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Cry for help should have come first


Vatchara Charoonsantikul and Thanong Khanthong look at implications of the reported government plan to borrow huge overseas loans in what might be the largest international bail-out package since the 1994 Mexican peso devaluation.

Thailand is coming to grips with the gruesome reality. It will need to find at least US$20 billion (Bt560 billion) in fresh foreign capital from other countries, possibly including the International Monetary Fund, to bail out its cash-strapped economy.

Had the government acquired foresight and earlier gone to the international financial markets to raise foreign debt, it could possibly have avoided floating the Thai currency. The baht has depreciated by 15 per cent since its flotation on July 2. If the currency depreciates by more than 20 per cent, it will spell doom for the economy.

A US$20-billion bail-out fund the Chavalit government is reportedly seeking compared to US$50 billion for Mexico in 1994 boils down to a desperate attempt to keep a positive cash flow. As of May, the country's international reserves fell to US$33.3 billion. But this amount should be significantly lower if the Bank of Thailand's costly defence of the baht in mid-May in the three-month foreign exchange swap market is taken into account.

Since Thailand is a capital deficit country, it needs foreign capital to finance its economic growth. Any capital inflow surplus from the current account deficit will run into the central bank's coffers to form international reserves. The central bank then relies on these ''borrowed" international reserves to prop up the baht.

International reserves represent the last macro-economic stronghold of the country and is a measure of a country's creditworthiness.

With the collapse of the bubble economy and the financial crisis, foreign speculators have attacked the baht, forcing the central bank to mount a fierce defence by running down its international reserves. In the end the central bank caved in by floating the baht since its value was no longer supported by the sharp macro-economic deterioration.

If the reserves are depleted, as in the Mexican case, it would trigger a catastrophe of great magnitude that would have adverse effects on global financial stability.

The floated baht has already sent a shock wave throughout the region. The Malaysian ringgit and the Philippines peso, in particular, have come under speculative attacks, with foreign investors' fearing that these two neighbours might be developing a Thai-style economic depression.

A foreign stock-broking firm has made it clear that floating the baht does not solve the country's twin problems of balance-of-payment financing and domestic liquidity traps.

''These twin problems could in time threaten to drive the country into bankruptcy unless the central bank quickly obtains strong funding support from abroad," it warned. ''This is, of course, apart from the need for ongoing finance sector consolidation [selective bankruptcy], securitisation of distressed assets at a sharp discount and opening up to larger private foreign equity stakes."

Suppose the central bank operated as a company, to remain solvent it must operate with a positive cash flow.

With its initial international reserves of US$33.3 billion as of May, the central bank will be facing a bleak prospect of an outflow of US$20 billion in short-term debt repayment, US$8 billion in current account deficits and, presumably, US$12 billion in forward dollar sales to defend the baht.

When the net positive foreign direct investment of US$6 billion is taken into consideration, the central bank will end up with negative reserves, after operations, of minus US$7 billion. This is a spectre to a financial catastrophe if nothing is done to reverse the capital outflow.

The impression has been that the Thai government is doing everything at the last minute, until it was almost too late. In the absence of capital inflow, interest rates will not come down to give Thai businesses some breathing space. If interest rates are kept high to defend the baht over the next three months, corporate bankruptcies will wreak havoc through the entire economy.

It remains uncertain how the government plans to spend the US$20 billion in fresh borrowings to prop up the economy. Nonetheless, the amount will significantly alter the debt profile of the country.

As of June, Thailand's external debts reached US$85 billion, US$19 billion of which accounted for government debts and US$66 billion for private debts. Since the foreign creditors are certain to recall their money owed them by private corporates, the private debt should fall significantly, hence a capital outflow.

So the government's fresh borrowings of US$20 billion will cushion this outflow, coming at a time when Thailand still retains a relatively strong credit rating by international standards. With a high credit rating, it will be able to borrow at competitive interest rates, while only a handful of Thai companies can now borrow at commercially acceptable rates.

Now the government must make its intentions clear on how it intends to spend the new money, the arrival of which will improve liquidity in the Thai financial system. The money should be used to retire old state enterprise debts or tackle the finance sector crisis.

The financial sector crisis must be resolved effectively, otherwise Thailand will not win back confidence from the international community. The Financial Institutions Development Fund may be able to tap this resource so that it can stop further bleeding to the financial system.

Standard & Poors, the US credit rating agency, has estimated that Thailand will need to spend about 6 per cent of its gross domestic product, or about Bt300 billion, to write off the bad debts. Without fresh capital to tackle them, there is no way the government can mend the economic dislocations.



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