Lesson from baht crisis

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.