Thailand's Exchange Rate Crisis : How it Relates to the Asian and Global Economy

Ladies and Gentlemen,

There is still a need for more analysis and work to determine the true causes and turn of events that have led to the crisis we are witnessing today. I would rather reflect on the process of change that we are going through at the moment to ensure that we are in touch with the reality of the situation, aware of the things that we have to go through, and cognizant of the kind of measures and adjustments that must be put into action.

Economic Change

Firstly, I would like to establish one fact - the current crisis is not limited to Asia. The present adjustments cannot be said to be an "Asian flue" that has resulted from Asian ways of working, or because the "Asian Miracle" was unsustainable. I think the present process of adjustment would have had to come sooner or later, considering the processes of economic change that have been going on throughout the whole world. In the past, Asian economies were able to reap the benefits of high growth and cheap labour. They were breaking into new territories, facing less competition. Now they are in a time of adjustment. With or without any of the attacks on our currencies, Asian economies were bound to eventually accept change and make adjustments. So, I would not say that this present "crisis" is something very much different from any normal economic cyclical movement.

Secondly, while blaming some of these things on governments throughout Asia, I do not think we can exaggerate or over emphasize the limited power of governments. We all have to realize that the process of liberalization results in lessened autonomy in the determination of government actions and policies. It makes government intervention and government policies less potent and effective. That is a fact that we have to realize. Even though governments may know about on-coming changes, many times they are left somewhat helpless in directing changes in flows of trade and finance.

Thirdly, this is a time for us to realize that markets really do dictate the terms and conditions of economic changes and markets can really force changes these days, particularly in the global market. The power of the market is much greater than we, or most governments realize. There are governments in Asia, no doubt, that continue to believe that they can withstand the force of markets. I think the sooner we realize how powerful that markets are these days, and take note of information coming from them, the earlier we can try to make meaningful changes. Ultimately, one will be forced to go through these changes and if one does not make the appropriate decisions at the right time, then the magnitude of these changes could escalate to disastrous proportions.

The fourth point I would like to make is that the events we are going through at the moment have been witnessed before in various parts of the world. The United States went through the savings and loan associations trauma, towards the end of the 1980s and beginning of the 1990s. Northern European nations, such as Sweden and Finland, went through their own periods of financial reform. Even England has had to rely on the International Monetary Fund. So, there is nothing exceptionally wrong or unique about the kind of process that we in Asia are going through at the moment. And, if you look at how western economies have come out of crises and have come out of the IMF programs, in spite of all the pros and cons about IMF programs we have discussed today, we shall see that this is not the end of the world. All of these economies have come out of their respective crises and resumed normal paths of economic growth. Also, currencies do come out of crisis. They may not necessarily return to their old strength, but eventually stabilize somewhere, and not necessarily at the depth of the depreciation.

The Current Crisis and the Global Economy

I would next like to discuss the meaning of the present crisis to East Asia and to the global economy. Here again I have seven points to make:

Number one, of course growth will be affected. For the first time in recent history, growth in Asia may fall below the level of growth in the United States or in Europe. But one cannot avoid drawing the conclusion that if Asia is affected severely and reaches the brink of a recession, then the rest of the world will not be unaffected. We should not forget the fact that at least 50% of the new growth in international trade is derived from Asian trade. We cannot forget that a growing proportion of U.S. and European trade, export-import trade, is associated with Asian nations.

A prolonged period of economic slowdown or a recession for Asia would surely jeopardize the rest of the world. I have been informed by various analysis that, for example, US growth for 1998 may have to come down from close to four percent for 1997, perhaps to two-and-a-half to two percent. Major sectors in the advanced economies in the west, like energy, infrastructure, tourism, the aircraft industry, the defense industry, will surely be effected. From day to day you'll be hearing that various Asian countries are suspending energy programs, as well as their infrastructure programs. We'll have to buy fewer aircraft and we may ask to delay delivery for those we have already ordered. Defense expenditures have already gone under the axe many times, and will again be reduced, further effecting the western economy.

Secondly, I would not say that financial institutions from the west should be blamed, but they have been part of the process that created opportunities for us in Asia to borrow. Those institutions stand to be negatively affected because they will have to look after their clients in Asia. They may have to reduce their exposure, write off some of the bad loans, or try to work out some solutions for these loans. Over-borrowing to my mind is the flip side of over-lending and I would say that our friends from financial institutions in the west have been rather inventive in creating different borrowing instruments for us. But, of course, we all jumped in. I would not want to blame any particular institutions or markets, but would like to say, "I think we are all in this mess together."

A third point is that investment results will also be affected, particularly for European nations, which have become larger and larger investors in Asia. Some companies and major multinationals from Europe have been earning half of their profits from Asia. Investment results will be affected. Some banks have already announced that because of the Asian crisis their profits will drop 10% to 20% in 1998.

Number four, trade liberalization may be jeopardized, but this is not because we want to slow down trade liberalization. I think most Asian governments still adhere to our original commitments to trade liberalization. Being confronted with growing rates of unemployment and bankruptcies, I think priorities are more with the need to address social problems than with the expediting of trade liberalization. But, we in Asia have announced our commitment. As a representative of the Thai government, I would still maintain that we will try our best to remain committed. But pressure is growing on us from day to day to delay trade liberalization, to provide more protection elsewhere, so that some respite, a period for recovery, could be given to our domestic industries. I am not saying that we are going to yield to that kind of pressure, but the pressure is mounting. In the case of my own country, I think we have been rather successful in trying to resist this pressure, and have gone forward on the path of liberalization, not only on the part of trade, but also on the investment side, as we have committed ourselves in the past.

Number five, I want to make sure we understand that this is not a normal economic crisis or management crisis, per se, but that this is mainly a financial crisis, out of which we cannot emerge without fully addressing the reform of the financial system, the reform of prudential supervision, and the reform of our central banking activities. I would not say the reform of our central bank, but the reform of some central banking activities. This will be a rather drastic reform and will take a lot of time. So, the on-going crisis is mostly related to the lack of liquidity, the net outflow of funds, the need to consolidate financial institutions, the need to change management, and to recapitalize financial institutions. This will have to be done and these reforms cannot be done overnight. You all know that banks will have to be strengthened. Non-bank financial institutions will also have to be recapitalized or merged, and that will also take a couple of months. In our case in Thailand, we have to complete some major recapitalization of our major banks within the first quarter of this year, but it will take a longer period of time to strengthen the entire management system.

Number six, the disease has spread throughout Asia. We must be able to stop the contagion. I don't think the rest of the world can sit back and relax and allow the contagion of this disease to go on and on, ending with rounds and rounds of competitive devaluation which will do no one any good. So, this must be stopped somewhere. China must be protected, I don't know whether that is the right word or not, from the need to enter in the devaluation tournament that we are engaged in.

My strategy would be that the contagion must be contained somewhere, and the origin of the disease, which unfortunately is Thailand, is a good place to stop the disease. Because we entered into the crisis first, we have already made several corrective efforts that were initiated by the previous government. We therefore stand to come out of the crisis earlier, should more effort be put into this rehabilitation program.

Lastly, effects on the world government bond market cannot be ignored. Japan is the number one holder of U.S. treasury bonds; China is the second largest. I don't think they will both withdraw from the U.S. government bond market, there is no threat for them to withdraw. If there should be any need for more liquidity, which has been sucked away from the East into the West, then some effects might be felt in the U.S. bond market. So, that also will have to be prevented.

Going Forward

Finally, here are my suggestions. Firstly, I think most of us agree that exchange rate corrections have gone too far, and I would definitely say they have gone beyond the rightful corrective scale. The correction has overshot. Everyone in the world knows this, but because of a lack of confidence, and because of the easily spread panic, we understand that the present overshooting will not go away just like that. So, I have suggested time and again a G-7 meeting to address the Asian financial crisis. Today's news suggested that Britain may be in agreement with the U.S. to call this meeting. I think that is much needed. As much as we needed the Plaza Accord to renew the strength of the Japanese yen and create more growth for the world economy, I would say we will need a "reverse" Plaza Accord, this time to confirm the strength of the Japanese yen. The Japanese yen today, I would say, is rather undervalued. The U.S. dollar may not necessarily be overvalued but is definitely leaning towards the strong side. It would cost the United States close to nothing if the dollar were allowed to depreciate to a more stable position for the yen. It would also be helpful if the existing mechanisms of the World Bank, the Asian Development Bank, IMF, Export-Import Bank, or any funding arrangement, could be used to recycle some of the foreign exchange liquidity that has been siphoned away.

Secondly, I think we should all adopt the Manila Framework that was agreed upon a few months ago when the deputies of the financial authorities met. The Manila Framework is important because it emphasized the fact that all Asian governments must be reminded that financial reform should be pursued with no delay. At the same time, however, we must conceive of some mechanism that would provide additional surveillance, apart from the IMF. This would be in the form of regional surveillance, or what we now fashionably call "peer" surveillance. A forum of meetings among economic ministers of Asian nations would be used to exchange views, learn from one another's mistakes, and learn what alignment or coordination policies will be needed in the future. We have to conceive of some sort of mechanism to function as an early warning system, a task that I would rather leave in the hands of academics like yourselves. We need this because the warning system through the IMF that we have been using has worked sometimes, but not always. Of course the IMF has issued some warning signals, but admittedly they were not very strong. And coming from the IMF, in Asia because we have our reservation we do not always accept this kind of warning easily. Within this context, I would like to recommend that we move, for our own economic cooperation, more in the direction of an Organization for Economic Cooperation and Development type of economic cooperation rather than a trade negotiating forum, particularly with regard to Asia-Pacific Economic Cooperation forum activities. I am sure that APEC can continue to pursue trade liberalization as we have done in the past, but I wish that APEC could concentrate more on OECD type activities, analyzing macroeconomic policy and so on.

Conclusion

I think if one looks at the fundamental economic figures for Thailand these days, there are some positive signs. I would not claim that this is due entirely to the present government, but I would say that it is probably partly and mainly the result of the substantial devaluation of our currency that we have experienced. We are beginning to see the signs of a healthy current account and I would like to repeat this message in case hedge fund people have not noticed the figures. We have had four consecutive months of current account surpluses in the last four months of 1997, altogether totaling nearly $2.4 billion U.S. dollars, This is not much, but it is a turn for the better and it is something that we have not seen in the recent history of Thai economic conditions. Given orders that have been placed for Thai products, January will also show a surplus. That will be the fifth consecutive month of current account surplus. Because the surplus has been created by the slow down in import demand, and not purely because of export expansion, it is not really the most desirable picture for the Thai economy, but it is a turn for the better. It is still better than having four or five consecutive months of current account deficit.

So I would say that for 1999, there should be no bleeding of foreign exchange from Thailand through the trade and services account. Problems will remain mainly and only on the financial account. There are definite signs that the headquarters of more international firms are moving to Thailand. Of course, the cost of living is rising in other countries, while our relative cost is coming down more rapidly than others in the region because of the devaluation.

Thailand has sustained a Baht depreciation of around 110%, but inflation is kept under 10%. The month to month figure now amounts to something like 7.7%. Now if you look at the case of Hong Kong, which has not devalued at all, and has an inflation rate posted at around 6%, then you would say that Thailand's performance on inflation is rather satisfactory. I was told that in the Mexican case inflation went above 50%. So that is another positive point for our economy.

We have been complaining a lot about interest rates in Thailand in the last couple of months. And in the last few days, after having done a lot of soul searching among ourselves and with the responsible authorities, we have come to the conclusion that the IMF prescription of interest rates from 15% to 20% should be adhered to. But in our case, we have gone beyond that. To go over that level for overnight rates, for short term periods, would be all right. But our overnight rate has become, I would say, an "over month" rate, because for months now rates have gone beyond 20%. It is not really overnight, it is the over month rate that has peaked at around 25%. The last few days saw a slight drop to the level of 22%. There was no political intervention in this. Instead of keeping the rate high, the market mechanism was allowed to operate more than in the past to let the interest rate come down a little bit. I emphasize that we accept the guideline of a 15% to 20% range as prescribed by the IMF. We can expect more export financing forthcoming from the ADB, I think $1 billion (U.S.). This is not a part of the $17.2 billion (U.S.) stand-by arrangement, but is an additional $1 billion (U.S.) for export financing. Japan's export-import bank also is offering us some loans to finance our export sector. This would be rather helpful because I project, and I set the goal for, Thai exports this year to be at the level of $62 billion (U.S.). Financing for roughly 20% of this total figure will have to be found somewhere, and I don't think that opportunities within our own financial system will be adequate. So the task is now for us to find supplementary financing from abroad.

And, finally in the last couple of days the IMF chairman has issued statements pointing in the direction, I would say, of the IMF understanding the situation. The IMF would also like to be more flexible in the arrangements that they have made with countries like Thailand. I think this is really a positive sign and, coming from the IMF itself, it shows that the IMF program review is a good thing. We talked only about review, but when the press reports this, it always abuses the word and wrongly turns review into re-negotiate. Just as a parting remark, Thailand never, never, had it in our mind to re-negotiate any conditions. We have agreed with the IMF people that we will be in close consultation at all times, and a second review will be forthcoming in the month of February. This review is a normal process and through the review we hope that, with the IMF being more flexible in the arrangement, we will have a new letter of intent tailored to the present economic conditions in Thailand and the current needs of the Thai economy.