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Burdened with the country's future


FOR recovery or for recession, for hope or for despair, for better or for worse, the destiny of Thailand rests in the uneasy palms of Tarrin Nimmanahaeminda.

As guardian of the financial system, Tarrin is presiding over the painful economic and financial reform, battling against the odds to save Thailand from the ruins of 1997, the year when the baht crashed triggering a regional financial crisis.

It is still premature to say that Tarrin, a dedicated student of the International Monetary Fund, has succeeded in his mandate to salvage the country. Yet there is no question that the course of economic and financial reform under his stewardship will have a significant bearing on the future of Thailand as it moves towards the 21st century.

By all accounts, trying to breathe life into a half-dead economy is an almost impossible task. When the Democrats took over in November last year and Tarrin was appointed as finance minister for the second time, Thailand was in a critical shape. The baht was plummeting. Interest rates had shot up by more than 20 per cent. Inflation was running out of control. Foreign exchange reserves had been nearly depleted. A total of 58 finance companies had been shut down. Other medium-scale banks were on the verge of collapse. The Financial Institution Development Fund had pumped more than Bt1 trillion to keep the financial system afloat. External debts reached more than US$90 billion, about $40 billion of which were short-term.

Thailand was only just saved by the life-support system administered by the IMF. Without the $17.2-billion rescue package, it would have been pronounced virtually dead because confidence in Thailand had evaporated with the Bank of Thailand's disclosure that it had spent nearly all of its foreign exchange reserves in a failed defence of the baht. When foreign investors and creditors realised that Thailand's reserves had been depleted, they were heading out in a panic. That was how the Thai economy, which had experienced a relatively strong growth of about 7 per cent a year over the past 30 years, had been brought down to its knees. Other neighbouring countries, which shared similar structural problems as Thailand, were also caught in the contagion. That was the end of the ''Asian miracle''.

From the outset, Tarrin was aware of the risks he faced in inheriting a wrecked economy from the unpopular Chavalit government. One of the main reasons behind Gen Chavalit Yongchaiyudh's resignation was that the IMF was ready to desert him and had threatened to withhold the remaining standby credit, a prospect which could have plunged Thailand further into anarchy.

At that time IMF, which was criticised later for prescribing the wrong remedies, was in the process of working on a second letter of intent with Thailand. The crux of this letter did not depart significantly from the first, with stringent requirements of a budget surplus, a tight monetary policy to defend the baht and a painful financial restructuring.

Tarrin's priority was to win back confidence in the government's macroeconomic management as well as to restore external and internal stability. Prime Minister Chuan Leekpai's clean image did help. Relations between Thailand, the IMF and the US improved. Yet the requirements of a budget surplus and a high interest rate policy to defend the baht would be having a toll on the collapsing economy. During that period, Tarrin negotiated little with the IMF to relax these requirements, which would have alleviated the recessionary conditions.

However, Supachai Panitchpakdi, the deputy prime minister and commerce minister, along with Abishit Vejjajiva, Prime Minister's Office minister, defended the government's willingness to bite the bullet during this stormy period and argued that Thailand had but little choice. At that time the country was at the mercy of foreign creditors. Any government, under those severe conditions, would have no choice but to follow this austere programme to win back confidence.

At that time, the baht was the important daily barometer. It was not floating with the managed float foreign exchange regime, but was sinking fast before it touched a record Bt56 to the US dollar in January 1998. Indonesia was defaulting on its foreign loans. The spectre of political crisis and social upheaval sent the rupiah on a free fall. South Korea was also on the verge of bankruptcy. And Tarrin was using his best efforts in public relations to decouple Thailand from the Indonesian crisis.

Late that month he was so confident with his game of poker that he decided to end the two-tier currency system, created in May 1997 to punish currency speculators. This helped improve Thailand's image as a market-friendly country which was willing to continue being a good member of the international community. In a reality check, Tarrin imposed capital controls by prohibiting banks from conducting foreign exchange transactions worth more than Bt50 million without any underlying commercial or investment activities.

It was not until February that IMF started heeding the criticism that its fiscal surplus requirements, aimed at tackling the current account deficit and accounting for the cost of financial sector restructuring, were killing the economy. That paved the way for Tarrin to negotiate relaxed terms on fiscal conditions in the third letter of intent.

Still, a tight monetary policy continued being advocated. Tarrin staked his reputation in defending the currency by imposing high interest rates. His mantra was that interest rates should be kept high to defend the baht, which would not be allowed to sink like the rupiah even though high interest rates were choking the economy.

Tarrin worked behind the scenes to win back international support for Thailand. A trip was even arranged for Chuan to meet US President Bill Clinton. Earlier Tarrin had been greeted by the US president, a rare and unprecedented event in US politics. Clinton was willing to improve ties with Thailand following growing antagonism in Thailand over the baht's collapse owing to US hedge funds. Besides, American indifference to Thailand's plight as it sought rescue funds from international donors was also resented.

The successful US trip had enhanced Chuan and Tarrin's standing in the international community. The foreign perception of Thailand had changed for the better, with its credible financial and economic reform programme being praised. Yet Thailand still faced the task of solving the banking crisis and years of over-investment, which would take years to overcome.

Business leaders and social critics began complaining about the high rates, which were taking a toll. They called for liquidity in their cash-strapped companies. At one point, short-term interest rates hit more than 23 per cent in January 1998. Yet Tarrin argued that liquidity was the problem for it was a symptom of the banking crisis. He moved swiftly to take on the banking crisis by nationalising the Bangkok Metropolitan Bank in late 1997. After testing the waters, he went on to nationalise the Bangkok Bank of Commerce, First Bangkok City Bank and the Siam City Bank. Subsequently, a host of other finance companies also faced a similar fate. Thailand's crony capitalism continued being punished.

Tarrin realised that if he could not restore health to the banking system, Thailand had little chance for recovery because banks had virtually stopped lending. The credit system had collapsed. Businesses no longer trusted each other. The Thai economy had been sent back to medieval times when trade and commerce were done in cash or barter.

Still, the task of stopping the economic spiral was equally critical. It appeared that Tarrin and the IMF did not realise the tough remedies imposed in the first and second letter of intent would lead to severe recessionary conditions in Thailand, which would contract by 8 per cent. With this severe economic downturn unemployment would skyrocket threatening social and political upheavals.

The IMF, obsessed with punishing Thailand's crony capitalism without paying any interest to the plight of the poor or working Thais, began to parrot about the need to help social causes. The poor and working Thais had been left behind in the initial efforts. Worse still, the entire cost of restructuring the financial sector would be borne by the public sector through the fiscal budget. In truth, the government was bailing-out the rich at the expense of the poor. It was not until the third letter of intent that the fiscal surplus was adjusted to a deficit of 2 per cent of the gross domestic product (GDP), against the 3 per cent of the GDP in the fourth, and 3.5 per cent in the fifth.

Tarrin went at length to ask for public support for his bail-out programme. He quipped that politicians in other countries faced difficulties in explaining the need to bail-out banks but in his case he was lucky enough to be able to get away with it.

It was not until August this year that major IMF policies began shifting significantly. Interest rates began to fall, though gradually at every step. Baht sentiment had improved. Suphavut Sai-chua of Merill Lynch Phatra argued that the baht had stabilised not because of the high interest rate policy but because of the fiscal deficit, which saved Thailand from more recessionary conditions.

The World Bank came out to attack the IMF for its harsh remedies. It advocated a Keneysian-style of fiscal stimulus to pull the economy out of recession. It also rendered severe criticism against the IMF for its tight monetary policy at the cost of the real sector or working people. The IMF defended its policy staunchly, saying when it came to Thailand's rescue, the baht was plummeting and the first order of business was to try and restore confidence in the currency otherwise reforms would fail. The debate and traditional rivalry between the twin institutions of the Bretton Woods system continues.

Credit should also be given to MR Chatu Mongol Sonakul, governor of the Bank of Thailand, for engineering a drive to bring down interest rates and stabilise the currency. The Financial Institution Development Fund, which had borrowed significantly from the interbank market and sucking liquidity away, had been taken out of the system. The fiscalisation of the costs of the financial sector restructuring process had been completed. That set the stage for liquidity to swamp the money market again but liquidity did not necessarily flow to those who needed it the most.

Confidence in the baht improved with surplus in the current account by more than $1 billion a month. This was not due to the boost in exports but due largely to the collapse in demand. The burden of foreign exchange swap contracts had eased significantly, helping to boost the baht. Thailand's swap contracts exceeded $30 billion, built up to defend the baht. With the money from IMF, swap contracts were unwinded until Thailand no longer suffered from this Achilles' heel.

On Aug 14, Tarrin introduced a sweeping banking reform, pushing out Bt300 billion to help the banking system recapitalise. This was semi-nationalisation of the banking system which looked marvellous, but its implementation was doubted.

Tarrin was praised for this reform package, yet some cynics saw it as a camouflage to help Krung Thai Bank and Siam Commercial Bank. Bangkok Bank and Thai Farmers Bank had already successfully raised new capital from foreign investors, but still needed fresh money to keep their positions stable. That spelled trouble for other undercapitalised banks, whose fate was still uncertain.

Progress of the reforms have been slow. Auctions of the Bt800-billion assets of the 58 defunct finance firms have also run into a snag. Yet, Tarrin still believes in the role of the marketplace and the need to create conditions for markets to work again. That was at the heart of the IMF programme, which is now focusing on bank recapitalisation and debt restructuring.

In launching his reform package, Tarrin initially tried to work everything out by himself without paying adequate attention to the solicitation of political support from even his fellow Democrats.

As snags and glitches on reform implementation spread, making criticism louder on his focus of solving the financial turbulence at, what critics claimed, the expense of social harmony and control of the country's economic destiny, Tarrin quickly adapted to politics of the day, aiming at moving his reform package forward.

In a recent indication of a more politically-suave Tarrin, the finance minister had distanced himself from the heated debate over alleged failure in the controversial Financial Restructuring Authority's auctions.

He clearly departed from his usual style of taking a forceful stand has learnt to keep a low-profile and work behind the scenes to garner enough support to salvage FRA's work.

Doubts about the efficacy of the IMF programme have increased because foreign capital has not started flowing back into Thailand or emerging markets. When Malaysian Prime Minister Dr Mahathir Mohamad imposed capital controls on Sept 1 to have his government control the ringgit and macroeconomic management, the Mahathir model and the IMF model for Thailand became the focus of attention. Were the Mahathir model to succeed, the IMF would become obsolete.

Well-known economists, like Dr Virabongsa Ramangkura, came out to criticise the IMF and the Tarrin programme, believing that the policies designed to win back confidence of foreign investors would not work and the only way to pull Thailand out of the recession was to focus on the domestic economy. In short, forget all foreigners or international rules and just make sure the domestic economy or banks work again.

Tarrin is still caught in this dilemma of following the market-friendly approach or trying to save Thailand from a complete breakdown in the ''Thai way''. He can no longer be hesitant. With deflation hanging as a dark cloud, it is not sure that Thailand will stage a recovery by 0.50 per cent next year as he wishes. The 11 economic bills awaiting passage in Parliament have drawn sharp criticism from the Senate and public support for the government's reform is waning.

To be fair to Tarrin, too much has been expected of him. A recent McKenzie study calls for the Siam Cement Group to downsize its business by 40 per cent if it would like to remain competitive. Indeed the group is undergoing this painful process and if it could be considered a symbol of the Thai industrial sector, it could very easily depict the pain and the bankruptcies which may happen as at least half of the businesses go under. That has already been reflected in the 50 per cent non-performing loans in the banking system.

Whether he will succeed in his reform efforts, Tarrin indeed is Thailand's Man of the Year.

By Vatchara Charoonsantikul and Thanong Khanthong



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