Thailand Escapes Financial Meltdown

By Tim Johnston
Washington Post Foreign Service
Friday, October 24, 2008

BANGKOK, Oct. 23 -- Thailand has escaped the global financial panic with only minor immediate damage, in part because of an ethic of financial caution that it learned in the 1997 financial crisis, which almost stopped its economy.

The country today has little or no direct exposure to risky asset-backed securities and is awash with liquidity from a high and rising savings rate. The worst damage so far is $125 million of losses from the collapse of Lehman Brothers.

"I think 1997 made us very aware of the role that risk management has to play," said Kosit Panpiemras, executive chairman of Bangkok Bank, speaking of Thai banks in general. "I think we have also been very careful about liquidity, particularly here at Bangkok Bank. Our loan-to-deposit ratio is something like 90 percent -- only 90 percent of our deposits have been lent out."

High liquidity and reliance on deposits as a source of cash have protected Thai banks from the vagaries of the stalled interbank lending market. "The banks here are surprisingly solid given what is happening in other markets," said Vincent Milton, managing director of Fitch Ratings Thailand.

But if Thailand has been protected from the primary fallout, it is worried about secondary damage that the global slowdown is likely to inflict on an economy that for years has been driven by export growth. "The most important issue is what will become the engine of growth going forward," said Kosit, who was a deputy prime minister in 2006-07.

For the last three years, Thailand has been mired in a drawn-out political conflict. Huge anti-government demonstrations led to a peaceful military coup in 2006, but the return to civilian rule at the end of last year has failed to end the paralysis. Few analysts expect the current government to last much longer.

The political uncertainty has dented investor confidence and government planning, but it has had one unexpected benefit: It has prevented the building of the sort of asset price bubbles that have amplified problems elsewhere in the world.

Looking to find ways to defend against future crises, Thailand is preparing to propose setting up a regional financial institution that would be an Asian hybrid of the International Monetary Fund and the World Bank.

"The first step would be a kind of Asian IMF," Thailand's finance minister, Suchart Thada-Thamrongvech, said in an interview Thursday. "So if we are in trouble, we could get some help from this multilateral organization." And in normal times, the institution would "have money in the system and it could act as a kind of development bank, like the World Bank."

"If we had this kind of organization, Chinese reserves could be used to finance rural roads in Thailand rather than buying U.S. government bonds," Suchart said.

He said the size of the fund was not the point: "I think the figure is not important at the moment. It is the concept that is important."

His comments came after Thai Deputy Prime Minister Olarn Chaipravat suggested that Asian nations should pool 10 percent of their foreign exchange holdings, about $350 billion, into a superfund that could protect the region from effects of the global economic crisis.

Suchart stressed that the negotiations are at a very early stage. But he said that when he met senior Chinese and Philippine officials in Washington last month, there had been support for expanding the Chiang Mai Initiative, a framework of bilateral agreements that many Asian nations formed after the 1997 financial crisis to support each other's currencies if they again came under attack by speculators.

Ministers from the 10 member countries of the Association of Southeast Asian Nations, along with China, South Korea and Japan -- the so-called ASEAN Plus Three -- are set to meet in Beijing on Saturday after attending the Asia-Europe Meeting this week. Thailand currently chairs ASEAN.

Philippine President Gloria Macapagal Arroyo this month said the World Bank had agreed to contribute $10 billion to a fund to assist Asian countries should they run into liquidity problems. The bank has denied it made such a commitment.

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