The Straits Times, April 23, 2007
By Nirmal Ghosh, THAILAND CORRESPONDENT
ASIA INTERVIEW
Chalongphob, who takes on the unenviable job as Finance Minister, lists his priorities
WORK TO BE DONE: Dr Chalongphob's priorities include ensuring more liquidity in the rural sector, better scrutiny of mega projects and greater fiscal transparency.
BANGKOK - NOT many envied 57-year-old Chalongphob Sussangkarn, who holds a PhD in economics from Cambridge University, when he accepted the job of Finance Minister in Thailand's military-backed government in early March.
His predecessor Pridiyathorn Devakula had left abruptly, leaving an economy staggering from a series of policy decisions and flip-flops that badly dented investor confidence, against an uncertain political backdrop.
The capital was still jittery with rumours of political infighting and potential coups d'etat by hardliners in the military.
Prime Minister Surayud Chulanont's own credibility was taking a beating. The shadow of former prime minister Thaksin Shinawatra still loomed from overseas.
And the beginnings of vocal opposition to military rule were beginning to stir in various sectors, with apprehension mounting over what the new Constitution would have in store.
Economic pundits were busy scaling down growth projections for the economy which, despite still growing at slightly over 4 per cent, has been underperforming against the rest of Asean.
Less than two months after Dr Chalongphob took up his new job amid these challenges, he spoke to The Straits Times about his agenda and priorities.
Here are excerpts of what he said in the interview:
On measures to boost the economy of the rural hinterland
FOR people in rural areas, because of the big push of money out to the grassroots under the Thaksin administration to people, farmers, small and medium businesses, special projects, there was a huge amount of liquidity in the rural sector, in fact too much because people could not make productive use of it.
When this government came in, many of these populist policies were cut back. But I believe the cutback was too quick and too severe. It created a very different situation, it affected livelihoods. Of course, in terms of pursuing populist policies, this government does not agree with simply pumping out money to create popularity.
But because a lot of our people are still poor, if you are going to reduce these policies it has to be done gradually, replaced by other policies that will also benefit the poor but not create a lot of the negative impact of populist policy.
So when I came to office, one of my main priorities was to ensure there is more liquidity in the rural sector, the grassroots.
This is being done now through a number of different avenues. The first thing is to disburse the budget more quickly. The government is pushing every ministry and agency to accelerate their budget utilisation.
The second route is through specialised financial institutions which are under the Ministry of Finance. I told them they should look carefully at their lending to small borrowers and try to accelerate it, but look at the quality of the loans. Give loans to people who will make productive use of it. These agencies are now working on different projects that will get money out to these small borrowers.
A third area is to look at indebted people: farmers, small business people, whatever, and find a more sustainable way of dealing with their debts.
In the past, when they tried to solve the indebtedness problem, it was piecemeal. Each time, the farmers formed a mob and came to Bangkok, they surrounded a bank, sometimes our ministry or some other ministry, then they negotiated with them, maybe reduced their interest. The mob went away and, six months later, they were back again. It's not a permanent way to deal with it.
I have asked various special financial institutions to think of dealing with the indebtedness problem in a more strategic way, to create incentives, so that we help the people in a way that they don't want to come back over and over. This is another area which will provide some stimulus to grassroots, rural areas.
At the same time, maybe there could be some tax measure to provide more incentive to the housing sector, which has a lot of backward linkages, to construction materials, furniture and so forth.
So at the moment, we are in a period where the various stimulation measures, whether on the monetary or fiscal side, will now begin to kick in.
These are needed at this stage when the economy is down; you need to provide some counter-signal. But you don't want to do it in a way that becomes just a similar populist policy, and also you have to make sure the way you do it doesn't create big windows of opportunity for corruption. We want to make (projects) more transparent and more market-based.
On economic nationalism
WE JUST signed the FTA with Japan so that is at least a signal that on relations with foreign countries, it is business as usual. But at the same time we have to admit that under this regime, there has been some legislation introduced that had an impact on confidence.
This was really a reaction to the problem caused by the previous government, particularly the sale of Shin Corp.
First of all, the way the sale was conducted created a lot of social protest because everything was structured so that taxes which should have been paid could be avoided.
Many groups felt in the telecoms sector, certain aspects are very much a national monopoly, and giving a national monopoly to a foreign buyer may lead to problems with national security.
And when this government came in as a reaction to that, they introduced the new Foreign Business Act which had the rationale of dealing with the problem of the sale of Shin shares to Temasek.
But in fact, because it is a very broad law, it affects every sector. The Cabinet already agreed on the rationale for the law before I came into office. There has been a slight weakening of the transition period (for companies to declare and reduce shareholdings that are above the limit on foreign ownership) to three years. Of course, we don't know what will happen when it goes to the National Legislative Assembly.
In the medium term, this law is something Thailand should have, because it's simply the same standard as most advanced countries to make your law clear and make sure there are no legal loopholes which people can exploit.
But in the short term, of course, it may not be a good time to do it, because we already have a lot of problems with confidence, from the coup, the capital control measures, the (New Year's Eve) bombing in Bangkok. Event after event was affecting basic confidence, and then you have this law coming out which again adds to that loss of confidence.
But I think now if a new law comes to the Cabinet and it is too extreme, then it will be more difficult (to pass it); more members of the Cabinet are now making their moderate views felt a little bit more than before.
On key priorities
ON THE fiscal side there are two main areas. One is how to make sure mega projects are better scrutinised. Over the past five to six years, you can see clearly there are too many loopholes which allow the executive branch to push through mega projects without careful evaluation. This is to block that so that when future governments come, they will have to follow clear procedures in evaluating feasibility.
The second is fiscal transparency. Under Thaksin, so many of the policies used non-budgetary avenues so that the contingent liability did not show up in the normal accounting process.
I understand in the new draft Constitution, there is one statement about fiscal transparency; this will lead to a law.
This is very important because we can expect that after the next election, when the new government comes in, they will have to introduce populist policies, because this is what the public demands.
In Thailand this is very new. In the past, policies were difficult for people to grasp but, under Thaksin, because of his experience in big business and developing products for consumers, everything under his regime was very tangible for the people in general.
So now they expect that whoever comes into power will have to offer something like that, and it is important we provide a system of fiscal management, to be used as an early warning system of potential distress on the fiscal side.
On how Thailand is placed 10 years after the Asian financial crisis
THE crisis in 1997 was clearly related to the volatile capital flows that began to expand in the early part of the 1990s, particularly short-term capital flows.
At that time, there was a threat of volatility in capital flow in conjunction with mistakes in our policy stance. We had the impossible trinity, a classic example - easy, liberalised capital flow but we attempted to pursue an independent monetary policy.
Between 1989 and 1996, the average overnight interest rate in Thailand was almost four percentage points above the overnight rate in the US. At some periods, it was 10 per cent higher. This led to huge short-term inflow.
We also ignored the fact that you need enough reserves to service the short-term debt. That's why we got into insolvency. It was exactly the same in South Korea and Indonesia.
So we learnt that lesson. The probability of Thailand falling into the same crisis as 1997 is now very low.
First of all, we have a floating exchange rate system. Secondly, we know now we need to not let short-term foreign debt get out of control, so at the moment the ratio is very low.
But at this time, compared with 10 years ago, the risk factor is still the same; volatile capital flow has not gone away, it has increased.
Middle-income countries like Thailand have the greatest difficulty in managing these flows because our financial system is not fully developed; it's still small. Middle-income and emerging markets are attractive destinations for these inflows.
The challenge now is still the same - how do you deal with volatile capital flows?
This is a major challenge, and my view is that in periods when capital flows are very volatile, countries do need some instrument to manage them, and the instruments need to be mild, ones you can finetune, that tend to be weak medicine which you can gradually adjust.
--------------------------------------------------------------------------------
LESSON LEARNT
'The probability of Thailand falling into the same crisis as 1997 is now very low. First of all, we have a floating exchange rate system. Secondly, we know now we need to not let short-term foreign debt get out of control, so at the moment the ratio is very low.'
DR CHALONGPHOB
Qualifications
Education
BA and PhD degrees from the University of Cambridge.
Career milestones
1977 to 1979: Lectured in economics at the University of Southern California at Berkeley.
1979 to 1985: Worked with the World Bank in Washington, DC.
1996 to 2007: Served as president of the Thailand Development Research Institute, an independent think-tank based in Bangkok.
2007: Appointed Finance Minister.
By Nirmal Ghosh, THAILAND CORRESPONDENT
ASIA INTERVIEW
Chalongphob, who takes on the unenviable job as Finance Minister, lists his priorities
WORK TO BE DONE: Dr Chalongphob's priorities include ensuring more liquidity in the rural sector, better scrutiny of mega projects and greater fiscal transparency.BANGKOK - NOT many envied 57-year-old Chalongphob Sussangkarn, who holds a PhD in economics from Cambridge University, when he accepted the job of Finance Minister in Thailand's military-backed government in early March.
His predecessor Pridiyathorn Devakula had left abruptly, leaving an economy staggering from a series of policy decisions and flip-flops that badly dented investor confidence, against an uncertain political backdrop.
The capital was still jittery with rumours of political infighting and potential coups d'etat by hardliners in the military.
Prime Minister Surayud Chulanont's own credibility was taking a beating. The shadow of former prime minister Thaksin Shinawatra still loomed from overseas.
And the beginnings of vocal opposition to military rule were beginning to stir in various sectors, with apprehension mounting over what the new Constitution would have in store.
Economic pundits were busy scaling down growth projections for the economy which, despite still growing at slightly over 4 per cent, has been underperforming against the rest of Asean.
Less than two months after Dr Chalongphob took up his new job amid these challenges, he spoke to The Straits Times about his agenda and priorities.
Here are excerpts of what he said in the interview:
On measures to boost the economy of the rural hinterland
FOR people in rural areas, because of the big push of money out to the grassroots under the Thaksin administration to people, farmers, small and medium businesses, special projects, there was a huge amount of liquidity in the rural sector, in fact too much because people could not make productive use of it.
When this government came in, many of these populist policies were cut back. But I believe the cutback was too quick and too severe. It created a very different situation, it affected livelihoods. Of course, in terms of pursuing populist policies, this government does not agree with simply pumping out money to create popularity.
But because a lot of our people are still poor, if you are going to reduce these policies it has to be done gradually, replaced by other policies that will also benefit the poor but not create a lot of the negative impact of populist policy.
So when I came to office, one of my main priorities was to ensure there is more liquidity in the rural sector, the grassroots.
This is being done now through a number of different avenues. The first thing is to disburse the budget more quickly. The government is pushing every ministry and agency to accelerate their budget utilisation.
The second route is through specialised financial institutions which are under the Ministry of Finance. I told them they should look carefully at their lending to small borrowers and try to accelerate it, but look at the quality of the loans. Give loans to people who will make productive use of it. These agencies are now working on different projects that will get money out to these small borrowers.
A third area is to look at indebted people: farmers, small business people, whatever, and find a more sustainable way of dealing with their debts.
In the past, when they tried to solve the indebtedness problem, it was piecemeal. Each time, the farmers formed a mob and came to Bangkok, they surrounded a bank, sometimes our ministry or some other ministry, then they negotiated with them, maybe reduced their interest. The mob went away and, six months later, they were back again. It's not a permanent way to deal with it.
I have asked various special financial institutions to think of dealing with the indebtedness problem in a more strategic way, to create incentives, so that we help the people in a way that they don't want to come back over and over. This is another area which will provide some stimulus to grassroots, rural areas.
At the same time, maybe there could be some tax measure to provide more incentive to the housing sector, which has a lot of backward linkages, to construction materials, furniture and so forth.
So at the moment, we are in a period where the various stimulation measures, whether on the monetary or fiscal side, will now begin to kick in.
These are needed at this stage when the economy is down; you need to provide some counter-signal. But you don't want to do it in a way that becomes just a similar populist policy, and also you have to make sure the way you do it doesn't create big windows of opportunity for corruption. We want to make (projects) more transparent and more market-based.
On economic nationalism
WE JUST signed the FTA with Japan so that is at least a signal that on relations with foreign countries, it is business as usual. But at the same time we have to admit that under this regime, there has been some legislation introduced that had an impact on confidence.
This was really a reaction to the problem caused by the previous government, particularly the sale of Shin Corp.
First of all, the way the sale was conducted created a lot of social protest because everything was structured so that taxes which should have been paid could be avoided.
Many groups felt in the telecoms sector, certain aspects are very much a national monopoly, and giving a national monopoly to a foreign buyer may lead to problems with national security.
And when this government came in as a reaction to that, they introduced the new Foreign Business Act which had the rationale of dealing with the problem of the sale of Shin shares to Temasek.
But in fact, because it is a very broad law, it affects every sector. The Cabinet already agreed on the rationale for the law before I came into office. There has been a slight weakening of the transition period (for companies to declare and reduce shareholdings that are above the limit on foreign ownership) to three years. Of course, we don't know what will happen when it goes to the National Legislative Assembly.
In the medium term, this law is something Thailand should have, because it's simply the same standard as most advanced countries to make your law clear and make sure there are no legal loopholes which people can exploit.
But in the short term, of course, it may not be a good time to do it, because we already have a lot of problems with confidence, from the coup, the capital control measures, the (New Year's Eve) bombing in Bangkok. Event after event was affecting basic confidence, and then you have this law coming out which again adds to that loss of confidence.
But I think now if a new law comes to the Cabinet and it is too extreme, then it will be more difficult (to pass it); more members of the Cabinet are now making their moderate views felt a little bit more than before.
On key priorities
ON THE fiscal side there are two main areas. One is how to make sure mega projects are better scrutinised. Over the past five to six years, you can see clearly there are too many loopholes which allow the executive branch to push through mega projects without careful evaluation. This is to block that so that when future governments come, they will have to follow clear procedures in evaluating feasibility.
The second is fiscal transparency. Under Thaksin, so many of the policies used non-budgetary avenues so that the contingent liability did not show up in the normal accounting process.
I understand in the new draft Constitution, there is one statement about fiscal transparency; this will lead to a law.
This is very important because we can expect that after the next election, when the new government comes in, they will have to introduce populist policies, because this is what the public demands.
In Thailand this is very new. In the past, policies were difficult for people to grasp but, under Thaksin, because of his experience in big business and developing products for consumers, everything under his regime was very tangible for the people in general.
So now they expect that whoever comes into power will have to offer something like that, and it is important we provide a system of fiscal management, to be used as an early warning system of potential distress on the fiscal side.
On how Thailand is placed 10 years after the Asian financial crisis
THE crisis in 1997 was clearly related to the volatile capital flows that began to expand in the early part of the 1990s, particularly short-term capital flows.
At that time, there was a threat of volatility in capital flow in conjunction with mistakes in our policy stance. We had the impossible trinity, a classic example - easy, liberalised capital flow but we attempted to pursue an independent monetary policy.
Between 1989 and 1996, the average overnight interest rate in Thailand was almost four percentage points above the overnight rate in the US. At some periods, it was 10 per cent higher. This led to huge short-term inflow.
We also ignored the fact that you need enough reserves to service the short-term debt. That's why we got into insolvency. It was exactly the same in South Korea and Indonesia.
So we learnt that lesson. The probability of Thailand falling into the same crisis as 1997 is now very low.
First of all, we have a floating exchange rate system. Secondly, we know now we need to not let short-term foreign debt get out of control, so at the moment the ratio is very low.
But at this time, compared with 10 years ago, the risk factor is still the same; volatile capital flow has not gone away, it has increased.
Middle-income countries like Thailand have the greatest difficulty in managing these flows because our financial system is not fully developed; it's still small. Middle-income and emerging markets are attractive destinations for these inflows.
The challenge now is still the same - how do you deal with volatile capital flows?
This is a major challenge, and my view is that in periods when capital flows are very volatile, countries do need some instrument to manage them, and the instruments need to be mild, ones you can finetune, that tend to be weak medicine which you can gradually adjust.
--------------------------------------------------------------------------------
LESSON LEARNT
'The probability of Thailand falling into the same crisis as 1997 is now very low. First of all, we have a floating exchange rate system. Secondly, we know now we need to not let short-term foreign debt get out of control, so at the moment the ratio is very low.'
DR CHALONGPHOB
Qualifications
Education
BA and PhD degrees from the University of Cambridge.
Career milestones
1977 to 1979: Lectured in economics at the University of Southern California at Berkeley.
1979 to 1985: Worked with the World Bank in Washington, DC.
1996 to 2007: Served as president of the Thailand Development Research Institute, an independent think-tank based in Bangkok.
2007: Appointed Finance Minister.
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