Lesson from baht crisis
The fierce speculative attack on the Thai baht last week seems to have ended in a bloodbath for speculators. Most analysts have hailed the joint intervention by several Asian central banks to rescue the baht as the first successful test of their repurchase agreements signed in early 1995, soon after the Mexican financial crisis in late 1994. The agreements among central banks of 11 Asia-Pacific countries, including Bank Indonesia, provide liquidity to one another in times of currency crises by selling their holdings in U.S. government securities. Their joint intervention, especially the monetary authorities of Malaysia and Singapore, has conveyed a clear, strong warning to currency traders against excessive speculative raids on their currencies.
The lingering question though is whether a new wave of such attacks may surge and whether a coordinated defense by the central banks in the region will again be effective in coping with such a currency crisis. A closer look into the nature and underlying reasons of the attacks on the Thai currency and the events preceding the run on the baht provide a good lesson for Indonesia, which in many respects is encountering the same kind of the economic ills Thailand is currently grappling with.
A currency crisis is always related to the fundamentals of a country's economy, notably the position of its balance of payments. Likewise, the baht's travails should be blamed partly on the worsening fundamentals of the Thai economy. Its economic growth has been predicted to decline to between 5 percent and 6 percent this year. Even though this amount is still fairly high, it is much lower than the robust expansion of 9 percent it has been enjoying over the past decade. Its export growth is slackening and its current account deficit, albeit expected to decline from a large 8 percent of its gross domestic product last year to 6 percent this year, is still dangerously high. Moreover, its financial sector suffers from huge amounts of problem loans in the property sector and its foreign debts have reached US$90 billion.
Nonetheless, the condition of Thai economic fundamentals have not been so problematic as to warrant such excessively speculative raids on the baht, had it not been for the wild rumors and conflicting remarks by Thai officials. Before the run on the baht, businesspeople were gripped by rumors about a possible baht devaluation, which were set off by remarks from a senior economic official. Speculations about political discord in the cabinet and an imminent replacement of the finance minister, Amnuay Viravan, further lent credence to the rumors. Amnuay's credibility was put into question.
As the confusion and rumors surged at a time when the economic growth rate was declining and export expansion was slackening, the panic they caused among businesspeople was much worse than it should have been.
Indonesia, which is also coping with a widening account deficit (4 percent of gross domestic product), foreign debts exceeding $100 billion, slackening export growth, potentially large amounts of bad credit in the weakening property sector, needs to be extra careful of the possibility of similar rumors, especially in the run-up to the general election next week and presidential election next March. The most effective preventive measures against such rumors would be better coordination among ministers with economic portfolios, strong consistency in policy direction and timely, credible announcements of key economic indicators. Of no less importance, as the Thai experience shows, is the valued cooperation of Thai domestic banks in helping the central bank in cutting down short-term funds for speculators.