Thailand's Time Warp - Brief Article - Statistical Data Included

Business Asia, July, 2000 by Alex Erskine

The problems are far from fixed, but ALEX ERSKINE(*) believes Thailand deserves more credit for cleaning up its economic backyard

EVEN FREQUENT visitors from Australia to Thailand enter an unusual time warp. Not only is progress in resolving Thai economic problems always slower than previously promised, but Thai attitudes today are identical to Australians' in 1993.

Remember that period of dry thirst when the first beer simply didn't touch the sides? When the despair of the recession had passed but before the evident recovery finally lifted confidence?

Remember the articles lambasting bankers for capricious behaviour? They are being recycled in Bangkok today.

The economic turnaround is in train, with gross domestic product (GDP) growth of 5 per cent likely in 2000 following 4.2 per cent in 1999. Gloom is understandable -- real GDP per capita in local currency in 2000 will still be 7.5 per cent below the 1996 level -- but some portents are good. Everyone understands that the current account balance is still in substantial surplus and inflation dormant.

Better still, the International Monetary Fund is packing its bags. The Stand-By Arrangement expired in June.

Thailand did not draw down its full entitlement and is moving to pay off its debts early.

And the ratings agencies are beginning to recognise marginal improvements in still "speculative grade" credit quality.

Standard & Poors has upgraded some banks and Moody's has started a sovereign "review for possible upgrade".

But all is not rosy in the Thai garden. The banking system has taken a lot longer to fix than the two years that the central bank initially portrayed as necessary. Then, re-capitalising the banks was seen as priority no.1.

With five banks substantively sold to foreigners and others having raised new capital, that problem might appear to have been boxed.

But, as is well-known, non-performing loans (NPLs) -- and their counterpart, a heavily indebted corporate sector -- are the enduring issue. NPLs officially peaked at close to half of all loans outstanding and in the most recent data, for April 2000, still stand at 36.5 per cent.

Cuts in the NPL ratio have been limited largely because existing bad loans tend to be lightly restructured -- say, by temporarily deferring interest payments -- rather than sold down or written off, which means that each month some restructured loans become non-performing once more.

Analysts reckon that the NPL ratio will continue to fall, but no one believes the "best case" 7.4 per cent ratio for year-end projected recently by the deputy finance minister.

The IMF, in issuing its exit review in May 2000, stated the obvious by urging that corporate loan and financial reforms will have to dominate policy for the next three years. Otherwise the recovery, which depends in future on a revitalisation of investment, will be stillborn.

In my view, banks will survive, and, more importantly, so will the economic recovery. The banks jeopardise their health by the "Japanese" approach to treating their wounds.

But the margin between what banks charge their customers and what depositors receive has widened to over 6 per cent, and the capacity of Thai corporations to pay has improved sharply from the levels plumbed in the depths of the recession.

As a result, despite the re-emergence of past bad loans in the NPL pipeline and despite restructuring and write-offs reducing the absolute level of credit outstanding, a glimmer of light is seen in recorded new lending.

The Bank of Thailand looks to credit growth of 2 to 3 per cent in 2000, a marked improvement from the latest -4.7 per cent reading.

The economic recovery will be sustained not only by the banks but also by the stock market and the corporate bond market. Both have proved valuable funding alternatives for existing companies, leaving only new start-ups and the walking dead at the mercy of the banks.

The upshot is that domestic demand has been able to replace net exports as the engine of growth, while both exports and imports are rising at double-digit pace. Investment has already made the crucial turn from cash-constrained cut-back to cautious growth.

Don't expect to read much of this good news, however. It will be over-looked in the self-satisfying bank-bashing and the political turmoil within the electoral system arising from the constitutional reforms started after the crisis.

Year 2000 is a big year for elections -- the Senate, the Governorship of Bangkok and the House of Representatives. The process of cleaning up corruption has seen three attempts to hold fair Senate elections. All but four of the 200 seats have now been decided but a fourth poll is currently in dispute.

The delays and uncertainty in the new electoral process make a decisive outcome for the lower house election, which must be called by November, a remote possibility at best.

So the current government, led by the Democrat Party's Chuan Leekpai, faces a daunting task passing the 2001 budget on a responsible basis ahead of the election, given the obvious reward to the opposition and even the ruling party's coalition partners for grandstanding.