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A moody and powerful ghost named Market

November 3, 2000

ON October 31, Finance Minister Tarrin Nimmanahaeminda appeared on Channel 8 to defend his economic stimulus package, which had been unveiled earlier the same day. The merits of the package aside, the timing of its launch was not at all auspicious. While Tarrin was clarifying the virtues of the stimulus package that would presumably help maintain the economy's momentum during the political transition, ghosts were out for party time. It was Halloween night.

It remains a mystery as to whether the ghosts were poking their faces over Tarrin's shoulders while he spoke. But Tarrin did make one interesting comment during the talk show about the ghost of the modern economy - the Market. "If the Thai Rak Thai were to form the next government, it would still be obliged to work on the economic policies formulated by the present government because it cannot afford to ignore the Market," he said.

Although the Market is invisible and cannot vote in the election, its power and influence are all encompassing. It is a vast combination of money markets, capital markets, foreign-exchange markets, industries, companies and economies. It's a major constituency with which all political parties are forced to reckon if they are to manage the country successfully in this era of globalisation.

Tarrin and the Democrats have a proven record of orienting their policies toward the free market and economic liberalisation, believing that the private sector should lead the country to economic prosperity while the government should reduce its role as a facilitator of that process. The ultimate policy objective is to let the market's mechanisms function normally and smoothly.

The criticism against Tarrin and the Chuan government is that they have banked too much hope on the Market, which still has a long way to go to function properly in Thailand. Anusorn Tamjai of Salomon Smith Barney holds the view that the Chuan government should have played a more active role in its intervention in the economy rather than simply allowing the Market to work its way out of the crisis. The latter policy takes more time and creates further damage to the economy in the meantime.

Thaksin Shinawatra, the leader of Thai Rak Thai, is also conscious of the power of the Market, which has rewarded him with billions of baht. But while on the campaign trail, he cannot afford to place too much emphasis on the Market while ignoring the plight of working Thais, most of whom are struggling to balance their wages at the end of the day. So the underlying political messages addressed to voters are laced with pork-barrel spending that will certainly end up creating a greater public debt to the government. As the incumbents, the Democrats have also been ignoring the Market lately by pushing pork-barrel projects in hopes of winning back votes. In the end, the two parties are not much different.

In spite of its invisibility, the Market has some clear attributes. It is driven by greed and fear. When it is greedy, it hands out rewards. When it is governed by fear, it metes out punishment. It has a penchant for profits and efficiency. It helps discipline the economy. It hates unpredictability. And it is always nervous and overreacting.

During the economic boom of the first half of the 1990s, the Market rewarded Thailand for its potential. Massive foreign capital flooded into the country in the belief that growth would stay at 8 per cent forever. This was a period of Market greed. Thai regulators did nothing to prevent the bubble. Commercial real estate was allowed to spin out of control. Hotels were built without any regard for supply and demand. Foreign debts, particularly short-term debts, were accumulated at a scale two to three times higher than international reserves, giving rise to a mismatch of funding. Local finance companies borrowed short-term money to lend to long-term projects. These financial sins were allowed to flourish without any proper regulation.

When signs of trouble began to show up in the currency, in the balance sheets of banks and in political credibility, the Market began to change its view. Fear built up quickly and money scrambled out of Thailand en masse, creating a huge shock to the economy.

The reason Bill Clinton has been running the US economy so successfully is because he had the support of both Robert Rubin, the former US treasury secretary, and Alan Greenspan, the chairman of the US Federal Reserve. Both recognise the sheer power of market forces, implementing and fine-tuning their policies to cope rather neatly with the financial markets. Rubin often remarked that it was increasingly difficult for governments to pursue policies that deflect financial markets, which react very quickly to both good and bad policies.

Greenspan has been taking on the financial markets so directly that at times he is viewed as being guided by them. He keeps up an informal dialogue with the financial markets, so that a consensus is reached each time before the Fed is due to announce a decision on its interest rate policy. In this regard, Greenspan is the ghost of the Market himself.

Increasingly, like it or not, governments around the world have been working hard to cope with the Market. Those who ignore the Market will be punished brutally.

Just witness what has happened in the Philippines. When the scandal surrounding President Joseph Estrada broke out a few weeks ago and the country's system failed to respond to the leadership crisis, the Market punished the Philippines - both in the stock market and the currency market.

The Philippine peso took a steep dive, plunging beyond its crisis level of 46 against the US dollar to touch almost 52 to the dollar. That was an expensive premium the whole country had to pay. Apart from a meltdown in the value of stocks, another large, punitive premium that the whole country had to pay was higher interest rates, which at one point jumped by four percentage points to 15 per cent. Higher interest rates deal a blow to individual companies and the whole economy.

The Market has been elusive, disguising itself so well that it does not have to participate in political debates nor subject itself to any system of checks-and-balances.

Tarrin has been working very hard to win back the Market's friendship. But being a ghost who is difficult to please, the Market has yet to return to speaking terms with the Democrat. Only when it is pleased with Thailand will we start to see a genuine economic recovery.


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