed the abrasive former central bank governor, MR Chatu Mongol Sonakul.

Chatu Mongol lost his job partly because of the low-interest-rate policy he has engineered since late-1998. Standing in the way of this radical policy adjustment planned by the Thaksin government, the former BOT governor either had to concur or bow out.

With the prime minister himself firing Chatu Mongol, it gave the impression of political interference in the central bank's "sacred" task of monetary policy management. But in fact, it was a combination of personality differences and policy clashes that led to the governor's dismissal.

The IMF and the central bank are alarmed by the impending interest-rate 'reversal'. With the economy still facing a deflationary trend and the banking sector still crippled by bad debts, higher interest rates are a prescription for disaster, the IMF and central-bank economists believe.

But the banks have been quick to respond. Yesterday, DBS Thai Danu Bank, sensing a U-turn in monetary policy, announced a rise in its 12-month deposit rates by 0.50 percentage point to 3.50 per cent. By doing so, it wants to make sure it can control its funding costs rather than relying on short-term funding, which is about to face upward pressure from interest rates.

This effectively signals an end to almost three years in the downward trend of interest rates.

Virabongsa's ideas are also likely to lead to an end of inflation targeting as the anchor of macroeconomic stability. Inflation targeting, which replaced the fixed-exchange-rate regime as the economy's anchor, was the legacy of Chatu Mongol.

Although most foreign analysts and economists have rated Chatu Mongol highly, to Virabongsa, the central bank has been doing a poor job in macroeconomic management.

The outspoken economist believes that, because of advice from the IMF, interest rates were kept too high for nine months after the baht was floated in July 1997. Virabongsa then took Chatu Mongol's predecessor, Dr Chaiyawat Wibulswasdi, to task for keeping rates so high they destroyed companies and banks' balance sheets.
Chatu Mongol was credited, however, for bringing the rates down in August 1998.

Virabongsa also believes the baht was kept at Bt37 to Bt38 to the dollar for too long, between late-1998 and most of 1999, saying it should have been pushed down to Bt42. By weakening the baht, the central bank would, in theory, have massively rebuilt reserves to protect the currency for the harder times ahead and at the same time boosted exports.

Without proper management of foreign-exchange reserves, Virabongsa argued, the central bank allowed a current-account surplus, to the tune of US$10 billion (Bt454 billion) a year after the crisis, to flow out of the country.

Thailand's reserves have now become more vulnerable to the prospect of a current-account deficit later this year, accentuated by a deteriorating trade balance and higher oil prices. If debt repayment continues, including the repayment of IMF loans, there could be pressure on the country's reserves down the road.

Given this view, Virabongsa calls for a 'more appropriate' interest-rate structure to achieve macroeconomic stability. If Thai rates are lower than US rates, foreign capital would never return. Thai investors would not hold the baht either.

Once capital outflows subside, the baht would achieve greater stability, which would translate into overall macroeconomic stability. And once the macroeconomic stability is achieved, it will pave the way for economic recovery.

In the meantime, the government can at best keep the economy going by relaxing rules to keep companies and banks afloat during this difficult time. Virabongsa believes economic recovery over the past three years is simply a "technical rebound".

All Thailand needs to do is to hold tight to stability and not think about recovery, he says. Then, and only then, the recovery will come about.

Thanong Khanthong