Baht Seriously, The Deal Has Its Benefits

The Age

Tuesday August 12, 1997

TIM COLEBATCH

Canberra

Excuse me. I heard on the news the Federal Government is going to give Thailand $1.3 billion because the Thai banks are in trouble. Why can't they give money to Australians who need it rather than to Thailand?

We are not giving Thailand anything . . ..

Please explain.

All we are doing is joining in a currency swap. We will buy $US1 billion of their currency, and they'll buy $US1 billion of ours. It's not a gift, it's not even a loan. It's just a swap.

But why would we want to swap currencies with Thailand? The old baht has slumped 25 per cent this year!

Yes, but you've got to look carefully at what the Government has agreed to do. In effect, our Reserve Bank will deposit $US1 billion worth of $A or $US in an account at the Bank of Thailand, their central bank. And they will deposit $US1 billion in baht in an account at the Reserve.

That money will remain there for a fixed time, maybe five years, earning interest at the going rate. And as the going rate is usually higher in Thailand than here, we'll probably make a small profit on it.

At the end of that period, we will swap back, and that swap will be at the same exchange rate as the original deal. So we are protected against everything except the Bank of Thailand defaulting - and central banks don't default.

If it's that good a deal for us, what's in it for Thailand?

Foreign exchange. They've spent more than $US15 billion of it in recent months defending the baht against speculators. They've just signed an agreement with the International Monetary Fund to keep at least $US25 billion in foreign exchange, so they need to build up their supplies.

How do you know Thailand will get itself out of trouble? Didn't we read last week that Transparency International has rated it as one of the most corrupt countries in Asia?

Yes, and that's one reason why Thailand got itself in this mess. While Malaysia has been cleaning up its act, Thailand assumed it would always grow so fast that it could borrow, demand kickbacks, speculate, live it up, and never run short. Now it has. For 10 years Thailand and China have been the fastest-growing economies in the world: 9 per cent growth, year after year. Japanese money poured into the country, manufactured exports poured out of it. Because it was growing so fast, people made money by borrowing to build or speculate in real estate.

But then Asia's export growth slumped. The wheels of Bangkok's boom stopped turning. It was full of empty apartments and shopping centres built by speculators who had borrowed from finance companies who had borrowed from Japan. By June, 20 per cent of those loans were non-performing . . .

Please explain.

The borrowers were no longer paying interest on them, and people say that number could double in the end. To restore confidence, the Thai Government has suspended two-thirds of the finance companies and guaranteed the rest. But it'll be a long road.

So Thailand is going to sign an agreement with the IMF to tighten up: slash its Budget deficit, stop subsidising fuel bills, and slow the economy to cut the current account deficit. Once they do that, we'll help out with the currency swap.