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Overcapacity at core of collapse


WEAKENING the exchange rate or cutting the interest rate without taking into account the macro-economic framework will only prolong the pain in the Thai economy without actually curing it, the general manager of Dresdner Bank said on Wednesday.

Speaking at The Nation Forum on the way out for the Thai economy, Vichai Punphocha argued that local businessmen, merchants and industrialists were daydreaming that a weaker baht or cheaper interest rate would revitalise their operations when most of them were in fact no longer viable.

Thailand, he said, is suffering from a fundamental problem of overcapacity in all of its heavy industries and other businesses, exactly the same disease as its neighbours in Southeast Asia and East Asia. ''We have an overcapacity in cement, steel and petrochemicals, and so do Malaysia, the Philippines and Indonesia,'' he said. ''Each country would like to become the motive centre of the region, but not all of them can. Only one can, and the rest have to go under. Without proper coordination among the Asean countries, they have rushed into overinvestment and infrastructure building to sustain the investment that will never come. Most of the investment has turned sour.''

Vichai added: '''Businessmen have been calling for increased liquidity to prop up their operations, but liquidity is not a problem here. Liquidity is simply a symptom of the larger problem of overcapacity, of the financial crisis and of an economy that has not yet undergone restructuring. Capital is scarce, and it needs to be channelled into the viable businesses, otherwise the money will be wasted on prolonging the businesses or industries that should not be around in the first place.''

Overcapacity cannot be cured by entering into another round of competitive devaluations or by drastically cutting interest rates at a time when the foremost objective of the country is to safeguard macro-economic stability, he said: without macro-economic stability there is no chance of a recovery. Since the baht float, Thai businesses have been subject to a world-standard discipline with which they must cope otherwise they will not survive.

Germany, he noted, completes a business cycle every eight years. At the end of each cycle there is painful business restructuring or mergers and acquisitions among companies and financial institutions. In 1995 some 29,000 German companies, with sales of at least Dm50 million, went bankrupt.

In Thailand, the business cycle which started off in 1987 on a grand scale should have lost steam in 1994 when the stock market started its downward trend, he said, but the currency-peg system, which fuelled short-term capital inflow, and the build-up of offshore loans from the Bangkok International Banking Facility obscured this restructuring need. When financial and economic restructuring was delayed until the export machine collapsed in 1996 it was too late: Thailand and the fast-growing economies of the region suffer from structural flaws in their economies far deeper than anybody could have imagined.

Vichai suggested that rather than blame the IMF or the government, businesses should go beyond the denial stage to confront their overcapacity or management problem directly, if painfully, through wholesale restructuring. If they want to survive, they need to devise a completely new game plan.

A financial and banking restructuring is more visible than corporate restructuring because the financial sector is supervised by the cardinal rules of the Bank of Thailand. Already 56 finance companies have been closed; more are about to be restructured. Four banks have been nationalised in a dramatic wipe-out; more are about to face a similar fate. Although the process of corporate restructuring, particularly among the big ones which have saddled themselves with unhedged foreign debts, is slow to start, the day of reckoning is nigh.

Thailand, he told the forum, is going through a painful transition period during which a radical restructuring of the economy is taking place. The process is inevitable and unstoppable. The financial and economic reform package prescribed by the IMF has pushed Thailand into a new economic paradigm under which Thailand will emerge over the next two to three years with a virtually new financial and economic landscape.

It will, he predicted, be a U-shaped recovery, not the V-shaped recovery Finance Minister Tarrin Nimmanahaeminda and the IMF have hoped for. By that time Thailand will not be manufacturing what it is now manufacturing or doing the business it is now doing. ''Nobody knows what it is going to be, but it is certain that Thailand's face will never be the same,'' Vichai says.

He cautioned that it was not easy politically for the Chuan government to sell the economic restructuring message, which was highly unpopular among proprietors, shareholders and workers. In the first half of this year corporate bankruptcies have already hit 5,000 companies, with unemployment expected to reach two million this year and the economy to contract by at least 6 per cent. In a country that hardly has any social safety net, unemployment is the most frightening thing that can happen to a working Thai.

It was the plight of the less fortunate in Thai society that Dr Phasuk Phongpaijit of Chulalongkorn University's Economics Department castigated Tarrin and the Chuan government for neglecting. The IMF, she argued, has failed on most fronts in its attempt to restore the health of the economies it has stepped in to assist. The IMF, she added, is more interested in looking after the interests of the creditors, not of the working people or the rural people who had nothing to do with the economic crisis in the first place. In Latin America the IMF's record, she said, was quite horrible.

But Dr Pisit Lee-artham, the deputy finance minister, said the blame should be on the Latin American or the African economies themselves that had sought reform packages from the IMF. ''Most of them backtracked on the IMF programme because after a while they felt that the medicine they were taking was too bitter. This resulted in a loss of confidence and dampened the economic recovery,'' he said, calculating that Latin America had lost a decade in the 1980s through debt crisis.

Pisit said the lesson that Thailand had learnt was that it lacked transparency in its system, so that when the crisis occurred nobody knew what was happening or the scale of the problem. ''When the IMF warned us about our exchange rate and of the need to improve our transparency aqwnd tighten the supervision of the financial system, we did not pay enough attention. When the crisis hit us, it spread to the entire region.''




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