Published on August 11, 2007
Speaking at a seminar on "Asia Financial Outlook: The Next 10 years," Ammar said the recent evidence showed that most of the new investment in the industrial sector came from multinational companies as local industrialists had lost their appetite for taking risks.
"We have learned from the crisis in 1997 too well. Thai industrialists are no longer trying to obtain the best knowhow. We are all for multinational companies, " said Ammar, acting President of the Thailand Development Research Institute.
He said even the younger generation of powerful businessmen in 1997 tended to go for the service sector such as restaurants instead of the industrial sector, which is the backbone of the economy.
"There is also a problem that our domestic capitalisation is nowhere to be seen in our industrial sector," he said, adding that most of new investment is focused on property development.
"Appetite for risk taking has almost disappeared because of the destruction of the financial sector," he said.
"Greater emphasis on risk management was fine, and that was missing in 1997. But we are learning it too well," he said. "Before the financial crisis, the investment in the Gross National Product's ratio was around 41 to 42 per cent while our savings accounted for around 35 per cent. Since then, the saving ratio and the investment ratio have gone down to around 20 per cent.
"Apparently, throughout Asia, all of us are traumatised by 1997. It's time we have to rethink through the institutional framework to allow risk taking so it will encourage people to invest. The country can grow because people can manage risk," he said.
Ammar also called for the government to rethink the exchange rate policy.
"Another lesson the central bank has learned from the financial 1997 is that they would be much more focused on inflation targeting. That's also fine."
Such inflation targeting seemed to be working for the past 10 years but during the past two years, such a policy didn't seem to be sufficient especially now the Asian region is flooded with American capital.
"Asia is now a refugee camp for American capital that seeks better returns and to avoid the low returns of the American economy," he said, adding that American capital is huge and the money moves very fast.
Such inflows are beneficial to the Americans, but for Thailand, the foreign inflow affects the local economy. It puts a lot of social cost and burden on Thailand. Therefore, the Bank of Thailand's traditional policy of focusing on inflation targeting is no longer tenable.
"It's time the Bank of Thailand officially incorporated that "de facto". We need some kind of institutional set up. The Finance Ministry should work out a strategy to deal with the inflow of capital and how it can be traded off with inflationary strategy.
"There is too much single minded focus on inflation targeting. I believe that inflation targeting is a very good strategy in the stage where the exchange rate is not a problem. But now we have a problem with foreign exchange, we have to rethink," he said.
The government should also have instruments to neutralise and stabilise capital inflow. Some sort of capital control may be necessary.
Prasarn Trairatvorakul, president of Kasikornbank, responded to Ammar's criticism that the private sector lacked the risk taking spirit, by saying that the private sector "had to work for profit." But what's different between now and the precrisis is that "we didn't know the pricein risk before the crisis but now we can pricein. The pricein is better and the private sector is now taking risks through pricing by providing lower costs for good clients."
Meanwhile, the Bank of Thailand believes the baht smugglers could not make as much as Bt4 profit to a dollar and could possibly lose if they sell out the baht for the dollar in neighbouring countries, as claimed by National Legislative Assembly (NLA).
Suchart Sakkankosone, director of Financial Markets Operations Group, said the levels of the baht in onshore and offshore markets would be narrower than today if anyone smuggled the baht out of the country to arbitrage the baht in the two markets. But the gap remained high at Bt34 to a dollar.
For example, speculators bring the baht to Singapore for US dollars. They have to change the baht into Singapore dollars before converting to the US dollar, which would cost them more than the direct exchange.
In addition, they would carry higher costs if they do cash withdrawals abroad for changing to the baht in the onshore market. This way, they have to pay creditcard company fees and interest rates.
"They could not make a profit and could even make a loss, so it could not be like the NLA cited," said Suchart.
Meanwhile, Tarisa Watanagase, the BOT's governor, said the central bank has its own foreignexchange target but could not announce it to the public as it would create a risk. However, the BOT would take the NLA's proposal for consideration.
She said about half of the net foreign selling in the stock market has flowed out of the country. The capital inflows and outflows were a perfectly normal process.