The following report was taken from The Nation's Home Page at: http://www.nationmultimedia.com/commerce/nukul1/excerpt.shtml
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The economic crisis, which emerged in 1997, was one of the worst in the Thai economic history. But their causes in this time were different as they came from within; in other words, we have created the problems onto ourselves from the rapid increases in foreign borrowings in the two to three years prior to the crisis.

Even if the authorities were able to foresee the crisis but they lack decisiveness in implementing preventive measures. Once the problems have arrived, they also lack the courage to use measures, which may be politically unpopular to tackle them.

The measures eventually adopted whether in the case of intervening to defend the baht or to use funds from the Financial Institutions Development Fund (FIDF) to assist financial institutions could only help to buy time. These result consequently in very high costs to the country with burden on the businesses and the people for a long time to come.

In writing this report for the Ministry of Finance, the Commission has invited relevant people to separate hearings, comprising former deputy prime minister, former finance ministers, former governors of the Bank of Thailand, former permanent secretary for finance, and officials of the Bank of Thailand and representatives from the private sector. The Commission wishes that this report will bring benefits as aspired by the Finance Ministry to have it studied and recommend ways and means to improve efficiency and management of the country's financial system.

The Commission had conducted the study of the crisis and presented a report with recommendations for policy decisions, management, and implementation. The analysis had been done systematically with experience. All errors made in the past had been used as input to summarise recommendations in order to improve the working of the Bank of Thailand and related agencies for accountability and transparency in the future, which will restore confidence in the financial system and financial institutions of the country.�

The mistaken policy decisions may be sequenced as follows:

�1. The Bank of Thailand (BOT) had the option not to liberalise the capital market in 1990, but it chose to do so. The decision was a continuation of a long-held and politically supported policy. When Vijit Supinit became governor of BOT, he enthusiastically continued with that policy, inaugurating the Bangkok International Banking Facility (BIBF), a move, which was also widely supported.

2. Having decided to liberalise the capital market, the BOT should have adopted a more flexible exchange rate policy, but it preferred to maintain a narrow trading band for the baht instead. It began to reconsider this policy in April 1996, only a few months before economic conditions began to worsen considerably. With such worsening of the economic conditions, the BOT became reluctant to change the exchange rate regime, fearing that such an action would send the wrong signal to the market.

3. Having decided to maintain a narrow trading band for the baht, the authorities needed to pursue a particularly conservative aggregate demand policy, particularly after 1994. While fiscal policy remains the responsibility of the Finance Ministry and of the Parliament, the BOT did not push forward the need for a conservative fiscal policy aggressively. The BOT's own deflationary policy was generally ineffective, as it was negated by the inflow of foreign money.

4. Unable to constrain effectively the fiscal and monetary policies, the BOT could have imposed policies to control large capital inflows. When it finally did so, they were too late and ineffective. By that time, the stock of debt was already excessive.

The Commission's conclusions on questions as assigned

Management of the country's foreign reserves from the time when Thailand first encountered currency attacks, which led to the baht's flotation on July 2, 1997, until now.

The Commission concludes that BOT's insistence on adhering to its position, that the basket currency system was appropriate for Thailand, led to a baht defence which cost the country large amounts of its foreign reserves. BOT continued with this position despite the realisation that the slowing economy, declining export growth, weak financial institutions and property market collapse, were destroying foreign investors' confidence in the Thai economy, and putting pressure on the baht.

However, in trying to rectify the problem, the BOT gave priority to problems which would take a long time to resolve, such as tighter monetary and fiscal policies, and resolving debt and property market problems, before attacking the foreign exchange regime. On the other hand, from the point of view of foreign investors and speculators the exchange rate is the most crucial variable affecting the profitability of their investments, and is the point that is most amenable for them to attack. Consequently, the fixed exchange rate regime became the most vulnerable point in the economic system.

Nonetheless, the BOT remained confident that its policies were correct despite frequent warnings from the International Monetary Fund (IMF). And as the confidence crisis worsened, the BOT became more and more reluctant to adjust the foreign exchange rate regime, because it was not sure any changes would bring a good result.

Worse, by using swap transactions to defend the baht, the BOT was able to circumvent both the market constraints as well as the legal constraints imposed by the Currency Act. The BOT poured out an enormous amount of its reserves to defend the currency. By July 2, 1997, foreign reserves had declined to only US$2.8 billion.

Strategy linking local capital and money markets with offshore markets

1. Prior to 1990, the Bank of Thailand (BOT) had a strong plan to propel Thailand into a regional financial hub. The plan was clearly stated in the National Economic and Social Development Plan VI (1987-1991). The plan was outlined in the central bank document No. 640/2533 dated April 18, 1990. The document was fully endorsed by then central bank governor (Vijit Supinit) submitted to Finance Minister (Pramual Sabhavasu). The objectives for carrying out the plan were as follows:

The current rapidly changing global evolution is linking financial institutions closer. A fully integrated financial centre in the region with many kinds of financial services will help facilitate and support funding sources for the region's real sector. Such services will increase our competitiveness against rivals in other regions around the world. Thailand will develop a greater political and macro-economic image when it becomes a regional finance centre. The regional financial centre will also stabilise the country's monetary and economic systems.

The central bank document also said that the country still lacked concrete fundamental elements to support the plan. It said that authorities needed to come up with measure to minimise or reduce any obstacles. To this end, the BOT said it would begin relaxing certain rules and regulations. The most important rule to be relaxed was: "Foreign exchange controls will be relaxed to facilitate foreign capital flows and boost foreign investor confidence."

2. An urgent and immediate action was needed to cancel laws limiting international transfers and payments. The planned action was referred to in letter No. 545/2533 dated March 30, 1990, endorsed by former central bank governor (Chavalit Thanachanan) and submitted to the Finance Ministry. The letter proposed the government accept the International Monetary Fund (IMF)'s agreement No. 8. The agreement stated that the Thai government would not limit any payment or money transfer overseas. In reality, the agreement wasn't over significant, because prior to 1990, Thailand had already relaxed its foreign exchange rules. But the announcement officially signified to the world that Thailand had abandon foreign exchange controls. After the Thai government accepted the IMF's agreement, remaining foreign exchange control limitations were gradually relaxed over a period of time.

3. The letter No. 640/2533 from the central bank governor to the Finance Minister (referred in item 1) clearly outlined the benefits of removing foreign exchange controls. The BOT has since 1990 clearly followed the policies outlined in the letter. However, the letter also pointed to certain areas of caution. "The freeing of foreign exchange controls must be accompanied by the strengthening of financial institutions to enable foreign investors to develop confidence in such institutions. These institutions must be strengthened so that they meet international standards, particularly in the areas of capital base adequacy, asset quality, management efficiency and data base development."

In 1997, the IMF contacted Thai officials many times. The first was through a letter written by managing director (Michel Camdessus) to the deputy Prime Minister and finance minister (Amnuay Viravan) on January 31. The IMF chief emphasised the points discussed in December 1996 that Chaiyawat referred to. Camdessus asked Thai authorities to exercise discipline in applying monetary and fiscal policies and to completely resolve financial sector problems and referred the attack on the Thai baht starting Jan 30 (see 138) as follows:

"In the present circumstances, provided that policies succeed in calming markets in the next few days, I would not recommend an immediate change in exchange rate policy. However, I urge you to move quickly and decisively to reform the present system, taking into account the need for greater flexibility."

After seven days, the IMF probably saw that the measures used to reduce the pressure on the baht would have caused a great reserve loss. IMF deputy managing director Stanley Fisher wrote to Amnuay one more time and the priorities were reset. Fisher worded his letter carefully (without any sentence recommending a baht devaluation) but the message was clear:

"To continue supporting the exchange rate at its present level will require not only maintaining high real interest rates for the foreseeable future (with serious effects on the banking system) but it also entails the risk of a rapid rundown in reserves."

Chaiyawat noted his observation on the IMF's position to the Commission.

"To answer whether or not I believed that we could fight foreign speculators successfully, I cannot answer because I didn't know how intensely the baht was being attacked. It was not my area of responsibility, but I was surprised to hear that in December 1996, Camdessus had met Amnuay and governor Rerngchai ...and after being informed of the financial institutions' problems' urgency, they agreed to leave the exchange regime untouched. Then in February 1997, a special representative of Camdessus, Bijan Aghevli told us that we should devalue because we could not fight the speculators. I was very surprised by how the IMF suddenly changed its previous recommendation."

In the above explanation, perhaps Chaiyawat might not know that the IMF changed its mind a week after the December 1996 meeting with Amnuay, though the IMF had a month. The IMF informed the decision to Amnuay on January 31. The question, which should be asked, is whether the BOT's management, in the face of a rapidly changing situation, should adhere to its old way of thinking (maintaining fixed exchange rate regime) or accept the realities of a different environment.

When the IMF sent a mission to survey the Thai economy in March 1997 as part of a regular function under Article 4, it clearly stated:

"...as we have discussed on previous missions, we continue to believe that the introduction of a more flexible exchange rate arrangement is a policy priority, both to increase monetary policy autonomy and to improve the composition of the capital account by reducing the incentives for short-term inflows. ...In addition, the present system can hinder adjustment to external shocks; in particular the heavy weight of the US dollar in the basket has clearly been unhelpful in present circumstances. During our discussions you have indicated that you intend to introduce greater exchange rate flexibility at the appropriate time; we encourage you to do so promptly, while at the same time changing the present basket to more closely reflect the pattern of Thailand's foreign trade.

(International Monetary Fund, Thailand 1997 Article IV Consultation, Concluding statement of the mission, March 28, 1997).

By tradition, after an IMF report submission, there must be a response from the governor. In his response, the governor barely referred to the value of the baht and didn't use the word "exchange" at all. The only part that could be interpreted as referring to the baht problem is as follows:

"We are of the view that the recent adverse developments on the external fronts were in no small part of a cyclical nature."

It follows that a finance minister needs to receive good co-operation from the BOT governor and Exchange Equalisation Fund manager if he is to carry out his duties. The finance minister also has another important function - co-ordinating fiscal and monetary policy with the BOT governor.

According to Rerngchai Marakanond, BOT governor between November 1996 and June 1997, a period during which Amnuay was finance minister, there were routine meetings between BOT's ranking officials such as Rerngchai, Chaiyawat, Siri and Bandid and Amnuay and Finance

Ministry officials such as permanent finance secretary MR Chatumongkol. These meetings were held five or six times at Dr Pongsatorn Siriyothin's home, and several times at BOT's Ruaen Matcha hall. The group also met at Amnuay's home three or four times to discuss various issues. An hour sometime before the monthly Exchange Equalisation Commission meetings at the BOT, Rerngchai and BOT officials held a pre- meeting briefing for Amnuay at his home. These briefings for the finance minister and also some of the ministry officials often concerned confidential issues and were often off-limits except for those invited. All briefings except one were verbal. The one exception occurred when Rerngchai, Chaiyawat and technical director Kleo-thong Hetrakul brought Michel Camdessus' fax dated May 20, 1997 to Amnuay at his home. The message was addressed to the Prime Minister and carbon- copied to Amnuay.

Kleo-Thong wrote the following about the occasion:

Deputy Prime Minister (Amnuay Viravan) was consulted about the currency exchange system's suitability and whether Thailand should expand the band or change the system. He said a system change might cause trouble and (Thailand) must be able to defend (itself against attacks) and contain them. It would take the BOT two weeks to prepare for a system change. The consultation also involved the current official reserve fund amount free from encumbrances and the likelihood that the government would have a surplus budget. (Memo dated May 20, 1997)

The chief of Financial Market Analysis and Business division sent other memos to the BOT governor seeking his endorsement of foreign exchange interventions. The interventions involved swap agreements and selling US dollars during attacks against the baht. The memos were dated May 9, May 12, May 14, and May 15, 1997. Rerngchai annotated his endorsement to each memo's request with "The Finance Minister has been duly kept informed."

Rerngchai, however, sent only one written report to Amnuay, informing him of the BOT and Exchange Equalisation Fund's interventions by selling dollars and swaps. In the report, which was referred to as 1302/2540, Subject: Baht stabilisation policy dated May 28, 1997, Rerngchai said he had not previously kept Amnuay informed in writing (about the baht attacks and BOT interventions) because of frequent consultations between Amnuay and BOT officials.

Considering said facts, the Commission concludes there is good reason to believe Amnuay should have understood and have known the implications of the measures used by the BOT to defend the baht from speculators' attacks. Given his capacity as finance minister, Amnuay was also well positioned to ask Rerngchai and other BOT officials any question he wanted answered.

All that needs to be considered next is whether Amnuay was in position to change BOT's existing policy which resulted in the squandering of almost all the country's foreign currency reserves to defend of the baht. Other policy options included widening the currency band, devaluation or floating the baht.

The Commission concludes that Amnuay was well positioned to keep the Prime Minister informed of the proposed measures if executives of BOT had decided that the move was necessary. Unfortunately, it appeared that throughout the period until Amnuay left the Premier Chavalit's Cabinet on June 19, 1997, the BOT never informed the premier of its proposed policy shift from the pegged system to a more flexible one.

In 1981-82, high oil prices triggered a worldwide economic recession. Several Thai banks, Asia Trust (now defunct), Siam City Bank and First Bangkok City Bank, as well as several finance companies faced serious problems and needed government assistance under an April 4, 1984 lifeboat scheme. Subsequently, the government also helped Bank of Asia and Krung Thai Bank.

In September 1992, Bangkok Bank of Commerce chose to solve its problems on its own. Krirk-kiat Jalichandra assumed the bank's presidency and named two Bank of Thailand (BOT) officials to take executive posts. With BOT consent, Dr. Virabongsa Ramangkura was named adviser to the bank's board of directors.

The BBC problem was evident after a bank examination on April 30, 1991, discovered non-performing loans of Bt18.2 billion, which represented 26.73 percent of total assets, which was considered a heavy problem. At that time, the average non-performing loan ratio for the banking industry was only 7.41 per cent. The BBC revelations were serious. It had 3.6 times more bad debts than the industry average. By law, BOT was empowered to order BBC to write off bad assets or reserve against those assets. The Commercial Banking Act 1962 empowered the BOT to order capital increases and bad debt writedown, which was considered a drastic measure. The BOT immediately ordered BBC to increase capital by Bt800 million in 1992 and draw up a strict plan to increase its capital for 1992- 1994.

The March 31, 1993 examination showed that non-performing loans had risen to Bt38.5 billion or 39.57 per cent of total assets, because the bank had issued large loans without caution. With problem debts more than doubling from previous examination, it was clear that BOT could not control the problem. Former BOT governor Vijit Supinit told the Nukul Commission:

"...the solution for BBC was not effective...causing BOT to consider that it was necessary for the government to take over the bank and management control if effective and speedy solutions were to be achieved."

Then, the BOT ordered another examination.

The March 31, 1994 examination showed that the non-performing loan problem had risen further. Many of these loans were for mergers and acquisitions of Stock Exchange of Thailand listed companies. BBC didn't analyse these loans carefully and approved unrealistically high asset valuations. For example, the bank approved take-over loans involving Rakesh Saxena and other senior BBC executives, approved overdraft loans with no contracts or collateral, and approved loans valued higher than the authorised level. Since the BOT considered these activities inappropriate, it ordered BBC to stop and ban Saxena from the bank's activities. The BOT also ordered BBC to increase capital by Bt3 billion by June 1995 and another Bt3.7 billion by the end of 1996.

The 1995 capital increase was slow. The Tantipipatpong Group bought 14.69 percent of BBC's paid capital and in late 1995, the Fund for Development of Financial Institutions (FIDF) and Government Savings Bank bought 6.25 percent and 3.13 percent respectively. In March 1996, after capital increases, the Fund and GSB took 34.96 percent and 2.39 of the paid-up capital respectively.

On May 8-10, 1996, BBC's problems were highlighted in a no-confidence parliamentary debate, leading to public panic and a run on deposits. The BOT immediately took control of BBC and set up a control committee on May 17, 1996. On June 6, the BOT dismissed Krirk-kiat. In the same month, 20 lawsuits were filed against Krirk-kiat for damaging BBC.

Measures by BOT for BBC

On August 26, 1994, Jaroong Nookhwun (then assistant BOT governor) called a meeting with BBC management after the March examination showed substandard loans of Bt20 billion. According to the meeting, BBC promised to increase capital by Bt3 billion in the last quarter of 1994. There was no discussion of capital writedown and BBC agreed to sell at least 50 million shares worth Bt750 million to the government. (This negotiation happened before the official examination report was issued by the BOT).

June 30, 1995, Kleo-Thong Hetrakul (Fund manager) wrote to Jaroong for approval to buy 50 million BBC shares at Bt15 per share, a total of Bt750 million and would pay the shares booking on July 5, 1995, which was the final day scheduled by BBC. This transaction was by the Financial Institutions Development Fund's board on July 28. However, Jaroong and governor Vijit gave their approval on June 30, 1995. And the Fund's board ratified the approval on July 18 1995.

(The original format and language pattern in some places have been modified to facilitate understanding)

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