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Focus on Trade #23, part 2 of 8 (fwd)
FOCUS-ON-TRADE #23, MARCH 1998
SPECIAL ISSUE ON THE IMF
Part 2 of 8
A regular bulletin produced by Focus on the Global South, Bangkok,
Thailand
Focus-on-Trade is a regular electronic bulletin providing updates and
analysis on regional and global trade and finance. Although initially
concerned with APEC, the scope of the bulletin now extends to include
the World Trade Organisation (WTO), the International Monetary Fund
(IMF), the ASEAN Free Trade Area (AFTA), the Multilateral Agreement on
Investment (MAI) and any other acronyms that require critical
attention. Focus-on-Trade contains updates on trends in world trade,
with an emphasis on analysis of these trends from an integrative,
interdisciplinary viewpoint that is sensitive not only to economic
issues, but also to ecological, political, gender and social issues.
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IN THIS ISSUES
Taming the Tigers: The IMF and the Asian Crisis
by Nicola Bullard, with Walden Bello and Kamal Malhotra
This paper is published jointly by Focus on the Global South in
Bangkok and CAFOD in London for the Asia Europe Meeting (ASEM)being
held in London on 2 and 3 April 1998. The paper will be officially
released on 2 April in London by the two organisations. If you would
like a hard copy, please contact Focus on the Global South at
admin@focusweb.org or CAFOD at dgreen@cafod.org.uk.
The paper is in EIGHT parts:
Part 1: Executive Summary, Introduction and WHOLE DOCUMENT AS
ATTACHMENT
Part 2: The IMF and Thailand
Part 3: The IMF and Indonesia
Part 4: The IMF and South Korea
Part 5. The social impact of the crisis
Part 6. The social impact of the crisis/The role of the IMF
Part 7: The role of the IMF
Part 8: Conclusions and recommendations, footnotes
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PART 2 OF 8
THE IMF AND THAILAND
A Cosy Relationship
Thailand's financial crisis was at least three years old before it
dramatically received global attention with the de facto devaluation of the
baht on 2 July 1997. It cannot be said, however, that the International
Monetary Fund (IMF) was particularly worried. Indeed, as late as the latter
half of 1996, while expressing some concern about the huge capital inflows,
the Fund was still praising Thai authorities for their "consistent record of
sound macroeconomic management policies."
The complacency of the Fund and its sister institution, the World Bank, when
it came to Thailand - indeed, their failure to fully appreciate the danger
signals - is traceable to several factors. One is that both the Fund and
the World Bank had been instrumental in promoting Thailand, with its
openness to capital flows and its high growth rate (the highest in the world
in the period 1985-95, according to the Bank), as a model of development for
the rest of the Third World. It was after all during the IMF-World Bank
annual conference in Bangkok in September 1991 that Thailand was officially
canonised as Asia's "Fifth Tiger".
But probably more important is that the massive capital inflows into
Thailand in the form of portfolio investments and loans had not been
incurred by government in order to finance deficit spending. Indeed, the
high current account deficits of the early 1990s coincided with the
government running budget surpluses.
As a group of perceptive Indian analysts from New Delhi's Jawaharlal Nehru
University's School of Economic Studies and Planning, noted, "[p]art of the
reason for this silence was the perception that an external account deficit
is acceptable so long as it does not reflect a deficit on the government's
budget but 'merely' an excess of private investment over private domestic
savings."
In this view, countries with significant budget deficits, such as India in
1991, were regarded as profligate even when their foreign debt was much
lower than Thailand's.
The latter's debt, because it was incurred not by government but by the
private sector, was simply reflecting "the appropriate environment for
foreign private investment rather than public or private profligacy."
In other words, left to its own devices, the market would ensure that
equilibrium would be achieved in the capital transactions between private
international creditors and investors and private domestic banks and
enterprises. So not to worry.
Thailand had, in fact, moved relatively far down the road to the full
financial liberalization that had been urged on it by the Fund and the World
Bank throughout the late 1980s and early 1990s. Between 1990 and 1994,
under the liberal technocrat government of Anand Panyarachun and its
successor, the first government of Chuan Leek-Pai, a number of significant
moves to deregulate and open up the financial system were undertaken, including:
the removal of ceilings on various kinds of savings and time deposits;
fewer constraints on the portfolio management of financial institutions and
commercial banks such as replacing the reserve requirement ratio for
commercial banks with the liquidity ratio;
looser rules on capital adequacy and expansion of the field of operations of
commercial banks and financial institutions;
dismantling of all significant foreign exchange controls;
the establishment of the Bangkok International Banking Facility (BIBF).
The BIBF was perhaps the most significant step taken by the Thais in the
direction of financial liberalization. This was a system in which local and
foreign banks were allowed to engage in both offshore and onshore lending
activities. BIBF licensees were allowed to accept deposits in foreign
currencies and to lend in foreign currencies, both to residents and
non-residents, for both domestic and foreign investments. BIBF dollar loans
soon became the conduit for most foreign capital flowing into Bangkok,
coming to about $50 billion over a three year period.
Thailand's liberalization was incomplete, but the IMF did not raise a word
of protest against the two other key elements of Thailand's macroeconomic
financial strategy. The maintenance of high interest rates - about 400-500
basis points above US rates - was probably seen as a necessary inducement
for foreign capital to come into Thailand. Besides, in the context of rapid
growth, it was the usual IMF formula to contain overheating and inflation.
As for the fixing of the exchange rate at a steady $1:baht 25 through Bank
of Thailand intervention in the foreign exchange market, this was probably
seen as a necessary condition for investors to know they could exchange
their dollars for baht without fear of being blindsided by devaluations that
would drastically reduce their value. Besides, the Fund did not have a
reputation of being a partisan of floating exchange rates for developing
countries, which could plague them with volatile external accounts that
could be quite destabilising.
Thus, when the IMF was requested by the Thai authorities to come in to
rescue the economy in mid-July 1997, it was to fix a crisis that had as one
of its root causes a Fund prescription (the liberalization of the capital
account) that had led to a problem that the Fund had neither foreseen nor
worried about (private sector overborrowing).
When Thailand approached the IMF for assistance after the collapse of the
baht in early July, it was not unlike a player approaching the coach with a
quizzical look that said: "What went wrong? I was just following your
instructions."
By that time, however, the Fund was busily rewriting history, saying that it
had warned the Thai authorities all along about a developing crisis
-prompting economist Jeffrey Sachs to write wryly that "the IMF arrived in
Thailand in July with ostentatious declarations that all was wrong and that
fundamental surgery was needed" when, in fact, "the ink was not even dry on
the IMF's 1997 annual report, which gave Thailand and its neighbours high
marks on economic management!"
It took almost a month for the IMF and the government to negotiate the
agreement that was announced on 20 August. In return for access to $16.7
billion - later raised to $17.2 billion - in commitments gathered from
bilateral and multilateral donors, the Thai authorities agreed to a
stabilisation and structural adjustment program with two principal components.
First, a stabilisation program that would cut the current account deficit
through the maintenance of high interest rates, and the achievement of a
"small overall surplus in the public sector by 1998" through an increase in
the rate of the value-added tax (VAT) to 10 per cent, expenditure cuts in a
number of areas, ending subsidies on some utilities and petroleum products,
and greater efficiency in state enterprises via privatization.
Second was structural reform of the financial sector. "At the heart of the
strategy," noted the Fund in its statement, "has been the up-front
separation, suspension, and restructuring of unviable institutions,
immediate steps to instil confidence in the rest of the financial system,
strict conditionality on the extension of FIDF [Financial Institutions
Development Fund] resources, and the phased implementation of broader
structural reforms to restore a healthy financial sector."
Part of the financial reform would also "require all remaining financial
institutions to strengthen their capital base expeditiously. This will
include a policy of encouraging mergers, as well as foreign capital injection."
Concerns
The main part of the structural reform package was the closing down of
insolvent financial institutions. Even before the baht devaluation, the
Chavalit government had suspended 16 finance companies, including Finance
One, once the country's premier finance company. At the time of the
announcement of the agreement, the government declared that another 42 would
be suspended, bringing the total to 58 of the country's 92 finance companies.
This was a popular move, since the finance companies were widely known to be
bankrupt and had absorbed some 17 billion baht in subsidies from the FIDF,
which many of them had spent not to restructure their loan portfolios but to
relend, thus expanding their exposure. The IMF wanted a quick government
decision to shut down those firms that could not be salvaged.
The IMF's question when it came to the stabilisation part of the package
was: would the government go through with the agreement to raise taxes,
particularly on petroleum?
For others, on the other hand, doubts began to set in on the wisdom of a
program that would exacerbate deflation. With growth already set to slow
down owing to the high levels of corporate indebtedness and the depressive
effects of skyrocketing baht prices for imports, what was the rationale for
drastically cutting back on government expenditure? Government capital
expenditures, especially for infrastructure, had been the main factor
stimulating growth in 1996 as the private sector lost its dynamism.
Eliminating this stimulus would simply kick the economy from slowdown into a
severe recession.
These fears were related to a larger concern, which was that the IMF was
treating the Thai financial crisis with a cure for public sector profligacy,
whereas it stemmed from private sector excesses. What was needed was not
public sector policies that would speed up the downward spiral of the
private sector but a counter-cyclical mechanism to keep the economy afloat.
As Jeffrey Sachs, the main proponent of this view put it, "[T]he region does
not need wanton budget cutting, credit tightening and emergency bank
closures. It needs stable or even slightly expansionary monetary and fiscal
policies to counterbalance the decline in foreign loans."
Sachs went on to claim that the Fund's behaviour in fact worsened what was
already a delicate situation in the fall of 1997:
"[T]he IMF deepened the sense of panic not only because of its dire
pronouncements but also because its proposed medicine--high interest rates,
budget cuts, and immediate bank closures - convinced the markets that Asia
indeed was about to enter a severe contraction...Instead of dousing the
fire, the IMF in effect screamed fire in the theatre. The scene was
repeated in Indonesia and Korea in December. By then panic had spread to
virtually all of East Asia".
Another concern that emerged had to do with the actual use of the $17.2
billion rescue fund. The 20 August agreement stated that this sum would be
devoted "solely to help finance the balance of payments deficit and rebuild
the official reserves of the Bank of Thailand."
What this meant was that the funds could not be used to bail out local
institutions. "Financing the balance of payments deficit" was, however, a
broad canopy that covered servicing the huge foreign debt of the Thai
private sector, which in mid-1997 came to $72 billion, of which over half
was short-term debt. The IMF-assembled funds provided an assurance that the
government would be able to address the immediate debt service commitments
of the private sector, while the government and the IMF sought to persuade
the creditors to roll over or restructure their loans.
The rescue agreement thus repeated the pattern of the IMF-US Mexican bailout
in 1994 and the IMF structural agreements with indebted countries during the
debt crisis of the 1980s, in which public money from Northern taxpayers was
formally handed over to indebted governments only to be recycled as debt
service payments to commercial bank creditors.
To many, there was something fundamentally wrong about a process that
imposed full market penalties for Thailand while exempting international
private actors - indeed, socialising their losses. As the Nation put it,
"The penalties imposed on foreign creditor banks which have lent to the Thai
private sector must be precise and applied equally...Thailand and Thai
companies may bear the brunt of the financial crisis but foreign banks must
also share part of the cost because of some imprudent lending. It would be
irresponsible to lay the blame entirely on Thailand."
The Chavalit Government Hesitates
It took another two months before the government could come up with the
details of the stabilisation program. On 14 October, the Thai authorities
publicly underlined their commitment to the IMF to generate a budget surplus
equivalent to one per cent of gross domestic product by decreeing a series
of taxes, including increases on duties on luxury imports, surcharges on
imports not used by the export sector, and, most controversially, a fuel tax
of one baht per litre of gasoline. On the expenditure side, government
spending was cut by baht 100 billion, bringing it down to baht 823 billion.
On the financial sector reforms, the authorities announced the creation of
the Financial Restructuring Authority (FRA) to oversee the screening of the
rehabilitation plans submitted by the 58 suspended companies, which would be
the yardstick used to determine whether or not they would be allowed to
reopen. Also to be established was an Asset Management Corporation (AMC),
with seed money totalling one billion baht from the government, which would
oversee the disposal of the assets of the finance companies ordered closed.
The government also promised to allow foreigners to own up to 100 per cent
of financial institutions, tighten rules for classifying loans as
non-performing, provide full government guarantees for depositors and
creditors, and improve the bankruptcy laws to allow creditors to collect
their collateral faster.
At this point, the IMF's main concern was to see promises translated
promptly into action. But popular opposition forced the Chavalit government
to rescind the petroleum tax just three days after its announcement. Having
presided over the unravelling of the economy, the government simply did not
have the legitimacy to make its decision stick. The cabinet also failed to
approve the emergency measures that were necessary to put the financial
restructuring plans in motion, and procrastinated on identifying the finance
companies that would be closed.
When Finance Minister Thanong Bidaya resigned over the rescinding of the oil
tax, the Chavalit government's credibility hit rock bottom. The rising
tension and confusion was captured in the following account:
"In late October and early November, rumours swept regional markets that the
IMF might hold back the second phase of stand-by credits due in December.
IMF officials reportedly were frustrated by the glacial pace of reforms and
the indecisiveness by the government in acknowledging the seriousness of the
problems. Foreign creditors began to slash their credit lines and call back
outstanding loans to Thai institutions. As the baht slid toward 42 to the
dollar, fears emerged that Thailand might declare a debt moratorium".
On the other side of the barricades, street demonstrations called for the
resignation of the government, and many of the protests were beginning to
acquire an anti-IMF flavour. Critics became more vocal in saying that the
tight-money, tight-fiscal-policy austerity package was a misguided cure that
would only worsen the disease. As two influential analysts put it,
"IMF officials...believed that once its prescription of an austere economic
program was followed strictly, confidence would return and capital would
flow back into Thailand to improve liquidity and stabilise the baht. But
this wishful thinking has not happened, with the country still paralysed by
capital continuously flowing out of the system." In the meantime, "without
capital, Thai business in general is heading for a breakdown."
Chuan to the Rescue
With its credibility with both the public and the IMF hitting rock bottom,
the Chavalit government finally announced on 3 November - just a few hours
before the arrival of an IMF team to review government compliance with the
agreement - that it would step down and allow a new parliamentary coalition
to take power.
In the interval between the Chavalit government's announcement that it was
stepping down and the formation of the second Chuan government, IMF pressure
was instrumental in forcing the National Assembly to pass four emergency
decrees that were necessary to get the financial restructuring going.
When the new government was constituted, the Fund did not relax its
timetable, demanding that it immediately decide which finance companies
should be permanently shut down and which should be rehabilitated. Indeed,
it pinned its decision on whether or not the next tranche of $800 million
would be released on the government's announcement. Thai compliance, said
Karin Lissakers, US delegate to the IMF, "would be an important political
signal that we had overcome political resistance to action."
On 7 December 1997, the Chuan government announced that all but two of the
58 finance companies would be closed. The IMF money was released. But
praise for the Thai authorities demonstration of political will was tempered
by the government's admission that the financial crisis and the IMF
stabilisation program would bring about a worse than expected contraction in
1998, with the government and Thai authorities lowering their estimate of
economic growth from the 2.5 per cent projected for 1998 at the time of the
August agreement to just 0.6 per cent.
By the time of the next IMF review, in mid-February 1998, the figure of 0.6
per cent growth had again been revised downward to acknowledge a full-blown
recession, with a fall in economic output of 3.5 per cent for the year, and
more than 6 per cent for the first two quarters.
This dismal projection, which held out the possibility of an even greater
freefall, prompted the Fund to yield to the government's request that it be
allowed to run a budget deficit of 1 to 2 per cent of GDP rather than be
forced to produce a surplus of 1 per cent.
Explaining the Fund's concession, Herbert Neiss, the IMF's Asia-Pacific
director, admitted that "the economy had slowed down to such an extent that
a continued stringent austerity regime may prompt a new economic crisis."
However, the government was not able to shift the Fund from its insistence
on maintaining high interest rates, which were running at 20 per cent and above.
The Fund's new understanding with the Chuan administration committed the
latter to push a revision of the Alien Business Law to allow foreigners more
liberal investment privileges in the non-financial sectors of the economy;
to prepare legislation to tighten up the country's bankruptcy laws; and to
speed up the total or partial privatization of key state enterprises such as
the Telephone Organisation of Thailand, Thai Airways, and the Communications
Authority of Thailand.
Finally, the revised agreement committed the government to announce stricter
rules on classifying loans as "non-performing" by the end of March 1998 and
to force the banks to recapitalize on that basis.
Indeed, since it came into office in mid-November, the government had, in
fact, been urging the banks to recapitalize along the lines demanded by the
Fund ever since the value of their assets had been drastically savaged by
the currency plunge that meant allowing foreign partners to take a big, if
not majority, stake in the corporation, a step which had been made possible
by emergency legislation approved by the National Assembly in October.
For some institutions, the choice was between receiving an infusion of
foreign money or being brought more directly under the control of the
government. Indeed, the government nationalised four near bankrupt banks in
order to restructure, sell, or dismantle them.
With the legal ground being secured, foreign banks began to work out deals
with cash-strapped Thai banks. The Japanese Sanwa Bank announced that it
would take a 10 per cent stake in one of the country's biggest banks, Siam
Commercial Bank - a move that would bring total foreign shareholding in that
bank to 35 per cent. Citibank declared that it would move to gain a 50.1
per cent ownership share in First Bangkok City Bank.
While this deal remained suspended as of February 1998, ABN-AMRO, a Dutch
financial group, said that it had arrived at an agreement to acquire a
majority stake in the Bank of Asia.
By February 1998, after over three months in office, the Chuan government
had gained the reputation of being extremely compliant with the IMF,
definitely much more so than the preceding Chavalit government and the
Suharto government in Indonesia.
As IMF representative Neiss put it, "Thailand has turned the corner, along
with Korea...[Thailand has] won a battle or two but not the war
yet...Indonesia is still in the intensive-care unit."
It would be accurate to say that, while there were differences on interest
rate policy and government spending, the government and the IMF had achieved
a meeting of minds. The key to recovery was winning back the confidence of
foreign capital, and the key to winning that confidence was to adhere to the
IMF austerity program.
Thais had, however, become disillusioned with a growth pattern based on
foreign capital, for that had been after all what had led Thailand to its
current troubles. Moreover, how foreign capital would be induced to come
back to an economy in severe recession, where prospects for profits lay
quite a few years down the line, was not satisfactorily answered.
END PART 2 OF 8
______________________________________________________
Focus on the Global South (FOCUS)
c/o CUSRI, Chulalongkorn University
Bangkok 10330 THAILAND
Tel: 662 218 7363/7364/7365
Fax: 662 255 9976
Web Page http://www.focusweb.org
Staff email addresses:
----------------------
Walden Bello W.Bello@focusweb.org
Kamal Malhotra K.Malhotra@focusweb.org
Chanida Chanyapate Bamford C.Bamford@focusweb.org
Junya Prompiam J.Prompiam@focusweb.org
Nicola Bullard N.Bullard@focusweb.org
Ehito Kimura E.Kimura@focusweb.org
Joy Obando Joy@focusweb.org
Mayuree Ruechakieattikul nok@focusweb.org
Focus Administration admin@focusweb.org
______________________________________________________