Fears over capital account outflows

September 7, 2000

THE Thai economy could run into a dead spot if it fails to keep the current account in surplus to finance the huge foreign debts of more than US$80 billion, bankers said at a seminar organised yesterday by the Thai Rak Thai Party.

MR Pridiyathorn Devakula, president of the Export and Import Bank of Thailand, expressed his worries over a narrowing of the current-account surplus as imports have surged and threaten to overtake exports if they are not managed carefully.

Macroeconomic signs, he added, have begun to deteriorate since the beginning of this year, with the capital account continuing to face a huge outflow. Moreover, Thailand's net international reserves, which stood at $30 billion at the end of 1999, have not risen since, implying that the country might have a tough time servicing its external debt, including the $12.5 billion owed to the International Monetary Fund.

In the first six months of this year, the country's capital account faced a net outflow of $7.79 billion, compared with a surplus in the current account of $4.8 billion. This resulted in a balance of payments deficit of $2.54 billion. Last year alone, the capital account registered a net outflow of more than $7 billion.

The capital account covers movement of investments, while the current account covers imports and exports of goods and services. Both accounts are a part of the balance-of-payments system, which help a country evaluate its competitive strength and weaknesses and forecast the strength of its currency.

But in economic terms, a balance-of-payments surplus is not necessarily good, nor is a deficit necessarily bad. Rather, the state of the Thai economy and the manner of financing the deficit are important considerations.

In the case of Thailand and the other crisis-hit countries in Asia, foreign capital or investments have not made a comeback substantial enough to support their balance of payments, forcing these countries to resort to competitive currency devaluation to export their way out of the crisis.

Pridiyathorn predicted that Thailand would not see a surplus in net capital inflow over the next two years. He warned the government to be careful about the surge in imports, which rose about 34 per cent in the first six months of this year to $29.10 billion, compared with a slower 21-per-cent growth in exports to $31.96 billion.

Kosit Panpiemraj, executive chairman of Bangkok Bank, voiced a similar concern over the high level of the country's external debts, emphasising that the current account must be kept in positive territory or else the country would face another debt crisis.

"We have to strengthen our debt-servicing ability. We cannot afford to run a current-account deficit," he stressed. "Don't forget that the foreign debts pushed us into the crisis in the first place."

The Thai private sector has repaid more than $30 billion in external debts over the past three years. This brought the corporates' foreign-currency debt down sharply from $91.9 billion in 1996, to $85.2 billion in 1997, $74 billion in 1998, $59.6 billion in 1999 and $56.1 billion in March 2000.

But the country's total foreign debt remained high at $92.3 billion in March due to the public sector's external borrowings to offset the liquidity crunch created by private capital outflow.

"The Thai economy has continued to register positive GDP growth consecutively over the past 18 months. But at this point we are concerned that the overall growth of more than 4 per cent a year has begun to show signs for worry. How can we continue to have growth so that the current account remains in surplus?" Kosit asked.

Pansak Vinyaratn, adviser to the Thai Rak Thai Party, pointed out that Thailand has to reduce the import content of export products by turning to domestic raw materials.

Somkid Jatusripitak, a deputy party leader, said that the government must be the leading investor because the private sector is still weak. The Thai government should learn from the Singapore government, which holds shares in private firms.

Surakiart Sathirathai, former finance minister and deputy party leader, said that if elected to power, Thai Rak Thai would set up a national asset-management corporation to buy part of the non-performing loans from the banking sector.

The party will also allow about 20 million small farmers to suspend debt repayments to the Bank for Agriculture and Agricultural Cooperatives (BAAC) for three years. The government would shoulder the interest cost of Bt18 billion a year, while the farmers would still be required to repay the principal, he said.

Pitak Intrawityanunt, another Thai Rak Thai deputy leader, said that Thailand has competitive agriculture, agribusiness and tourism industries, but the current government does not put adequate investment into these areas.

BY THANONG KHANTHONG and WICHIT CHAITRONG