A nation on the brink

By Vatchara Charoonsantikul and Thanong Khanthong/ The Nation
DATE : 28/07/1997 02:01:07

Yesterday the Chavalit administration came closet yet to admitting that Thailand has no avenue left but to turn to the International Monetary Fund as the lender of last resort, since any domestically-initiated economic stabilisation programme is doomed to failure.

Finance Minister Thanong Bidaya is scheduled to unveil the government's economic stabilisation programme on Aug 5. It will include policy initiatives to stabilise the shaky baht, fiscal measures to solve tight liquidity problems in the depressed property market, measures to rehabilitate financial institutions, steps to speed up privatisation, fiscal measures to improve the industrial sector and measures to boost revenue collection.

But foreign investors and the financial markets will not buy Thanong's rehabilitation package. With the present make-up of the coalition government, it is clear that the leadership has no credibility nor any competence to implement the drastic, if not painful, economic reform necessary to put the Thai economy back on track.

Confidence in the Bank of Thailand, traditionally held as the country's most prestigious institution, has also evaporated. The central bank has spent Bt320 billion, a third of Thailand's national budget, to keep ailing finance companies afloat. In doing so it has flouted monetary discipline, principally as a trade-off to save the rogue Bangkok Bank of Commerce and the unrepentant Finance One Plc.

Liquidity that should have been channelled to Thai manufacturers or traders, who provide the country's bread and butter, has instead been wasted on the finance companies. The costly bail-out amounts to nothing more than flogging a dead horse.
Failure to tackle the financial crisis has had a spill-over effect into the foreign exchange markets. Capital flight to the tune of US$10 billion forced the Bank of Thailand, which also unwittingly spent several billion US dollars in mid-May to go after currency raider George Soros in the three-month swap market, into a corner. The baht was floated on July 2, amounting to a de facto devaluation.
With the collapse of the finance companies, the tumble of the baht by more than 20 per cent against its pre-float value, the ensuing corporate bankruptcies and imminent widespread labour lay-offs, the credibility of the central bank and its macroeconomic management ability has totally disappeared. When investors no longer have faith in a country's central bank, that is the end of it.

The Chavalit government has done virtually nothing to lay down the economic groundwork necessary to shore up confidence. When investors, who were supposed to have more confidence in the baht after the devaluation, look at the country they see no policy direction, no support measures and institutions with no credibility.

With this bleak picture, necessary foreign capital is not going to flow back into Thailand to finance its current account deficit. Thailand needs US$900 million to US$1 billion in foreign capital a month to finance its deficit.

Much worse, most of the country's short-term debts, totalling between US$40 billion and US$50 billion, are not going to be rolled over in the coming months. This amount already exceeds by far the central bank's international reserves, which stood at US$33.3 billion as of May. The June and July figures for international reserves should be significantly lower, due to the costly defence of the baht.

This gloomy prospect leaves the government no choice but to seek IMF aid. Leading economists, former central bankers, bankers and businessmen now share the belief that there should be no further delay in requesting an IMF bail-out.
The aid would come through structural loan adjustments and painful economic austerity programmes. Forget about economic growth; be prepared even for negative growth. The term is stabilisation, with the focus on tackling the current account deficit and the balance of payments crisis.

The economy would be further contracted to the level that it would be largely financed by domestic savings and IMF loans since private foreign capital is not going to return, at least not in the short term.

The presence of the IMF, according to former finance minister Virabongsa Ramangkura, would assure foreign creditors that Thailand it is not an insolvent nation. An economic stabilisation programme laid down by the IMF, presumably over the next five years, would be a sort of timetable for the Thai government to follow, with strict obligations.

Since the Thai leadership lacks the credibility or capacity to look after the government apparatus, it must pass this task on to the IMF.

This means all government agencies - perhaps except the Foreign Ministry - would be subject to a strict IMF programme.
Between 1982 and 1986 Thailand drew US$750 million each year in structural loan adjustments from the IMF. The debts were fully repaid by 1991, when Thailand liberalised its financial sector by accepting obligations under Article 8 of the IMF.

Now, investment in the public and private sectors will have to be completely overhauled. A nationwide campaign for belt-tightening will have to be implemented. All the government or private bodies responsible for planning Thailand's economic and social development will have to re-examine the future of the country.

Blindfolded industrialisation and over investment, which have given rise to massive indebtedness, have been an expensive lesson. The good times for the Thai economy are over. If Thailand is to become prosperous again, it has to institute a new economic strategy, perhaps based on the strength of Thai creativity and resources.

The longer the delay in entering an IMF programme, the higher the probability of Thailand becoming a bankrupt nation, incapable of servicing its debts and alienated from the international trading community.

This is the only way to save the nation.