Tarrin seems ahead in contentious recovery

August 21, 1999 -- THE outcome of a long-standing clash between the Dr Virabongsa Ramangkura clique and the Tarrin Nimmanahaeminda camp over the course of economic recovery may soon be decided. And it appears that the Tarrin side is emerging victorious.

Even recently Virabongsa, one of Thailand's most able macroeconomists, came out lashing at Tarrin, arguing that the economy has yet to bottom out and that the government should revise its target based on a new fundamental assumption that the economy would not grow at all this year.

Over the past more than one year Virabongsa has become the leading opponent of the International Monetary Fund (IMF) programme and the sharpest critic of Tarrin's economic reform and stimulus measures.

His view is broadly shared by such leading figures as Vijit Supinit, the former Bank of Thailand governor, Kosit Pampiemras, the executive chairman of the Bangkok Bank, and MR Pridiyathorn Devakula, the president of the Export and Import Bank of Thailand.

But last week the IMF team forecast that a restoration of economic growth is taking place in Thailand this year after two years of crisis, with the positive growth rate being revised upwards from 1 to 2 per cent to 3 to 4 per cent. This forecast will become a hallmark of the eighth letter of intent between the Thai government and the IMF. Last year the Thai economy nosedived by 8 to 10 per cent in a year plagued by global turmoil and uncertainty.

MR Chatu Mongol Sonakul, the Bank of Thailand governor, also told foreign correspondents on Wednesday that economic growth in the fourth quarter will range between 4 and 5 per cent. The Economist, in its Aug 21, 1999, edition, also proclaimed an economic recovery in Thailand and elsewhere in East Asia, which took many people by surprise.

With the extraordinary rebound in South Korea, the magazine said: ''Thailand and Malaysia are also turning around quickly. Even Indonesia, which has sustained a 20 per cent drop in output, is now expected to start expanding in the second half of this year.''

One of The Economist's graphics showed a V-shaped recovery of the crisis-hit countries of Asia, which rebounded from negative growth to 3 to 4 per cent in 1999.

After a meeting of the Court of Directors of the Bank of Thailand yesterday, Ekamol Khiriwat, a former deputy governor and secretary-general of the Securities and Exchange Commission, expressed his surprise at the recovery of the Thai economy.

''The overall picture of the economy has improved incredibly,'' he said.

Somphol Kiatpaibul, the permanent-secretary for commerce who is also a member of the Court of Directors, also said the economic indicators show a marked recovery, particularly exports, the manufacturing index and domestic spending.

''We are seeing a very strong export recovery,'' he said, but declined to say by how much. The government had earlier projected export growth at 4 per cent, equivalent to US$56 billion.

Early this year when Tarrin and the IMF estimated Thailand's growth rate for 1999 at 1 per cent, they were viewed as being over-optimistic. After all, the government and the IMF had a poor record in projecting economic growth since the IMF programme for Thailand was adopted in August 1997.

From Virabongsa, Kosit, Pridiyathorn to Vijit, there emerged a consensus among them that the economy could go anywhere but up. How could the economy recover when exports were sluggish, utilisation of industrial and manufacturing capacities were slow, investment was falling, the banks were crippled by tight rules and regulations and saddled by a mountain of bad debts, and the public sector could not go on with its limited resources to spend its way to a economic recovery?

All the four gentlemen banked on the assumption that government spending and domestic consumption alone could not spur the economy into positive territory. Adding to the dilemma was the contraction of bank lending, which fell 8 per cent in June, making it impossible for credit growth to expand 4 to 8 per cent as expected by the authorities.

The only way to save Thailand, they argued, was through exports, which must be bolstered by weakening the baht further to improve the competitiveness of Thai industries and help the already depressed farm sector.

''I don't think the economic growth target of 1 per cent can be achieved this year,'' Vijit told Krungthep Turakij in an interview about two weeks ago.

Even Dr Supachai Panitchpakdi, the deputy prime minister, could not resist the temptation of having the baht weaken to boost exports. He strongly advocated this policy last year but lately has softened his stance.

Supachai could not influence Tarrin or the Bank of Thailand's policy of keeping the baht relatively strong to reduce the country's foreign debts. But both Tarrin and Chatu Mongol have been arguing that they let the markets dictate the exchange rate and that by pushing the interest rates almost to the floor the authorities could not be viewed as trying to keep the baht strong.

Virabongsa and Kosit, in particular, went so far as to argue that Thailand could not experience growth this year but rather had hit a deflationary trend, a phenomenon in which prices were falling amid a weak economy and high employment.

Moreover, Thailand was suffering from a vicious cycle in which goods, whose prices had already fallen as shown in the consumer price index, could not be sold because of the diminishing purchasing power of the people and this has forced manufacturers to cut their prices even deeper to stay afloat, they suggested.

Virabongsa also called on the government to relax banking rules or not to follow the Bank of International Settlements standard so that the banks could extend credit.

He said the international standard imposed on Thai banks had worsened the asset quality of the banks, which could result in the bankruptcy of the entire financial system and lead to more government intervention or sell-offs to foreign banks.

Although he was one of the earliest advocates of the notion of deflation, Kosit on Aug 19 told the alumni of the University of Wisconsin that there was a possibility that economic growth would reach 2 to 3 per cent this year because of the utilisation of inventories.

''But the economy will continue to grow weakly, which is not sustainable because credit is still contracting and prices are falling,'' he said.

If the Thai economy grows indeed by 3 to 4 per cent this year, then the Virabongsa clique has erred in its economic views. But one cannot quickly conclude either that the economic recovery is due to Tarrin's sole ability to turn the country around.

Malaysia, which has walked away from a IMF-style economic stabilisation, has also recovered, suggesting that economies some times do recover by themselves and economists are still at a loss over the exact causes of the recovery. Indonesia, devastated by political turmoil and a breakdown of its economic machinery, will also exhibit a degree of recovery this year.

Tarrin has followed the IMF formula in strict order -- by first stabilising the baht, keeping interest rates high to defend the baht, loosening fiscal and monetary policies, tackling the financial sector and then stimulating the domestic economy to restore growth.

Yet one may conclude that there is a stroke of luck, combined with the macroeconomic adjustments that have laid the groundwork for the recovery. Luck because the US economy has not burst its bubble and caused a global recession. The macroeconomic adjustments since August 1998, which were made possible because of tough negotiations with the IMF by Thai authorities, created a favourable environment for growth to resume. Lower interest rates and the stable baht have created more consumer confidence, leading to an increase in domestic consumption which is the catalyst in the present recovery.

The IMF explained that despite the banks' failure to function normally and the high level of non-performing loans, the economy still can recover because of the expansion of domestic consumption, which is not tied to the credit system. Domestic consumption, which is equivalent to 40 per cent of the gross domestic product, is the driving force at this juncture.

But looking ahead, the momentum of growth will not be sustained if the banks do not solve their problems by cleaning up their balance sheets, increasing capital and starting to lend again. Moreover, reform efforts in all the other sectors of the economy must be intensified to prevent Thailand from plunging into a crisis again.

Tarrin may have tasted his first victory and the Virabongsa clique may have suffered an initial setback, but there remain reform challenges ahead which, if carried out, can ensure a more sustainable recovery. The case is not closed yet because there may be other bumps along the way.

BY THANONG KHANTHONG