Mini series on 1997 crisis (13)

Chavalit Promises To Hold the Baton

ON Sunday, May 11, 1997, there was a critical political development. Gen Chavalit Yongchaiyudh, the prime minister, wanted to show off that he meant business.

In the absence of Dr Amnuay Viravan, the finance minister, the prime minister held a hastily-arranged meeting with top officials from the Bank of Thailand, the Finance Ministry, the Budget Bureau, and the National Economic and Social Development Board. These four agencies were responsible for formulating Thailand's fiscal budget.

Chavalit Yongchaiyudh

Also present were Surasak Nananukul, the prime minister’s advisor, and Chaturon Chaisaeng, the deputy finance minister. Chavalit informed the meeting that he would adopt a more hands-on approach in running the economy. He was trying to put his act together, hoping to quell growing criticism that measures that had been introduced to tackle the economic crisis were too slow to be implemented.

Chavalit, who had been in office for about six months, pledged to oversee macro-economic and financial management through a daily morning meeting with other top officials to ensure that policies and measures were timely implemented.

"I shall orchestrate everything to help Deputy Prime Minister and Finance Minister Amnuay. There will be clear objectives in the medium and long term. Please be assured that everything will be resolved in a timely manner," Chavalit emphasised.

He then delivered an official statement, which covered five key points:

First, there would not be any reshuffle of the economic ministers or officials.

Second, the baht would not be devalued.

Third, the prime minister would meet with officials daily at 07:00 AM at the Baan Phitsanulok to coordinate implementation of all economic policies.

Fourth, implementation of the measures to rescue the property market would bear fruit within the following week.

Fifth, every economic problem would be thoroughly discussed and followed up.

There was a lack of synchrony in the management of the economic crisis. The Baan Pitsanulok had its own polices to tackle the economy, while Lt Gen Chatichai Choonhavan, who headed the Chat Pattana Party and a coalition partner, also jockeyed to advise the prime minister on economic affairs.

He headed the Baan Manangkasila, the official office of the Chat Pattana, which had been given a mandate by Chavalit to work on a comprehensive export policy.

Chatichai Choonhavan

Chavalit was told by his advisors that the measures to tackle the economy, such as the property rescue measures, were not making progress because of the bureaucratic red tape.

Chavalit realised the sensitivity over his decision to stay on top. He was about to breach the turf of his deputy prime minister and finance minister. He said he had personally informed Amnuay about the meeting to avoid any misunderstanding. However, the prime minister complained about the unfounded rumours on the state of the economy.

Even if economic growth rate fell to five or six per cent, other key economic data had improved, including exports, the current account deficit and inflation, which dropped to four per cent, he said. "Our fundamentals are stilll good. The short-term external debt has fallen. But we cannot be idle. The economy needs a 24-hour monitoring," he said.

Chavalit backtracked on an earlier pledge to pursue sound fiscal policy. He backtracked the promise by announcing that he would consider a move to raise their salaries by 5 per cent.

Chavalit's attempt to appease the civil servants sent a conflicting signal to the financial markets. For a 5 per cent pay rise would require additional revenue by Bt21.7 billion at a time when the government was already facing difficulties in balancing its book.

Chavalit also instructed other agencies to stop making statements about the economy. He would like the official information on the economy to be consolidated under his personal guidance. He said he would talk to the media alone, to avoid any misunderstanding and confusion.

But Chatichai was ready to grab more power, sensing that Amnuay could not stay for long. He emerged to called for an appointment of new economic management, saying Amnuay could not effectively shoulder the responsibility alone.

Day Three of the Battle

The political confusion aside, the Bank of Thailand knew that it would be in for a turbulent week. On day three of the battle on the morning of Monday May 12,  Bank of Thailand Governor Rerngchai Marakanond called a meeting in his own office at about 8:30 AM. The meeting, again, would discuss the pressing problem of the foreign exchange.

Dr Chaiyawat Wibulsawasdi, Siri Garnjaroendee, Thanya Sirivehdin, Bandid Nijathaworn, and Phaiboon Kittisrikangwal were all present at this meeting.

Bandid and Phaiboon did most of the reporting to the group. They said the situation was extremely worrisome, with growing pressure on the baht as the speculators appeared to have accelerated their currency attack.

In the morning of that day, the baht was trading at Bt25.86-87, while the Exchange Equalisation Fund fixed the baht at Bt25.85. Later the financial markets would defy the EEF by forcing the baht down further to Bt25.93, above the mid rate of Bt25.88.

The Bank of Thailand did not intervene in the foreign exchange market on that day, so that commercial banks bought the US dollar by US$881.2 million from the Exchange Equalisation Fund. There was upward pressure on the swap points. This pressure continued from Friday and Monday and would continue to become more serious because of dollar buying.

The rumours over the central bank’s move to expand of the baht trading band were still persistent.

Although the prime minister did come out to insist that there would not be any change in the foreign exchange system, or devaluation, the meeting agreed that the scale of the attack was escalating and becoming graver. To prevent the exchange rate from falling to create panic, the meeting agreed for the Banking Department to intervene in two rounds.

In the first round, the amount of the intervention would be limited to US$300 million to test the strength of the speculators. In the second round, the intervention would aim at reducing the baht selling in the baht and keep the rate at the cost of Bt25.905.

The Bank of Thailand would try to contain the speculative pressure and restore confidence. It would ask coperation from Hong Kong to help intervention by the agreement. Before the intervention, the Banking Department would issue a release insisting that there would not be any change in the foreign exchange system and call attention to the market that at this point the prime minister came to throw his support behind the currency peg system.

Foreign Reserves Fell to Dangerous Level

On that day Bandid completed his report on the foreign exchange crisis, which Siri ordered him to do. Bandid's assessment was that the baht attack would continue insofar as the economic fundamentals remained weak and exports did not pick up; the stability of the financial institutions did not improve; the foreign investors did not have confidence in the country's foreign exchange policy due to divergent opinions on this issue; and the government failed to stick to fiscal discipline.

Bandid Nijathaworn

Bandid cautioned that the baht defence represented only a temporary measure to buy time for the authorities to tackle the economic fundamentals.

"The scale of the attack has become more serious and the latest incident has incurred higher losses to the foreign exchange reserves due to the intervention to stabilise the foreign exchange rate," he admitted in the report.

"Now the net foreign exchange reserves of the central bank has slightly fallen below the level needed to back the issuing of note. It is therefore necessary for the central bank to seriously consider the maximum limit at which the intervention to maintain the baht stability is tolaterated or at which the present foreign exchange regime should be revised."

Bandid also noted that before the net foreign exchange reserves fell to zero, the central bank should determine the appropriateness of the basket of currencies system and the policy to stabilise the baht. He also urged the Bank of Thailand to borrow money from the overseas to add to its depleting reserves and to mobilise the help from the neighbouring central banks.

As of May 9, 1997 the official foreign exchange reserves fell to US$36.6 billion, but when the foreign exchange swap contracts were taken into account, the net reserves stood at a dangerously low level of US$17.74 billion – slightly enough to back money in circulation. Money in circulation was around Bt400 billion then.

In the Thai laws, every single baht printed into the system must be backed by at least 60 per cent in foreign exchange reserves. As a display of its conservatism, however, the Bank of Thailand traditionally required 100 per cent reserves backup for every baht it issues from its printing press.

Lt Gen Chatichai played out his card

Gen Chavalit had a working lunch with Lt Gen Chatichai Choonhavan of the Chat Pattana Party. The signal was that Amnuay was no longer fit for the finance job. The government should speed up investment privilege promotion in Zone Three (Northeast) to encourage foreign capital investment.

Speaking from Fukuoka, Japan, Amnuay told Thai TV Channel 7 that he did not intend to resign nor did he see it necessary for the prime minister to hold a daily economic policy coordination meeting. It was just impractical to do.

Dr Amnuay Viravan

"The prime minister was already doing a good job, without having to hold that kind of meeting," Amnuay said. He also told his Asian Development Bank audience that the Thai government had accorded top policy priority to managing growth and stability and financial sector soundness. He downplayed the difficulties the baht was undergoing, coupled with the weakness in the banking sector where several banks had been downgraded.

Thailand, he said, was entering a new era of sustainable economic growth, with stability following years of high, sometimes, double-digit growth. He said the widening gap between savings and investment, which financed Thailand's economic boom, had lad to an inevitable impact of increasing the country's current account deficit.

But he promised to bring the current account deficit down to six per cent of gross domestic product that year. This would be followed by nation-wide campaigns to promote contractual savings and disciplined spending. Measures would also be developed to boost exports.

But speculation was rife in Bangkok that Amnuay was about to be removed from his job. There was also a rumour that he submitted his resignation before boarding the aircraft for Japan.

There was a report that Dr Suthee Singhasaneh, a former finance minister, was approached for the finance portfolio. But Suthee turned down the offer for the very obvious reason that he could not stand working alongside with the likes of Samak Sundaravej, the deputy prime minister, and Chalerm Yoobamrung, the deputy interior minister.

Poosana Preeyamanoj, deputy secretary to the prime minister, denied that Amnuay had resigned. "Nobody has put pressure on Khun Amnuay. I would know because I am close to him."

Chavalit was forced to take a firm grip on the management of the economic and financial affairs because Lt Gen Chatichai Choonhavan, the leader of the Chat Pattana, would like the job for himself or for members of his party. With 52 MP seats, Chat Pattana proved to be a powerful coalition partner Chavalit had to reckon with seriously.

The two met for about half an hour that day, discussing the division of labour within the government. Chatichai later indicated that he gave all the support to Chavalit's decision to stay on top of the coordinating economic management. He was also denied that he was behind such a move.

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