The Licence To Make War

On May 27, 1997 Rerngchai Marakanond, the Bank of Thailand governor, wrote on that same memo that Dr Amnuay Viravan, the finance minister, should be fully informed about all the matters since he chaired the Exchange Equalisation Fund and supervise the Bank of Thailand.

So the Bandid Report, “The Foreign Exchange Market Intervention to Stabilise the Baht,” written on May 12, 1997, was quickly revised to become a Rerngchai version. The following day on May 28th, the Bandid Report-turned-Rerngchai Report, stamped as “most confidential”, arrived at Amnuay's desk at the Finance Ministry.

It was the only official report Amnuay, as he later claimed, received from the central bank on its foreign exchange management. Amnuay's reaction to the report was almost indifferent, however.

Amnuay still believed that the central bank knew exactly what it was doing, although he was concerned about the dwindling foreign reserves.

Rerngchai's version was slightly changed from the Bandid report. All the key figures of the intervention were readily provided to Amnuay.

However, Rerngchai gave a more positive tone about a need to continue to defend the fixed exchange rate system, which would encourage capital inflow to finance the current account deficit.

He noted to Amnuay that the central bank had been pursuing a policy to stabilise the baht by 1) maintaining the credibility of the foreign exchange rate system, 2) adopting the interest rate policy that supported the value of the baht, and 3) intervening in the foreign exchange market to reduce the currency volatility.

Based on a study of the Economics Research Department, Rerngchai painted a rosy picture of a prospect of an economic recovery. The central bank expected exports to recover, while the fiscal tightening would lead to a reduction in domestic spending and curb inflation.

Despite a slowdown of capital inflow, Rerngchai said it would still be enough to compensate the current account deficit.

The Economics Research Department forecast that an economic recovery would take place in the second half of the year, jump-started by a pick-up in exports.

"From this outlook, the central bank will be pursuing a cautious monetary policy to guard the stability of the economy and to support the baht. At the same time, it will use the foreign exchange reserves to support a slowdown in net capital inflow and to intervene to shore up the baht as necessary," Rerngchai said.

"Despite the pressure on the baht and the attack from the foreign speculators, losses of the foreign exchange reserves would only incur in the first half of the year. But in the second half of the year, the situation should improve after an acceleration of export earnings and a restoration of confidence and a return of capital inflow due to improvements in the economic conditions and the export recovery."

In the final paragraph of his report, Rerngchai sticked to the same conclusion as the Bandid report that the intervention policy did not address the roots of the problem but represented only a time-buying strategy until the government could put its economic fundamentals back on track.

Rerngchai did warn about the prospect of a larger scale of the baht attack and the graver conditions for the baht due to growing nervousness in the fiscal and monetary discipline designed to address the economic stability.

Still he concluded: "As for a policy to look after the stability of the baht, the Bank of Thailand believes that, under the present currency regime, intervention is still necessary as has been conducted in the past to ensure confidence and credibility of the Thai exchange rate system. This should continue until a new foreign exchange regime is adopted."

Rerngchai also reported to Amnuay that the Bank of Thailand would continue to work against the speculators by asking for cooperation from the commercial banks and financial institutions in the country to stop lending baht to the foreign banks. This cooperation should continue until the measures to improve the economic fundamentals bore fruit and the economy recovered.

Shortly after the currency battle in May 1997, Amnuay and Rerngchai held a meeting at the New Imperial Hotel, which was located on the Wireless Road, opposite the US ambassador’s residence. The hotel was subsequently demolished to make way for a new premise.

Rerngchai also asked Dr Siri Garnjaroendee, the assistant governor, Dr Bandid Nijathaworn, the director of the Bank of Thailand’s Banking Department, and Phaiboon Kittisrikangwal, the chief treasurer of the central bank, to attend the meeting.

Other top bankers such as Dr Thanong Bidaya, the president of the Thai Military Bank, Banthoon Lamsam, the president of the Thai Farmers Bank, Chartsiri Sophonpanich, the president of the Bangkok Bank, Chulakorn Singhakowin, the president of the Bank of Asia and Dr Olarn Chaipravat, the president of the Siam Commercial Bank, also showed up. It would turn out to be a lecture session.

It was time to give the bankers a lesson on patriotism. Rerngchai assigned Phaiboon to speak out. Phaiboon described what had happened with the baht battle in May, suggesting that some Thai banks had speculated against the baht for their own profits.

Instead of asking for cooperation from the bankers, Phaiboon was said to have flexed his muscle. After his lecture, Phaiboon sent out his threat: “We (the Bank of Thailand) know what you guys are doing.”

The bankers were not impressed.

More secret meetings

After the fierce baht attack in mid-May, there were at least four to five secret meetings over the currency crisis at the residence of Amnuay's secretary, Dr Phongsathorn Siriyothin.

Phongsathorn used to work for Amnuay at the Bangkok Bank. He followed Amnuay to the Finance Ministry. The top policy-makers avoided to meet at the Fish House at the Bank of Thailand, which overlooks the Chao Phya River, for fears of arousing the suspicions from the nosy reporters, who could immediately tell the subjects of the meeting by the participation of the people involved.

During this time, MR Chatu Mongkol, the permanent-secretary of the Finance Ministry, traded some emotional words against Dr Chaiyawat Wibulsawasdi, the deputy governor of the Bank of Thailand.

Chatu Mongkol

Looking at all the key indicators, Chatu Mongol could not understand why the Bank of Thailand would be able to defend the baht at a rigidly fixed rate.

At one point he bursted out: "Don't you ever think that other people are fool and cannot understand what you people are doing?"

The stubborn Chaiyawat would keep his cool. He would argue in support of the currency peg and would not change his mind.

Siri would be murmuring in his throat, without making it clear his stand although deep inside he was extremely nervous over the survival of the currency peg. Thanya Sirivedhin, the assistant governor, was keeping quiet most of the time.