Paul Blustein
A TOP official of the International Monetary Fund (IMF) believes Thailand must quickly shore up its troubled financial system and cut government spending to defuse an economic crisis that has shaken currency and stock markets across three continents.
Stanley Fischer, the IMF’s deputy director, this week suggested that Thailand is behaving foolishly by refusing to seek an IMF emergency loan, which would come with politically distasteful conditions. “It seems to be hard for them to make very tough decisions,” Fischer said, speaking much more bluntly and openly than is customary at the fund, where officials have traditionally veiled their words in anonymity and vague phrasing.
The directness of Fischer’s remarks reflects the concern that has mounted at the IMF and the United States treasury over the past two weeks, as Thailand’s troubles have sent financial tremors throughout Southeast Asia, Latin America and Eastern Europe. The IMF has primary responsibility for containing such crises, and the Clinton administration has been consulting closely with the fund because of fears that the turmoil could engender an economic slowdown in regions of the world that have become major markets for US exports.
Indonesia’s currency, the rupiah, became the latest victim of frenzied speculative selling this week, dropping as much as 7% against the US dollar. The Philippine peso, Malaysian ringgit and Brazilian stock market have also fallen sharply since the Thai baht was devalued on July 2 following an attack by speculators.
Fischer stressed his belief that the current situation in Asia is unlikely to become nearly as serious as the Mexican peso crisis of 1994-95, which also sparked selling in other emerging markets and plunged Mexico into a deep recession.
Although Thailand, like pre-crisis Mexico, has been running sizeable trade deficits and has become dependent on short-term money flowing in from abroad, most of Thailand’s foreign debt is owed to private lenders by Thai companies, whereas in Mexico, most of the foreign debt was owed by the government, Fischer pointed out.
Moreover, Fischer said, another “very critical difference is that Mexico’s growth rate, despite very impressive reforms, never got up to anything like that which we’ve seen in the Asian countries”. Even during Mexico’s heyday of the early 1990s, growth barely reached 4% annually, roughly half the rate that the Southeast Asian countries have attained in recent years.
“If you’re growing at 8%, and you have to cut back a couple of percent a year, you’re not going to create the social problems of the sort you have had in Mexico,” Fischer said.
Yet at the same time, Fischer acknowledged the probability that Thailand’s once-booming economy could face a painful adjustment.
Asked about a forecast that Thai growth might be zero this year, he said: “We don’t see it going to zero. We think that with decisive action soon, they could still grow this year.” In the absence of decisive action, he added, “growth will be lower, and there will be a prolonged period of slower growth”.
Fischer praised the Philippine authorities, who received a $1-billion loan from the IMF a week ago, for the way they had handled the attack on the peso. As for Indonesia, despite the fall in the rupiah, “we’re quite confident that they know what they’re doing”, he said.
But asked about Thailand, whose finance minister last week dismissed widespread calls among financial analysts for an IMF- backed bailout, Fischer said: “They haven’t decided to come to us … whatever they may do, whether it is with an IMF programme or without an IMF programme, it is critical that they put together a clear, complete package of measures” to ease the crisis.
Countries that borrow from the IMF must abide by the fund’s conditions, which usually involve painful steps such as cutting government spending and clamping down on easy credit. Agreeing to such conditions would be a bitter pill for Thailand, which prides itself on having never been conquered by a foreign power, and which last stopped subjecting itself to IMF supervision more than a decade ago.
Bangkok has already taken some important steps, Fischer said, including letting the baht float against other currencies. But the Thais are only about “halfway” done cobbling together a package to shore up the shaky banking system, and once that is prepared, the additional government spending will require offsetting savings, Fischer said.
“One of the problems with these financial crises,” he said, “is that the longer it goes on, the more difficult it becomes to deal with these problems.”
– LATimes, Washington Post