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Unsound steps force supremo off finance


Vatchara Charoonsantikul and Thanong Khanthong look behind the resignation of Dr Amnuay Viravan .

By resigning from the posts of finance minister and deputy premier, Dr Amnuay Viravan has opened himself up to accusations that he jumped ship while the country was in deep financial and foreign exchange trouble, people familiar with the economic and political situation are saying.

Furthermore, Bank of Thailand Governor Rerngchai Marakanond, like Amnuay, wanted to tender his resignation due to the enormous pressure of dealing with the country's financial crisis, a source close to the situation said.

''It was last week that Rerngchai, who had just lost his father, made known to Amnuay his intention to step down. But Amnuay said Rerngchai couldn't go because he had to go first," the source said.

Amnuay's loss of face in the Cabinet showdown with Industry Minister Korn Dabaransi on Tuesday was just one in a number of slights.

Since Amnuay did not have the backing to pass even a minor tax package, how could he have been expected to oversee financial reform.

It was true that some New Aspiration Party and Chat Pattana Party members wanted him out of their way, yet Amnuay's decision to quit the Chavalit government could be interpreted as his failure to restore economic stability and calm frayed nerves in the financial system.

Prime Minister Chavalit Yongchaiyudh, who handpicked Amnuay to head his economic dream team, was very upset with Amnuay's abrupt departure, which came at a time when the political and bureaucratic machinery has virtually ground to a halt.

Chavalit, Amnuay and Rerngchai must share the blame for failure to respond adequately and in a timely manner to the economic slump, triggered by the property crisis and now encompassing the financial and foreign exchange systems as well.

Chavalit begged Amnuay to stay, knowing he could not find a suitable candidate to replace the internationally respected technocrat. Chavalit even asked Singapore Prime Minister Goh Chok Tong, while they were playing golf together on Wednesday, to try and persuade Amnuay to stay on.

Chavalit realised his government would suffer another blow to its credibility if Amnuay departed at a time when the financial markets increasingly doubt the ability of his administration to put the economy back on track.

The mess the economy is in now is a legacy of the bubble economy of the late 1980's and the first half of this decade. By the time Chavalit took over the premiership in December 1996 from Banharn Silapa-archa, the bubble had burst. Amnuay's task was to restore confidence and manage stability of an economy in a steep nosedive.

His style subsequently proved that he was not equipped to be the finance minister at a time of grave economic danger, although he was broadly respected in the international community.

''Amnuay is a super technocrat; he is not a finance minister," the source said.

Amnuay and Rerngchai's biggest mistake was their failure to contain the financial crisis. They knew there were a number of troubled finance companies whose net worth had completely been wiped out by bad debts. Yet they could not devise a game plan that would separate the healthy finance companies from the problem ones.

When Finance One Plc sought a rescue, Amnuay and Rerngchai responded in the true spirit of Santa Claus. The Financial Institutions Development Fund began pouring into Fin-One as much as Bt35 to Bt40 billion, which kept the moribund company from going bankrupt.

Fearing that the news of the collapse of Fin-One might trigger a widespread run on financial institutions, the gentlemen spoke of a mergers and acquisition package, which proved to be so vague it was unworkable.

In March, they blacklisted 10 ailing finance companies in the hope of restoring public confidence in the other 81.

Subsequently, there were rumours that 22 companies not 10 were in danger of collapsing under property-related bad debts. Last month the number climbed to 33.

Now people are saying as many 40 to 60 finance companies out of the 91 are in big trouble. It can only be a matter of time before commercial banks begin to topple as well.

Rerngchai unwittingly fell into the trap of the central bank's conservative public policy that financial institutions were too big to fail. ''The authorities could not bring themselves to allow the Bangkok Bank of Commerce to go bankrupt," the source said.

Then Rerngchai and Amnuay repeated the mistake by bailing out Finance One.

''They never said how much more money they could plough into these failed institutions. Where will it end," asked an investment banker from a big Thai bank.

As a result, Rerngchai, who was part of a team working on the ''Life Boat Scheme" in 1984 to bail out failed financial institutions, came up with a deeply flawed policy of a universal bail-out for all the financial institutions by avaling their promissory notes. He did not take into consideration whether these companies were good ones, bad ones or ugly ones.

In the process, the good, bad and ugly companies were lumped together until they are now indistinguishable.

At first, there was a flight to quality, with people shifting their money from finance companies into banks. Yet after they realised that the BOT was avaling all P/N, they rushed back to the finance companies and, in what may turn out to be poor judgement, deposited their money at interest rates of 13, 15 and sometimes 21 per cent.

One commercial banker said by avaling the finance companies' P/N, the central bank has created a two-tier interest rate system that has made it impossible for interest rates to come down.

Meanwhile, finance companies continue to demand money from the Financial Institutions Development Fund (FIDF), which at first charged them 15 per cent, to maintain their ''zombie-like" existences.

Now the FIDF has run out of money and is borrowing from other banks and the Bank of Thailand. This means that the FIDF is fighting for an already scarce resource in the financial system.

It has also borrowed more than Bt100 billion from the BOT to support its bail-out efforts, and nobody has been discussing the inflationary implications of tapping the BOT's M1 money supply.

Commercial bankers agree the central bank's lack of a financial policy has contributed to the current mess. Without a financial policy, Rerngchai and his central bank officials were merely focusing on tackling the short-term problems. ''People are wondering what the banking authorities are doing, what they really want to achieve," said a financial executive.

Because they obviously didn't have a back-up plan, it was difficult for the financial markets to comprehend where the policy initiatives of Amnuay or Rerngchai would eventually lead. This bred a crisis of confidence in the macro-economic management of Thailand.

Rerngchai is not really at the helm of the central bank. He has failed to bring the best minds of the BOT together. His deputies, from Chaiyawat Wibulswasdi, Jaroong Nookhwun to Siri Ganjarerndee, have yet to get their act together to advise the governor in a comprehensive and systematic fashion.

Even now opinions among them are divided as to how to deal with the ailing financial institutions or with the country's foreign exchange policy. Instead of imposing a hands-on management style on the central bank, Amnuay elected to distance himself from Rerngchai. The result was they did not adopt the aggressive posture needed to deal with the financial and foreign exchange crisis.

Rerngchai and his aides have demonstrated a single-minded determination in their drive to punish the speculators who attacked the baht in mid-May. Their measures to close down the foreign exchange market have been a spectacular success but are now coming back to haunt them.

The two-tier baht system has bred all sorts of distortions in capital movement to speculate on the exchange rate differentials between the onshore and offshore markets. Some foreign institutions, who lend money to Thailand and attacked the baht through their currency operations, have been discouraged from bringing capital into Thailand to finance its current account deficit.

Some Thais have speculated against their own country by taking money offshore to Singapore, depositing it in US dollars and shifting it back to Thailand to profit from the exchange rate differential, banking officials said.

A former banker said some companies have gone as far as to open letters of credit in baht in order to speculate on foreign exchange differentials.

''You are also seeing some importers over-value their orders and exporters undervalue their orders to profit from the foreign exchange differentials created by the two tier system," he said.

Much worse, foreign lenders are increasingly reluctant to lend Thai companies money because they are wary of the two tier system, which makes it difficult for them to mark to market. They are likely to redeem the dollar-denominated bills of exchange issued by Thai firms to raise money.

On the foreign exchange front, Amnuay and Rerngchai did not have a back-up plan for dealing with a post currency peg system era. The financial markets now have the impression that the banking regulators will resist devaluing the baht at all costs by staunchly defending the fixed currency regime. But they also realise that the central bank does not have the strong macro-economic backup to support the fixed currency policy indefinitely.

Central bank officials will be exploring the possibility of floating the baht, adjusting the currency mix in the basket of currencies or widening the band in which the baht is allowed to trade against the US dollar.

Without confidence in foreign exchange policy, foreign investors will not bring capital into the country or lend to Thai corporations without many strings attached.

It appears that Amnuay, Rerngchai and their aides were far from reaching a consensus on how to tackle the currency issue.

The final question is how the financial or foreign exchange policy will fit in with the country's overall game plan of becoming a newly-industrialised nation. Neither Amnuay and Rerngchai had a credible plan in mind to make Thailand a value-added manufacturing nation boasting an educated workforce and industrial and scientific base essential to a modern economy.

This long-term plan is what foreign investors are most interested in seeing because it will be the basis upon which Thailand can recover and grow. In this regard, Amnuay and Rerngchai missed an opportunity to tackle the financial crisis and chart a course toward economic stability.



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