THE Thai government has decided to plunge headlong into pumping up the economy by going for a 5 per cent fiscal deficit, spending and adopting lax monetary policy in full support of economic recovery, completely reversing its stance of a year ago when Thailand was in a full-blown crisis, according to its Sixth Letter of Intent agreed with the IMF.

By giving the Thai government the go ahead for a 5 per cent deficit spending, the IMF signals its change of heart from a standard prescription of painful stabilisation to a full adoption of Keynesian style stimulus spending. Moreover, for the first time since the inception of the rescue programme in August last year, the IMF indicated its willingness to let loose the monetary conditions to set the platform for economic recovery.

An unnecessarily tight fiscal programme and the awkward pace of bringing down interest rates have been largely blamed for creating severe recessionary conditions in Thailand, which is expected to register a contraction of gross domestic product between 7 and 8 per cent. However, the Sixth Letter of Intent said there are signs that the economy is bottoming out, with domestic demand starting to level off. It added that economic growth be resumed next year at about 1 per cent, with most of the growth in the fourth quarter, 3 to 4 per cent.

Easing fiscal and monetary conditions have come about as inflation and the exchange rate have been kept under check. Moreover, with the country recording a trade surplus of more than US$1 billion per month, foreign exchange reserves have strengthened dramatically. The US$20-billion obligations in foreign offshore swap contracts, built up last year to defend the baht, were completely settled in October. This factor, coupled with a weak US dollar, has helped to stabilise the Thai exchange rate.

The Sixth Letter of Intent also broadens its focus on financial sector restructuring and corporate debt restructuring, two key areas which appear to have lagged behind schedule. The Financial Institution Development Fund has been urged to speed up mergers and sales of those banks and finance companies in which it has intervened with debt-to-equity conversion.

Most important is an anticipated move by the Bank of Thailand to bring all remaining financial institutions to the negotiating table, where they are obliged to sign memorandums of understanding that they will remain fully capitalised in the six months to June 1999. The Letter of Intent said there have been a number of institutions wishing to seek public resources for their recapitalisation, either through tier-1 and tier-2 capital support programmes.

Delay in banking recapitalisation has been one of the stumbling block to economic recovery, because banks have also virtually stopped lending or creating further asset risks. About 40 per cent of their loans have been booked as non-performing, so affecting their solvency. Speaking from India, where he is attending a conference, Deputy Prime Minister Supachai Panitchpakdi said he expects bank recapitalisation will be completed on schedule, before the first half of 1999.

The Letter of Intent said efforts have produced results on corporate debt restructuring. Half of the first target group of 200 key cases, involving some 353 companies and debts of about Bt674 billion, have begun debt restructuring in line with the Bangkok Approach. Overseeing this process is the Corporate Debt Restructuring Advisory Committee, chaired by Bank of Thailand governor MR Chatu Mongol Sonakul.

The Thai government admits in the Letter of Intent that the process of amending the Bankruptcy Law, the Code of Civil Procedure and the Alien Business Law, has taken longer than anticipated due to the large volume of bills pending in Parliament. In fact, there is a political storm about these bills, particularly in the Senate, over fears that individuals will be squeezed by their creditors until they are totally bankrupt. Fears of prevailing foreign influence in the Thai economy have also been a political factor stalling passage of the bills, which will eventually be passed with some watering down.

The Thai government has asked for a waiver of its commitment to pass the Bankruptcy Law Amendments on Oct 31, 1998. It also shows its determination to move to the next phase of foreclosure reform by amending the Civil and Commercial Code by mid-1999. Success in corporate debt restructuring hinges significantly on passage of these key laws, which will speed up the bankruptcy process and give debtors a chance to rehabilitate their businesses.

In a similar period, the Thai government is also expected to pass amendments to commercial banking laws to revamp the Thai banking system. The Bank of Thailand's new financial supervision framework will be put in place by the third quarter of 1999.