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Published on July 20, 2007

In 1997, General Chavalit Yongchaiyudh was prime minister. Now we also have a general, Surayud Chulanont, serving in that position. The military careers of both generals were focused on combating communism and Chavalit was seen as a keen strategist and a not-so-good communicator, traits that Surayud shares.

With the crisis looming, Chavalit showed strong support for Dr Amnuay Viravan, his finance minister. Amnuay was a technocrat by temperament, although he moved from Bangkok Bank to take over the finance portfolio. Amnuay led an economic "dream team", but he did not have technical knowledge of the foreign-exchange markets. The Bank of Thailand was fiercely defending the baht against hedge funds and currency speculators behind Amnuay's back, but he had a good image.

General Surayud also handpicked his finance minister, Chalongphob Sussangkarn. Chalongphob is also a technocrat like Amnuay. He is well versed in international economics and has a solid knowledge in macroeconomics, however, like Amnuay before him, he does not have a good grasp on foreign-exchange markets.

Amnuay trusted Rerngchai Marakanond, the governor of the Bank of Thailand at the time, and respected the central bank's turf, giving Rerngchai the freedom to manage both the crisis facing financial institutions and the baht crisis. He thought that Rerngchai knew what he was doing.

Rerngchai had spent most of his career supervising financial institutions. He got the top job because he was the senior-most official at that time, however foreign-exchange management was not his trade. During the 1997 crisis he had to manage the dual tasks of rescuing failing finance companies and banks, and defending the fixed exchange-rate regime. He failed on both fronts, leading Thailand to seek a bailout package from the International Monetary Fund.

Tarisa Watanagase, the current governor, also spent most of her career supervising financial institutions. Pridiyathorn picked her as governor because they got along well and she was also the senior-most official at the central bank.

Tarisa might be very knowledgeable concerning the supervision of financial institutions, however her knowledge is limited when it comes to managing the foreign-exchange system. Like Rerngchai she is now facing a baht crisis, although in a reverse gear.

During Rerngchai's time, capital was flowing out of Thailand like crazy. Investors were afraid that authorities might devalue the baht and they did not have confidence in the financial sector. Rerngchai had to spend the dollars from the international reserves to defend the baht until he ran out of reserves.

Tarisa is facing the opposite situation. Foreign money is flowing into Thailand like crazy. The baht has been appreciating so rapidly that it threatens the competitiveness of Thai exports. Tarisa is under pressure to stabilise the baht by keeping it competitive vis-a-vis regional currencies. She can't cope with the massive influx of foreign capital, which has been driving up the value of the baht.

In May 1997, Rerngchai separated the onshore and offshore foreign-exchange markets to prevent hedge funds and currency speculators from getting their hands on the baht. The move was intended to make the baht too expensive for speculators to speculate against.

In December of last year, Tarisa also created a two-tier foreign-exchange market, cutting off the onshore baht market from the offshore baht market. The tactic was aimed at preventing foreign money-managers from profiting by speculating against the baht.

During Rerngchai's reign leaflets were spread inside the central bank calling for his resignation. Yesterday, a group calling themselves Pirabkhao2006 also staged a small demonstration calling for Tarisa to resign over her failure to ensure the baht's stability.

Rerngchai was not comfortable with deputy governor Dr Chaiyawat Wibulswasdi, so he worked more closely with assistant governor Dr Siri Garnjaroendee. If the central bank were run by a merit system, Dr Chaiyawat would have been promoted to the position of governor instead. With this disunity it was difficult for Rerngchai to manage the financial system during the time of crisis. Chaiyawat was kept off the crisis-management team but would join later on. He was against any attempt to change Thailand's fixed foreign-exchange regime.

Tarisa is not very comfortable with Dr Bandid Nijathaworn, the deputy governor, either. Since Bandid is Tarisa's rival, the governor relies on Atchana Waiquamdee and others to help her to manage the baht crisis. Bandid has been left largely in the cold, although he is one of senior-most officials at the central bank.

Before the devaluation of the baht on July 2, 1997, there was a great debate inside the country as to whether the currency should be devalued or floated or what kind of foreign-exchange regime was suitable for Thailand.

Dr Olarn Chaipravat, the president of Siam Commercial Bank, came out to defend the Bank of Thailand. He put forward a strong argument against any attempt to devalue the currency.

Noted economist Dr Virabongsa Ramangkura was the staunchest proponent of the baht devaluation. He saw it as the only way to save Thailand from the crisis. In the end, he was proven correct.

Dr Ammar Siamwalla, the top economist at the Thailand Development Research Institute, also came out to urge the banking authorities to devalue the baht because it had lost most of its foreign-exchange reserves through currency-swap operations. He, too, was proven correct.

A group of Thammasat academics also held a seminar urging banking authorities to adopt a more flexible foreign-exchange regime to do away with all the uncertainties around the fixed baht.

Now these characters have re-appeared. Dr Olarn came out first on Sunday to criticise the central bank's mismanagement of the foreign-exchange policy, followed by Virabongsa, Ammar and, yesterday, the Thammasat University academics led by Dr Nipon Puapongsathorn. The Thai crisis has come full cycle in 10 years, with similar players and the old characters springing back to life. Never underestimate the power of history.

Thanong Khanthong

The Nation