Repaying IMF: Another marketing ploy

Repaying IMF: Another marketing ploy

Thanong Khanthong, The Nation, Asia News Network, Bangkok

Prime Minister Thaksin Shinawatra would like to show off
Thailand's financial strength by announcing that the Kingdom will
be pre-paying all the outstanding loans of US$4.8 billion owed to
the International Monetary Fund by July this year. There is
indeed an underlying political agenda behind his decision to
remove Thailand from the yoke of the IMF and restore its
financial integrity.

Thaksin's Thai Rak Thai Party conducted a vigorous anti-IMF
campaign during the run-up to the last general election on Jan.
6, 2001. It blamed the IMF for aggravating the Thai economic
crisis and for advocating that foreigners buy up Thai assets on
the cheap.

By painting the Democrats and the IMF as the culprits in the
1997-1998 crisis, Thai Rak Thai rode on a crest of nationalism to
win their landslide election.

Thaksin would like to claim that it is his government that
succeeded in liberating Thailand from the IMF's obligations.
Repaying all the debt to the IMF would add more weight to
Thaksin's Asia bonds, which will be launched this year at the
second meeting of the Asia Cooperation Dialog (ACD).

At the ACD meeting, member countries will be asked to
contribute a small portion of their international reserves to set
up a regional fund, which will be used to subscribe to the Asia
bonds. Then Thaksin will host the Asia-Pacific Economic
Cooperation forum with the status accorded to his regional role.

Yet our memories should not fail us. Thailand sought a $17.2-
billion rescue program from the IMF in August 1997 during the
Chavalit government.

At that time, when Thaksin served as a deputy prime minister,
the country's foreign-exchange reserves were depleted in the Bank
of Thailand's futile defense of the fixed exchange rate system.
Without the reserves, the baht could have gone anywhere from Bt50
to Bt160 or Bt200 to the U.S. dollar.

The IMF was brought in to restore confidence in Thailand's
financial solvency. The IMF, international organizations and
other governments extended a $17.2-billion credit line to
Thailand, which would only be able to draw on this credit line on
a quarterly basis to shore up its reserves once it met the tough
IMF reform conditions.

The Democrat government implemented most of the painful and
very unpopular reforms, with mistakes here and there, yet overall
Thailand emerged from the depths of the crisis and has been
headed toward the path of recovery since 1999. By that year
Thailand had already graduated from the IMF program because it no
longer needed the IMF's credit line.

In total, the IMF program was designed to cover a period of
six years. In the first three years Thailand could draw on the
credit line and undertake financial and structural reforms. In
the last three years, Thailand would repay the loans.

From a macroeconomic standpoint, Thailand is in a position to
pre-pay all the outstanding loans of $4.8 billion. Of the $17.2
billion IMF package, Thailand actually withdrew only $12 billion
to prop up the baht.

And Thailand has made progress in its financial and structural
reforms, so that it has so far repaid $7 billion to the IMF.
There remains $4.8 billion in outstanding loans. The last payment
to the IMF is due by May 2005.

Given the high level of Thailand's international reserves of
$38.6 billion, a prepayment of $4.8 billion by the middle of next
year should not have any significant impact on confidence.

But there are a number of factors that should be taken into
account. First, Thailand's total external debt of $60 billion
remains high, albeit manageable. The private sector will continue
to repay its foreign loans, which would periodically put pressure
on the baht.

Second, Pridiyathorn Devakula, the Bank of Thailand governor,
has repeatedly warned of his fears about the looming war between
the U.S. and Iraq. If that happens, it is likely that investors
would go for safe havens by holding hard currencies such as the
U.S. dollar.

The governor has rebuilt international reserves from around
$31.6 billion in the middle of last year when he took office to
$38.4 billion. This amount should represent Thailand's last
stronghold to stabilize the baht in the event of war.

Third, if there is a war in the Middle East, it would
significantly affect Thailand's external account. The surplus
from either the current account or the balance of payments might
be reversed if our exports go into a tailspin or capital takes
flight from the country again. Although most analysts try to
discount this factor, it could happen.

Fourth, the foreign-exchange market is likely to face
volatility next year. As pointed out by Pisit Lee-ahtam, the
president of TT&T Plc, Japan will be resorting yet again to a
weak yen to boost its exports after it exhausted all of its
stimulus measures to bring its economy back on track.

A weak yen will create further foreign-exchange fluctuations
among the regional currencies, which move in alignment with the
yen.

Overall, the issue of prepaying the loans to the IMF looks
more political than a routine practice. And Thaksin knows how to
take advantage of the timing. He will never easily exhaust his
marketing gimmicks.