Analyst urges devaluation

By The Nation
DATE : 02/07/1997 02:01:52

THE government has no option other than to devalue the baht against major currencies, a move which would also benefit those who have borrowed solely in the local currency, the former president of the Thailand Development Research Institute said last night.

Speaking on television's Channel 9, Dr Ammar Siamwalla said that the economic situation in Thailand has edged closer to the Mexican peso crisis of 1995.

During an appearance on Nation News Talk , the respected economist questioned how long the Bank of Thailand (BOT) can hold out in its defence of the baht against speculators, a battle which is causing the rapid depletion of foreign exchange reserves.

The BOT reported a US$4 billion decline in the foreign exchange reserve in April, down to US$33 billion. Much of it is believed to have been used to defend the baht.

"I am worried how long the US$33 billion will last," Ammar said.

He said that it is quite clear that with the baht at Bt25 to Bt26 per US dollar, Thailand cannot maintain a balanced current account deficit.

"Can we maintain such baht exchange and at what cost? There is little the government can do. It is no longer a question of whether there should be a devaluation or not."

Ammar's call echoed the comments of former finance minister Virabongsa Ramangkura - the architect behind the 1984 baht devaluation - who outlined a similar argument last week.

However, both the government and the BOT insist that there will be no devaluation. Olarn Chaipravat, president of Siam Commercial Bank, released a study recently which found that devaluation would do more harm than good as the structure of Thai industries and exports has changed since 1984.

Ammar said the authorities should not wait until the country is cornered by a depleted foreign exchange reserve as Mexico had been when it was forced to devalue the peso and approach the United States for help.

He said Thailand still has the capacity to withstand a devaluation.

"Optimistically speaking, we have only about six months left. But I am becoming less optimistic every day."

He said that putting it off will only aggravate the effects of the decision as the market does not believe in the currency's present value.

This lack of confidence in the baht has resulted in an outflow of capital and "the prime minister appearing on TV will not help", he said.

Ammar said businesses will not be able to survive if the situation is left unchanged. "People may not realise that there is a high cost in maintaining the baht at the present level, especially borrowers who have to pay excessive interest rates. The people borrowing in baht are dying because of high interest rates used in defending the baht. In reality, it is a battle between the borrowers in foreign currencies and borrowers in baht."

He said that the country has little choice other than to devalue its currency.

"It will hurt everyone. It depends if it is less or more painful. If the devaluation takes place when the foreign exchange is depleted, then the situation will get out of control. Interest rates will rise even higher and so too the inflation rate."

He said Mexico first devalued the peso by 15 per cent but could not control the situation and it became a 100 per cent devaluation. At times, inflation rose by almost 100 per cent annually.

Ammar said there is no less bitter pill because the country's external debts are higher than the foreign exchange reserve. At the same time, the central bank has to use extensive resources to help ailing financial institutions. In the end, it is a burden that is faced by the taxpayers and not the central bank governor or the prime minister, he said.