-- PHOTO: APRISE OF BAHT: Warning bells are going off in Bangkok as recent increases in the baht spark comparisons to the start of the 1997 Asian financial crisis. BANGKOK - THAI Finance Minister Chalongphob Sussangkarn warned yesterday that the baht's recent gains showed unexpected parallels to 1997, when it came under speculative attack and Bangkok was forced to abandon defending a fixed exchange rate and float the currency.That crashed the Thai economy and triggered the Asian financial crisis.Dr Chalongphob told a seminar in Bangkok: 'Ten years ago, there were huge inflows to Thailand, which we found out later were short-term...Money coming today is not short-term...but in the stock market.'However, there is contingent liability that the current inflows could become outflows if the stock market starts to decline. That is the kind of situation we should be aware of to make sure that our international reserves are enough.'Almost US$1 billion (S$1.5 billion) has poured into Thailand since the beginning of this month, mainly into the stock market, which has resulted in a sharp appreciation of the baht, Mr Chalongphob said.In a bid to curb the rampant rise of the baht, the Bank of Thailand (BOT) yesterday cut its key interest rate by 25 basis points to 3.25 per cent.THEN AND NOW: 'Ten years ago, there were huge inflows to Thailand, which we found out later were short-term...Money coming today is not short-term...but in the stock market.'IF THINGS GO WRONG: 'However, there is contingent liability that the current inflows could become outflows if the stock market starts to decline.'It was the fifth consecutive rate cut this year as the BOT scrambled to reign in the currency, which recently reached a 10-year high against the US dollar.Following yesterday's announcement, the baht was quoted at 33.45 to 33.46 to the US dollar, slightly down from Tuesday's close of 33.35 to 33.37.'The policy rate cut will help halt the baht's appreciation', BOT assistant governor Suchada Kirakul told reporters.The Finance Minister and BOT governor Teresa Watanagase have come under severe pressure in recent days over the baht's rise.At an economic seminar on Tuesday, a respected economist, Dr Virabongsa Ramangkura, launched a stinging critique of the financial and banking authorities for allowing the baht to appreciate.The first taste of what could happen if the currency continues to rise came in the shock layoff of close to 5,000 workers on July 12 by a garment exporter.After an uproar, Thai Silp South East Asia Import Export subsequently reinstated the workers.But the episode showed how vulnerable the export sector could be if the baht continues to rise.Owner Pipat Unopas said: 'The baht was so strong against the orders that we took in three to four months in advance. We had tried to solve the problems, but it came to the point that we cannot continue the business.'Commenting on the episode last week, Thai Chamber of Commerce chairman Pramon Sutheewong, while expressing doubt over the exporter's explanation, underscored the threat to Thailand's export sector, which comprises some 60 per cent of gross domestic product.With the stronger baht rendering exports uncompetitive, especially in relation to Vietnam and Indonesia, he said he expected many more factories would reduce production and could close down.Yesterday, Prime Minister Surayud Chulanont pledged that the government would not allow the baht to rise to 30 to the US dollar.If that were to happen, he said, the consequences for the economy would be very serious.nirmal@sph.com.sg
1997-98 and 2008-09: a tale of two crisesPublished September 22, 20091997-98 and 2008-09: a tale of two crisesBy BHANOJI RAOAT THE simplest, the crisis of 1997-98 was regional, while the present crisis is global. Beyond the simple similarity, there are complex differences in origins and effects.Currency contagion: The Thai baht sank when it was unpegged from the US dollar and floated in 1997, leading to financial and economic crisesWhen the Thai baht was tested by speculative attacks in late 1996 and in the first half 1997, the Bank of Thailand, in tune with the then prevailing fixed exchange rate regime, had to defend the currency. It spent a large part of the nation's forex reserves to maintain the exchange rate, through direct sale of foreign currency and through forward currency swaps.Outstanding swap contracts in mid-August 1997 amounted to US$23.4 billion dollars as against the reported US$30.4 billion in actual reserves. Relatively poor export performance, mounting external debt, weak financial sector and dwindling forex reserves led to a loss of confidence, setting off 'sudden' withdrawal of foreign funds.Market pressure triumphed and on July 2, 1997, Thailand abandoned a 13-year-old exchange rate mechanism that pegged the baht at around 25 to 26 to the US dollar. When the baht was floated, it inevitably sank, leading in turn to financial and economic crises.The so-called contagion affected at least six other economies in East and South-east Asia. Confidence crisis did hit Hong Kong, but it could ward off the currency crisis by doggedly sticking to the peg - at some cost which the policymakers preferred to incur instead of allowing the economy to slide into a recession.Singapore and Taiwan allowed the currency slides, but had robust financial institutions and regulatory oversight that prevented a financial crisis. Indonesia was at the extreme, with financial and economic crises providing the much awaited opportune moment for political change.The 1997-98 experience, though regional in character, had important implications. It demonstrates the close linkages between financial and economic crises, which is a reaffirmation of the importance of the health of the financial sector, which intermediates between the saving and investing classes.It tells us clearly that the origin of a financial crisis need not be from within the financial sector, but could be at some spot elsewhere, leading to loss of confidence in an economy, its neighbours and a whole region.The saving grace is that problems need to be tackled at the national level mostly, and speed of action ensures less damage for the economy.The present crisis is different. The root cause was in the financial sector, a vital sector with strong links to the rest of the economy. Thanks to the globalisation of finance, the spread of the financial crisis was quick, and far reaching. It was dubbed the worst crisis since the Great Depression. Much has been done at national and global levels to boost public spending in the hope of reviving consumer spending. The signs of 'out of recession' are already placed on some doorsteps.The role of regulation Two points need to be remembered in the context of the present crisis. First, all the talk about regulation, international cooperation, transparency, accountability, etc is important and has its role. Yet, we must also underscore the simple idea that all financial products and activities must have perceptible and easily verifiable value addition.The banker deserves her/his pay and stockholders their dividends because of the value addition involved in collecting and safeguarding our savings and making them available to investors with a good track record who produce goods and services, in turn leading to perceptible and clearly visible value addition.Had the question 'what is the value addition' been raised at the first roll-out of the great innovation called financial derivatives, there would have been a lot less pain for the world as a whole. Innovations that 'spread risk' do just that - spread the risk widely, so innocent savers too pay the price. This is no value addition.Second, all those who wish to say that 'crisis is over' should remember that the crisis has many dimensions and date lines, as brought out in the paper presented at the January meeting of the American Economic Association by Kenneth Rogoff of Harvard University and Carmen Reinhart of the University of Maryland. Their findings are based on a study of 14 severe financial crises, including the 1997-98 crises of Hong Kong, Indonesia, South Korea, Malaysia, the Philippines and Thailand.The duration of peak to trough changes in key parameters are found to be five years for house prices, 3.4 for equity prices, 4.8 for unemployment and 1.9 for per capita gross domestic product (GDP).We need to ask from now on: which crisis or which component of the crisis has ended?The author is a visiting professor at the Lee Kuan Yew School of Public Policy
