Thailand in 1997: Financial Crisis and Constitutional Reform

Author(s): Suchitra Punyaratabandhu

Source: Asian Survey, Vol. 38, No. 2, A Survey of Asia in 1997: Part II (Feb., 1998), pp. 161-167
Published by: University of California Press
Stable URL: http://www.jstor.org/stable/2645674
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THAILANDIN 1997
Financial Crisisand
Constitutional
Reform

SuchitraPunyaratabandhu

in Julytriggered
The devaluationof theThai currency a
engulfedtheentireregion.The country's
financialcrisisthatsubsequently
economicwoes have overshadowedthe promulgation of Thailand's new
Constitution,an eventof potentially in the longer
fargreatersignificance
term.

The Economy
Aftera decadeof spectacular performance, withpercapitaGNP growth aver-
aging more than8%, Thailand'soverheated economy began to slow down in
1996. A considerably steeperdownturn was anticipatedfor1997. Not even
theworst-case scenario,however,cameclose to predicting themeltdown that
occurred.Macroeconomic projectionsfor1997releasedbytheFinanceMin-
istryand theBank of Thailandin Novemberestimated real GDP growthat
0.6%, consumerprice index inflationat 10%, and an externaldebt of
US$94.9 billion,or58.6% ofGDP. Short-term debts,definedas thosematur-
ingin thenext12 months, amountedto US$39 billion,abouthalfconsisting
of loans fromJapanesebanks.
The Stock Exchangeof Thailand(SET), mirroring the conditionof the
economy,fellsteadilyfrom816.79 pointson December20, 1996,to 385.25
pointson December19, 1997, a loss of morethanhalfits value and near
nine-year low. The Thai baht,finallyallowedto floaton July2 aftercostly
attempts to defendit againsta numberof concentrated attacksby foreign
speculators, promptly dropped20% in value. The bahtcontinued itsdecline
to an all-timelow; by mid-December, it had depreciated
by roughly77% of
thefixedratepriorto theJuly2 flotation.

is AssociateProfessorand Vice-President
SuchitraPunyaratabandhu
forAdministration, of DevelopmentAdministration,
NationalInstitute Bangkok.
? 1998 by The Regentsof theUniversity
of California

161
 162 ASIANSURVEY,VOL.XXXVIII,NO. 2, FEBRUARY1998
Financialmismanagement lies at theheartof thenation'seconomiccrisis.
Massive bad debtsaccumulatedthrough overlending on thepartof private-
sectorfinancial led to thepermanent
institutions closureof56 outofa totalof
89 financecompanies. Operationsof the firmswere suspendedin two
waves-Julyand August-buttheclosuredecisionwas notannounceduntil
December,thusreinforcing thewidespreadimpression thatthegovernment
lacked a firmcommitment to solve thecrisis. The combinedassetsof the
suspendedfirmsamountedroughlyto US$23 billion. Nonperforming and
underperforming loans,mainlyin therealestateand construction sector,ac-
countforaroundhalfof thisamount.
The Bank of Thailand,once highlyrespectedforitsacumenand integrity,
has putup a performance so seriouslyflawedas to cause irreparable damage
to its credibility.The centralbank failedto exerciseregulatory oversight
overthebankingsystem,and it mayalso have committed a seriouserrorof
judgmentin authorizing an $11 billionrescuefundto bail out thetroubled
financecompanies. The bailoutapparently gave no consideration to the
firms'asset qualityor liquidityproblems,and fueledaccusationsthatthe
bankacteddespiteknowingthatit wouldneverrecovertheloans.
The centralbankis underscrutiny forits disastrousdefenseof thebaht.
The financeminister has set up an investigating committee to reviewthe
entiredecision-making processthatled to the centralbank's depletionin
March of US$7 billionin foreignexchangereserves,as well as creating
US$23.4 billionin obligations in forward contracts.The bank'sill-conceived
maneuverscontributed significantly to theloss of confidence in Thailand's
abilityto honorits foreignobligations.
In JulytheThai government was forcedto seek,and was granted, emer-
gencyaid fromthe International MonetaryFund. Acceptanceof an IMF-
imposedrecovery planwas a precondition fora US$17.2 billionloanpackage
puttogether by theIMF to shoreup Thailand'sforeignreserves.The condi-
tionsof theloan werestringent and,if implemented, wouldcertainly lead to
recessionin the shortterm. The followingconditionswere stipulated:a
value-added-tax increasefrom7% to 10%; a reduction ofthecurrent account
deficitfrom7.9% of GDP in 1996 to 5% in 1997 and 3% in 1998; and a
fiscalgoal of keepingtheconsolidated publicsectorin a surplusof one per-
centof GDP in 1997 and 1998.
A rootcause ofThailand's financial turmoil lies in excessiveborrowing by
the privatesector,compoundedby lax regulatory oversightby the central
bank. Thailand'seconomicgrowthhas dependedalmostentirelyon bor-
rowedforeigncapital,and thefinancialcrisisis based on excessiveprivate
ratherthanpublic debt. Of the totalexternaldebt,approximately 70% is
privateand 30% is publicdebt. DuringThailand'sboomyears,as corporate
debtgrew,so did theequitymarket.Examination of movements in thedebt/
 THAILANDIN 1997 163
equityratioreveals,however,thatequityincreaseswerenotusedto lowerthe
debtdependencebut ratherto leveragemoredebt. The use of short-term
foreign loansforlong-term investment was an intrinsically
unsoundstrategy:
erosionof foreigninvestors'confidence led to immediatewithdrawals, thus
exacerbating thecrisis.
Government policy,by openingup thecapitalaccountthereby facilitating
corporate indebtedness, contributedin no smallmeasureto theproblem.In
1993 thecentralbankintroduced theBangkokInternational BankingFacility
(BIBF), whichenabledlendingbyforeigners to Thai firmswithbanksacting
as intermediaries.By theend of 1996, almosthalfof totalprivateforeign
debthad beenchanneledthrough theBIBF. Much of thelending,at interest
rateslowerthandomesticsources,wentintocapital-intensive sectorssuchas
chemicals,petroleum, andconstruction. AmmarSiamwalla,thenotedecono-
mistand former president of theThailandDevelopment ResearchInstitute,a
prestigiousthinktank,has provideda perceptive and succinctanalysisof the
situation.'The establishment of theBIBF led to a heavyinflowof foreign
capital,the consequencesof whichwere (1) a prolongingof the property
boom bubble;(2) a declinein Thailand'scompetitiveness; and (3) soaring
current accountdeficits.
Bankingcrises are not uncommonphenomena.Indeed,between1980-
1996 morethantwo-thirds ofthe181 membersof theIMF haveexperienced
seriousbankingproblems.2Globalizationand globalmarketsamplifycrises
thatare oftencausedby macroeconomic volatility,
lendingbooms,maturity/
currency mismatches,badlypreparedliberalization, and structuraland legal
framework weaknesses.Recoverydependson how speedilyconfidenceis
restored.In theThai case, theChavalitgovernment's actionsworsenedthe
crisis. PrimeMinisterChavalit'srecordhas been summedup bluntlybut
accurately by theEconomist:
Itis hardtobeunfair ... record.... Inhis11months
toChavalit's inoffice
hehas
dithered whendecisionswereneeded,bumbled whenclearwordsmighthave
helped,andsmiled whiletheeconomy
benignly gotworse.He hasfailedtopurge
hiscabinet of shadypower-brokers,andrepeatedly meddledwiththepoliciesof
thetechnocrats he appointed
to burnishthegovernment's cloudyimageandsort
outthemess.3

1. AmmarSiamwalla,"WhyAreWe in ThisMess?" theJ.Douglas GibsonLecture,Queen's

University,
Ontario,Canada, reprintedin BangkokPost, sectionA, November12, 1997, pp.
12-13.
2. BengtDennis,former governorof Sweden's centralbank,in a seminarforThai bankers
andFinanceMinistry as quotedin TheNation,businessand financesection,December
officials,
11, 1997,p. B6.
3. TheEconomist,"The Relegationof Thailand,"October25-31, 1997,p. 29.
 164 ASIANSURVEY,VOL. XXXVIII,NO. 2, FEBRUARY1998
The government's mishandlingoftheeconomyerodedpublicconfidence at a
mostcriticaljuncture.NotwithstandingIMF intervention,theeconomyin-
clinedfurther towardrecession. In NovemberMoody's InvestorServices
downgraded Thailand'ssovereigndebtratingto just one notchabove junk
bondstatus.PrimeMinisterChavalitresignedin earlyNovember.On No-
vember9, his governmentwas replacedby a Democrat-led coalitionheaded
by formerPrimeMinisterChuanLeekpai.

Politics
One of thecharacteristics of thepoliticalsystemin Thailand'sfledgling de-
mocracyis theproliferation ofpoliticalparties.Coalitiongovernments, with
all theirlimitations
andliabilities,
arean unavoidableconsequence.The poli-
ticsof maintaining fragilecoalitionswithslimmajoritiesin Parliament has
meantthatsmallerpoliticalpartieshavewieldedinfluence disproportionateto
theirsize. This showsup in theapportionment ofcabinetseats. Government
policies reflectthe realityof fragmentation: thereis littleor no unity,let
alone cohesion. Each ministry becomesthepersonalfiefdom of thecabinet
minister in charge.
WhenPrimeMinisterChavalitresignedafter11 monthsin office,intense
politicking wenton forfourdays,as the Democratand Chat Thai parties
endeavored tobuilda majoritycoalition.Nearlyall oftheremaining political
partieswerecourtedby bothsides. Timeprovidesan apt commentary:
Forming a newgovernmentin Thailand
is likepicking
sidesforan elementary
schoolfootball
match:alltheplayers
knoweachother,havebeenthrough thedrill
beforeandusually
endup bickering
overwhowillgettoplaywhatposition.4
Preciselyso. At one point,bothChuanLeekpai,theDemocratcontender,
and ChatichaiChoonhavan, leaderof therivalChatThai party,heldsimulta-
neoustelevisedpressconferences to announcesuccessfulformation of a coa-
lition.In theend,Chuanemergedvictorious.
The victorycouldproveto be costly,however.The six-partycoalitionwas
joinedat thelasthourbydissidents fromPrachakorn Thai,one ofthesmaller
parties.As recompense,cabinetpostswereawardedto thedissidents, some
of whomare reputedto have shadybackgrounds includingoperatinggam-
blingdensanddealingin drugs.At leastone has beendeniedan entry visa to
theUnitedStates. Chuan'simageas a cleanpoliticianhas beentarnished by
thecabinetline-up.Nevertheless,his government,in particular
theeconomic
ministers,enjoygreaterpublicconfidence thaneitherof thetwo preceding
governments.

4. Time,"Now Get to Work,"November17, 1997,p. 20.

 THAILANDIN 1997 165
The New Constitution
On October11, 1997, a new Constitution was ratified.In recentyears,
amendingThai constitutions has become a somewhatroutineundertaking,
withlittlenoticeableimpacton thepoliticalsystem.The latestversion,how-
ever,represents a radicaldeparture fromits predecessors, bothin substance
and in the drafting process. The Constitution was draftedby a 99-person
electedAssemblyand involvedparticipation fromall sectorsof societyover
an eight-month period. Its 339 articlesreflect extensivepublicconsultation.
In this,themedia-in particular thenumeroustelevisiontalkshowsand na-
tionallytelevisedpublicfora-playeda keyrole. A majordesignfeatureof
theConstitution is theattempt to limittheinfluence of moneyin Thai poli-
tics. The so-called"people'sconstitution" representsa victory of democracy
groupsoversupporters of theold politicalsystembased on clique politics.
The new Constitution makesprovisionfora 200-member electedSenate
(in contrastto thecurrent 270-member appointedSenate)and a 500-member
House ofRepresentatives (as opposedto thecurrent 360 members).A some-
whatcuriousstipulation forbidsSenatecandidateseitherto canvassforvotes
ortobelongto a politicalparty.Senatorialseatsareapportioned on a provin-
cial basis,withmoreseatsassignedto largerprovinces.The termof officeis
six years.
The House of Representatives consistsof 400 membersrepresenting 400
electoraldistricts,plus 100 membersdrawnfrompartylists. The partylist
represents an innovationforThailand. The idea is foreach voterto vote
twicein a nationalelection,once fora district representative and once fora
politicalparty.Afterthevotesare tallied,candidateson thepartylistsre-
ceive parliamentary seatsbased on proportional assignment; forexample,a
politicalpartysecuring20% of thevotesis entitled to 20 MPs fromitsparty
listof 100 candidates.The partylistsare rankedfromtheoutsetso thefirst
20 nameson thelistwill gettheseats. The introduction of thepartylistis
tacitacknowledgment thatThai votershave tendedin pastelectionsto vote
forindividuals rather thanforpoliticalparties.By splitting thevoteintotwo
parts,thenewConstitution allowsvotersto voteforbothspecificindividuals
and politicalparties.
Will thenew electionrulesreducevote-buying?Skepticismpersistson
thisscore. The new Constitution makesvotingmandatory, thereby ensuring
a veryhighturnout at thepolls. It is hopedthatbyforcingall eligiblevoters
to casttheirvoteandbyincreasing thenumberofconstituencies whilereduc-
ingthenumberofMPs to one perconstituency, vote-buying willbe rendered
moredifficult. The partylistas a deterrent to moneypoliticsis questionable.
Listsofthelargerpoliticalpartiesobviouslyprovidegreater andit
attraction,
becomesall-important forcandidatesto be rankedhighon thelists,prefera-
blyamongthetopten. The probability of a parliamentary seatforanyoneon
 166 ASIANSURVEY,VOL.XXXVIH,NO. 2, FEBRUARY1998
thebottomhalfof a partylistis virtually nil. For obviousreasons,one may
anticipatecontributionsto partycoffersin exchangefora desirableplace on
theparty'slist.
Beforenationalelectionscan be held,a seriesof organiclaws, specifying
detailsand procedures, mustbe passed. The Constitution requiresthepas-
sage of threeorganiclaws-an electorallaw, theElectionCommissionlaw,
and politicalpartylaw-within 240 days of theConstitution takingeffect,
thatis, bymid-May1998. The House of Representatives is expectedto read
andpass thethreebillsin February, and theSenatewillcompleteitsreading
by May.
Provisionis madefora number ofnewcourtsandcommissions.The Con-
stitution Courtis an independent body consistingof a presidentand 14
judges. It has thepowerto considerbillsthatone-tenth oftheMPs, one-tenth
ofthesenators, one-tenthofthemembers ofbothhouses,or theprimeminis-
tersee as unconstitutional.The NationalHumanRightsCommission consists
of a chairperson and 10 membersappointedby thekingon theadviceof the
Senate. The OfficeoftheOmbudsman consistsofthreeombudsmen selected
by theSenate. Ombudsmen are empoweredto examinecomplaints concern-
ingfailureto abidebythelaw,ornegligenceofdutiesorviolationsofhuman
rightsby civil servants,stateenterprise officials,and local administrators.
The five-person ElectionCommission, an independent body,is chargedwith
overseeingelectionsat all levels,fromnationalto local. These entitiesare
new to Thailand,and will notbe in place untilearly1998. It wouldbe pre-
matureto ventureany conjectureabouttheirimpacton Thai politicaland
administrative systems.

ForeignRelations
Thailand'ssupport ofMyanmar' s entryintotheAssociationof SoutheastNa-
tions(ASEAN) in Julyandthegovernment's avowedpolicyto "abidebythe
principleof non-interferencein (Myanmar's)domesticaffairs"has produced
betterrelationswithThailand'swestern neighbor.5Bangkok'sforeign policy
stanceis consistent withits perceptionthatcloserintegration in Southeast
Asia is achievableonlythrough ASEAN. The memberstateshaveadopteda
unitedstandin protecting membercountries'strategic interests.
SupportofMyanmarhas haditsprice. In Novemberthepreparatory meet-
ing fortheAsia-EuropeMeeting(ASEM) summitscheduledto be held in
Londonin early1998 was abruptly called off. Myanmarhad announcedits
intention of attending
themeetingbutwas informed thatvisas wouldnotbe
issuedto its representatives.Launchedin March 1996 in Bangkokwith25

ofForeignAffairs,
5. See Ministry "ActionPlan: Section(A) PoliticalAction,"<http://www.
mfa.go.th/Policy/policy2.htm>,
December1, 1997.
 THAILANDIN 1997 167
headsof government fromAsia andEuropein attendance, ASEM has beena
loose forumfordevelopingdeeperpoliticaland economicties. In March
1997, 25 foreignministers metin Singaporeto deliberatethefutureof the
forum.Myanmar'sentryintoASEAN has effectively puta stopto a poten-
tiallymutuallybeneficialdialoguebetweenAsia and Europe.
The UnitedStatesas well had appealedto ASEAN memberstatesto turn
down Myanmar'sentryintothe groupingon groundsof its humanrights
performance. Some observersof Thai-U.S. relationsattribute U.S. apathy
duringThailand'sfinancialcrisisto theThai government's adamantstancein
regardto Myanmar.Certainly, Thailandwas givenfarless assistancethan
SouthKorea. By the year's end, Thailand'sforeignrelationshad become
linkedwithsolvingthefinancial
inextricably crisis.In theyearahead,it will
but essentialto meet the requirements
be difficult of the IMF agreement
whileavoidingconflictswithnationalinterests.