Tarrin Nimmanahaeminda

When Prime Minister Chuan Leekpai's government took over after General Chavalit Yongchayudh's resignation in mid-November 1997, Thailand was already facing a full-blown economic crisis.

The international reserves were largely depleted - with only US$158 million left - forcing the country to ask the International Monetary Fund (IMF) for a $17.2-billion assistance package and accept stringent loan conditions.

The baht was floated on July 2, 1997, but after the disclosure in late August of the international reserve position, the value of the baht continued to slide. Elsewhere in the region, troubles were already brewing. South Korea and Indonesia were to be next.

Domestically, 58 financial institutions representing about half the financial system were closed down by the Chavalit government around mid-year following a massive deposit run reflecting the public's loss of confidence.

Under IMF guidance, laws were quickly passed to create the Financial Sector Restructuring Authority (FRA), protecting the savings of the public through a government guarantee and absorbing future losses as a fiscal burden.

Meanwhile, deposit runs also occurred among small and medium-sized banks. By mid-November in 1997, the Financial Institutions Development Fund (FIDF), a central bank arm in charge of providing liquidity to pay off depositors, had built a liability position of up to almost Bt1 trillion from a mere Bt50 billion one year before. High interest rates were maintained to support the value of the baht and the government's crowding out of the money market to fund the FIDF. The liability position of the FIDF was growing fast.

The economy overall was already contracting. The loss of confidence began to take hold on consumption, investment, international trade, capital flows and the value of the baht.

The financial sector began to experience sharply rising non-performing loans (NPLs), raising questions over capital adequacy. A declining credit rating curtailed its ability to service international trade.

On a macro level, notwithstanding an obvious demand collapse, cost-push inflation was continuing unabated. Added pressure from the international financial community on the issue of credibility and confidence mounted as the crisis was no longer limited to Thailand but was quickly becoming a regional problem.

It was a thankless job when the Democrats had to step in to bring the country back from the brink. As finance minister, Tarrin's mission was to do just that.

"When we took our job, it became clear that we had to simultaneously introduce stabilisation measures, restructuring measures and growth measures to restart the Thai economic engine. We just had to do everything at once," Tarrin said.

To sum up the situation then, Tarrin often compared the Thai economy to a four-engine jet, which was driven by domestic consumption, private investment, net export income and government spending. At that time, however, three engines had completely broken down, leaving the economy with only government spending as the cushion.

"Amidst the regional turbulence, we had only one engine to fly the jet," Tarrin recalled.

Initially, even the export sector - which was expected to recover quickly - was hampered by price negotiations, and customers' doubts over its delivery ability as the baht was sliding and bank's letter-of-credit lines were affected.

"As deputy prime minister, Supachai Panitchapakdi really worked hard to get export earnings up as quickly as possible," Tarrin added.

However, the government's ability to use fiscal means to stimulate the economy was tied up by the fiscal restrictions imposed by the IMF as there were fears the government might not have enough money to pay for its losses in protecting the savings of the public and also eventually in the recapitalisation of the banking sector.

Renegotiation started immediately with the IMF on the particular restrictions and by the end of the first quarter of 1998, the IMF agreed to remove certain conditions, freeing the government to begin spending to cushion the economy. Even so, market constraints had to be taken into account as the government had to be mindful of a long-term fiscal burden.

Even when government spending was about to kick-start the economy, there was a hitch. Budgetary-spending backlogs could not be channelled out quickly. In 1997, the Thai economic growth rate was minus 1.8 per cent before further dropping by another 10.2 percentage points one year later.

"We found out that government contractors and service providers could not deliver per contract because they themselves became banks' NPLs. As deputy finance minister, Pichet Panvichatkul did nothing else for almost one year but focus on assisting debt restructuring for these firms, which eventually unblocked the government spending pipeline," Tarrin said.

In the financial sector, the central bank and the Finance Ministry began taking a bold approach aiming for stability, confidence and an ability to perform the functions to provide liquidity for the private sector.

This time, the strategy was not an outright closure but rather through an intervention process whereby troubled banks were asked to reduce capital at first, paving the way for government funds to increase capital and the central bank to influence changes to their boards of directors. This move was further shored up by the joint private-public sector effort to recapitalise remaining big banks in August 1998.

To encourage the banking sector to get back on track, private borrowers' debt restructuring was broadly carried out under the Bank of Thailand's assistance and direction. Legal reforms, in particular the creation of the Rehabilitation Court, were effective. This court was later to prove pivotal in achieving a fair and quick debt restructuring for most borrowers.

The severity of the banking sector's loan portfolio was shown when NPLs, even under a mild classification standard at that time, reached a record high of 46.7 per cent in May of 1998. Meanwhile, the FRA portfolio showed a 95-per-cent NPL level for corporate debts in the first quarter of the same year.

Under difficult conditions, Tarrin and the central bank had to pursue a strengthening of regulatory standards and closer supervision to achieve financial-system credibility and demonstrate its ability to provide services to the real sector.

"This was one of the hardest decisions of all to make. All of us were concerned about the banks' ability to lend quickly as well," said Tarrin.

The baht was to reach its weakest level at around Bt57 per US dollar in February 1998. When the central bank began to impose restrictions on baht holdings immediately after this peak, speculators quickly unwound their positions, resulting in the baht strengthening to around Bt41 per dollar, effectively ending major speculation against the Thai currency.

By mid-1998, as pressure on international reserves eased, the regional crisis was brought somewhat under control and domestic inflation fell sharply, the central bank began a loose monetary policy and dropped domestic interest rates drastically to allow sustainability in fiscal liabilities and greatly increase the financial sector's time and opportunity to work out borrowers' debt restructuring.

With all the moves to achieve macro stability, the financial sector restructuring and borrowers' debt restructuring, the government did not neglect the safety net for the poor and the agricultural sector.

Off-budget spending derived from funds borrowed from the World Bank and Japan's Exim was quickly conceived as early as December 1997 and put into a working scheme, with the Government Savings Bank acting as the government machinery. The state-owned Bank for Agriculture and Agricultural Cooperatives (BAAC) was massively recapitalised to assist their debt restructuring of farm loans on a broad basis.

Legal changes brought about by the Democrats also allowed the BAAC to become much more flexible in providing services to people both on the farm and in rural areas generally. Prime Minister Chuan took personal interest in creating village funds, village elderly subsidies and school-lunch programmes under tests for the needy. Budgetary allocations were increased to enlarge the student-loan programme as well as the public health insurance scheme. The overriding philosophy on implementing the safety net was to achieve loan community strength and a prudent value system.

Believing that education reform was really they key to bringing a competitive edge to the economy as well as uplifting the plight of the poor, the Chuan II government instituted an education reform agenda which has remained largely unfunded and put into place until now.

Good governance and transparency in the public and private sectors were also other areas strongly emphasised by the Chuan II government. International standards were adopted for government data dissemination to the public. The financial sector, in particular the stock market, was required to follow transparency rules. Tarrin gave credit to former deputy finance minister Pisit Lee-atham for these efforts.

Towards the end of the term of the Chuan II government, at the beginning of 2001, confidence and stability had returned to the Thai economy. Growth resumed on a recovery path. Financial institutions were fully recapitalised and borrowers' debt restructuring was carried out on a full scale. Interest rates remained low and the baht exchange rate achieved stability. International reserves were largely replenished. Repayments of the IMF loans began on schedule. The strict IMF loan conditions ended in September 2000 when the drawdowns were no longer a requirement and full disbursement of the IMF's facility was not necessary.

Tarrin, however, did mention that at the end of his tenure the economy was not fully robust. While government spending, export earnings and consumption were pulling the economy on a growth pattern of around 4.5 per cent, private investment was slow to recover, mainly due to unused capacities. The reserves rose to $20 billion. "On the other hand, the components of the fundamentals necessary for a sustained and equitable growth were put in place."

Throughout the turbulent years, Tarrin was subject to criticism from several quarters. The financial and business elites struggled with their huge losses. Most people were feeling exhausted from the hangover of the crisis, and as the election was near, attacks were heightened.

Tarrin received a bad press, though internationally he was well accepted for his efforts and achievements. History will judge the Chuan II government and Tarrin's role for what they did for the country.