World Bank says AMC is 'no magic solution'

February 17, 2001

WORLD Bank country director J Shivakumar expressed reservations yesterday about the impending establishment of a national asset-management corporation (AMC), saying it was not a "magic solution" to the economic malaise.

Instead, Shivakumar stressed that the incoming Thai Rak Thai government should focus on the expedition of corporate debt restructuring by strengthening the legal and judicial regime.

Shivakumar's comments mark the first time the World Bank has publicly stated its views on the Thai Rak Thai Party's controversial proposal to form a national AMC to further reduce problem loans in the banking system. Details of the national AMC have yet to be worked out, but Thai Rak Thai has claimed that one would help get the banking system back on its feet and encourage lending.

The World Bank, which has been advising the Thai government very closely over the past three years of the economic crisis, believes the national AMC might not be the best answer to the banking distress because most of the bad debts have already been nationalised by the government.

About 65 per cent of the Bt2.7 trillion in bad debts, which peaked in the middle of 1999, are now on the books of banks taken over by the state or state-owned asset management companies.

Michael Markels, a World Bank senior financial sector specialist, suggested it might be better for the government to focus on managing problem loans to maximise returns.

He implied that if all bad debts in both private and government-controlled banks were carved out and placed into one big pool they might be difficult to manage.

The World Bank and the International Monetary Fund appear to share a similar stance with the Chuan government on corporate debt-restructuring. Former Finance Minister Tarrin Nimmanahaeminda preferred to let private banks tackle their own bad debts by forming their own AMCs, while the government tried to provide incentives or assist in the regulatory environment.

But the rate at which corporate debts are being restructured is far from satisfactory due to weak bankruptcy and foreclosure procedures. The infamous Thai Petrochemical Industry case has dragged on for the past three years - and is still not resolved.

Tarrin has said corporate debt restructuring should be one of the top items on the agenda for the next government, which should move further to strengthen the judicial regime.

Ijaz Nabi, lead economist at the World Bank overseeing Thailand, said forming a national AMC was not as important as tackling corporate debt restructuring, as evidenced in the cases of South Korea and Malaysia. He pointed out that shortly after the crisis, both South Korea and Malaysia set up national AMCs to remove the bad debts from the banking system, yet there has been very little progress in either country in corporate debt restructuring.

Corporate debt restructuring is seen as the key to economic recovery. In the case of Thailand, the slow economic recovery can in part be traced to the debt overhang, with Bt1.5 trillion to Bt1.8 trillion in bad debts locked up in the banking system. If these bad debts could be released back to the secondary market, they would stimulate business and economic activities, and help boost investment and demand.

BY THANONG KHANTHONG