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'Middle path' pointed out to Apec


Thanong Khanthong says Prime Minister Chuan Leekpai's performance at the Apec leadership summit reflects Thailand's policy of walking the middle path.


On Nov 18 Prime Minister Chuan Leekpai was cautious in the opening remarks he made to Pacific Rim leaders on a new architecture for global finance.

Chuan said he fully supported proposals of G-7 and G-22 countries to closely ''monitor'' short-term capital flows, improve risk management at both the macro-and micro-economic levels, enhance information disclosure or transparency, increase efficiency in capital and financial market regulations and make sure that measures and mechanisms are set up to implement these proposals.

Chuan deliberately used the neutral word ''monitor'' -- instead of regulate -- to take on short-term capital flows for fear of scaring free marketeers. ''Monitor'' -- once again not regulate -- is also part of the language G-7 and G-22 countries use in dealing with short-term capital. This underlines the market-friendly approach Thailand is striving to achieve, although in practice there have been certain measures put in place since 1996 to rein in short-term capital flows.

Hot money from offshore banks under the Bangkok International Banking Facility (BIBF) had been curbed in 1996, with requirements that banks deposit 7 per cent of their foreign currencies interest-free at the Bank of Thailand. This raised the cost of short-term foreign capital.

On May 15, 1997, at the height of the currency's defence, the Bank of Thailand imposed capital control, in a desperate move to punish hedge funds and currency speculators, by barring local banks from lending baht to offshore banks. The foreign exchange swap market had been shut down to deny speculators a supply of baht to unwind their forward positions.

It was not until January 1998, when the country won a degree of confidence under IMF's programme, that the foreign exchange swap market was re-opened, although regulators put in place a regulation prohibiting trading at more than Bt50 million per transaction of baht/US dollar positions without underlying trade.

As the first country to experience the financial crisis, Thailand has now realised the danger of short-term capital, or money which can quickly move out of a country to precipitate a crisis.

In 1996 Thailand had more than US$90 billion in foreign debts, $40 billion of which accounted for short-term loans or loans with a maturity of less than one year. This reflected dismal financial planning and supervision on the part of regulators, who tolerated the creation of massive foreign debts without knowing if the money will be used wisely or not. The baht crisis in 1997 undermined confidence and triggered a massive capital outflow, which wrecked havoc in the Thai economy.

Chuan's speech also underlined Thailand's diplomacy. On the contrary, Malaysian Prime Minister Dr Mahathir Mohamad declared war on short-term capital, on credit rating agencies and on hedge funds, even though they were on a ground to justify his remarks. Free marketeers like Hong Kong and Singapore have also imposed measures to prevent speculation on their currencies.

Since Chuan realised that Thailand still depended on foreign capital -- which brings along technology and know-how -- to drive its economy, it is more appropriate, if not more rewarding, to approach capital flow cautiously. In the present capitalist system, capital rewards countries that pursue sound macro-economic policies, adopt a market-friendly system and punish countries which are not too good in economic discipline.

Finance Minister Tarrin Nimmanahaeminda said the matter would have to be handled with care because it tight regulation of short-term capital might undermine investors' confidence.

Thailand's past mistakes lay in the huge foreign loans in capital flows relative to foreign portfolio investment and direct investment. Of all the foreign money invested in Thailand, 70 per cent accounted for foreign loans, 15 per cent for portfolio investment and 15 per cent for direct investment.

On the other hand, Malaysia's experience with foreign capital was less painful because foreign loans accounted for just 30 per cent of the total foreign capital flowing into the country.

''We need to develop our capital market so that capital flowing in through this channel cannot abruptly flow out because there will be a heavy penalty in doing so. [A foreign investor will get less money if he tries to dump his all his stocks at the same time]. Yet in the case of foreign loans, capital can flow out easily without any cost,'' Dr Prasarn Trairatvorakul, the deputy secretary-general of the Securities and Exchange Commission, said.

At the Apec summit, which ended on Wednesday, mild language was adopted with regards to short-term capital flow owing to the insistence of mainly the United States. Both the US and the IMF have been reciting the mantra that regulating short-term capital will not only scare off foreign investors but will also make the cost of loans more expensive for recipient countries. However, the US accepted the blame for lax supervision of hedge funds, following the collapse of the Long-Term Capital Management. Apec leaders' declaration contained extensive wording on the proper regulation of hedge funds and on supervising banks, which lent money to hedge funds, without proper risk evaluation, to help them leverage their investment.

To render proof to its reputation as a good time to talk shop, Apec leaders agreed not to make any decisions on the new architecture for global finance but to pass the task to their finance ministers, who will meet at a separate forum in Kuala Lumpur in March 1999. Since the middle path has always been the hallmark of Thailand's policy, Chuan's performance at Apec reinforced yet again the Thai position of walking between free-markets and protectionists.



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