Exploiting Thai crisis myths

Thanong Khanthong, The Nation, Asia News Network, Bangkok

July 2, was the seventh anniversary of the 1997 financial crisis that forced Thailand to devalue the baht. Enough time has passed since then that the lessons of past policy mistakes should be clear. The policy recommendations prescribed by the International Monetary Fund displayed several flaws. Some of our economic remedies then also stumbled badly.

There are a number of myths surrounding the crisis that are worth taking a close look at.

Myth No-1: If Thailand had committed itself to economic reform, it would have regained the confidence of foreign investors.

This is a standard prescription of the IMF. It seemed logical enough at the time, though it did not work in practice. As we have witnessed, after the 1997 crisis, foreign investors fled Thailand and the rest of the region. And it is not likely that they would have been lured back so easily.

No matter how seriously a crisis-hit country commits itself to reform, it takes five to seven years before foreign capital starts to flow back. Even now, the international financial markets are closed for Thailand's sovereign debt.

However, this is no excuse for not undertaking reform. The key question is the timing and the pace of the reform itself. When you have to bite the bullet, you have to know how many bullets you can bite at a time.

Myth No-2: Austere economic programs should have been implemented immediately following the crisis.

This is wrong. After the baht crisis, the authorities should have tried to bring down interest rates as soon as possible without hurting the baht. Then the government should have stepped up expansionary fiscal programs to make up for the collapse in domestic demand.

Myth No-3: Without structural reform, the economy will never recover.

After the financial crisis, banks failed and businesses closed their doors. This in itself was a sort of reform. An economy does not recover because of structural reform alone. It depends on other factors, such as the international environment and some other domestic matters.

Myth No-4: The best way to have tackled the banking crisis would have been to sell local banks to the foreigners.

This is dead wrong. After the crisis, very few foreign banks were interested in buying into Thai banks. We have heard again and again about the pricing. But the real situation is that few foreign banks are willing to commit their capital overseas. Just take a look at Citibank or Hong Kong Shanghai Banking Corp. Even with their financial clout, they have not bought a single Thai bank.

Myth No-5: When banks fail, they should be closed quickly to avoid further losses of public money.

This is wrong. Banks should be merged and remain open to avoid a disruption to the payment system. Then their assets could be separated into good ones and bad ones for a smoother working-out process. In the case of the 56 defunct finance companies, they were ordered to close down without merging their assets first. The result was a big mess in the payment system.

Myth No-6: The economy will not recover unless the banking sector returns to normal health.

Wrong again. Even now, seven years after the banking crisis, bank lending remains sluggish, growing at 5-6 percent a year. Local companies and businesses have learned to make the necessary adjustments by investing from their earnings, raising money through IPOs, or by issuing bonds to refinance their debt or expand operations. Going ahead, though, bank lending is crucial to ensuring steady economic growth.

Myth No-7: The Thai economy could not export its way out of the crisis.

This is wrong. Exports helped Thailand escape the pit of the crisis. After the baht devaluation, Thai exports earned the country a US$10 billion (Bt407-billion) current account surplus per year, helping Thailand to pay off its foreign debt. Now the surplus from the current account is $3 billion-$5 billion per year.

The Thai economy has weathered a financial storm and is experiencing a recovery because of a number of key factors. First, the international economic environment has been sound, enabling Thailand to export its way out of the crisis.

Second, Thailand has devalued its currency by almost 50 percent, allowing it to earn foreign exchange to pay off its debts and to help move the economy again.

Third, the low interest-rate environment has prodded domestic consumption, which has played a key role in the country's economic recovery. Without low interest rates, the recovery would not have been possible.

Finally, when an economy enters into a crisis for a prolonged period, it eventually has to recover when the conditions are right. In the Thai case, several conditions - call them the "Amazing Thailand" effect - gradually allowed the country to emerge from the crisis.