Threat of asset deflation looms
The IMF can only guarantee sovereign risk but it does not have experience handling corporate risk, Vatchara Charoonsantikul and Thanong Khanthong write.
The IMF badge now elegantly worn on Thailand's shoulder does not automatically guarantee that the country will escape from an impending asset collapse as a result of corporate risk. For Thailand, the IMF stands strictly for It's My Fault.
The IMF-sponsored financial and economic reform for Thailand, through a combined US$20 billion in stand-by credit and bridge loan arrangements, is only aimed at addressing the sovereign risk. The stand-by credit will be largely placed at the doors of the Bank of Thailand, which will use it as foreign exchange reserves to prop up the baht and cushion international trade transactions. The credit will have nothing to do with corporate risk. The debt structure of Thailand, unlike that of most other troubled countries seeking the IMF cure, is 80 per cent private and 20 per cent public. Hence, resolving the sovereign risk does not necessarily alleviate the corporate risk. The IMF does not have experience in dealing with a country with a corporate risk like the one Thailand now has.
Thailand's external corporate debts amount to about US$70 billion, $42 billion of which is loans provided by Japanese banks. Dr Virabongsa Ramangkura, the deputy prime minister, has expressed deep gratitude to the Japanese banks for rolling over about 80 per cent of their loans.
The remaining US$28 billion are loans extended to Thai companies by American and European banks, which are still highly suspicious of the deteriorating asset quality of their clients.
Looking ahead, it will be tough to win back confidence. The IMF's austere programme clearly spells out the need to change the reckless behaviour of so many people living beyond their means.
This year the current account deficit, the gap between domestic savings and investment demand, will fall to 5 per cent, about $10 billion, of the gross domestic product (GDP), compared to last year's 8 per cent.
The IMF would like Thailand to further reduce the current account deficit to 3 per cent next year, amounting to a harsh attempt to contract the economy. Corporate bankruptcies and unemployment pressure will be widespread as a result of this shock therapy. How can fresh loans continue to flow in, given this severe environment?
The risk ahead lies in the impending collapse of assets. The banking and finance authorities are scrambling to tackle the 58 ailing finance companies and the remaining 33 finance companies and 15 commercial banks.
Some of the 58 ailing finance firms may be put on a fast-track package under which they will be allowed to re-open their doors for business, seek new partners, and have their due diligence conducted later. However their net worth should be at least 30 per cent between assets and liabilities to qualify for the fast track.
Those who fail to qualify for the fast track will be subject to purchase and assumption. The government will only take responsibility for the gap between bad assets and good assets. For this purchase, it will be setting aside Bt50 billion for the purpose of subsidies.
The government will also help the 42 finance companies shut down in the second round by negotiating with the foreign creditors to roll over the debts and reduce the interest burden to 2 per cent. Most of these cash-strapped 42 companies are fundamentally sound.
A loan syndication for the good clients of these ailing finance companies will be provided. The medium-scale companies, which are fundamentally sound, are suffering from a liquidity dry-up because their deposits and loans are getting stuck in the beleaguered finance companies.
The remaining ''healthy" 33 finance companies and 15 banks will be required to strengthen their balance sheets by recapitalisation or by forming new partnerships. They will also need to undergo a management restructuring. Foreign ownership in Thai banks and finance companies will be raised to 49 per cent.
If necessary, the healthy finance companies or banks may be required to reduce their capital first before undergoing a capital increase to accommodate the new partners.
Now the Thai economy is facing asset price deflation from the bursting of the bubble economy. The asset collapse will take place after the finance companies or banks are willing to let go of properties held as collateral to settle the debts.
For instance, if a finance company is to offer its stocks to a foreign investor at Bt12 a share, the foreign investor might bargain down to Bt7 a share. The purchase and assumption process, in which good and bad assets will be separated through outright buy-outs or mergers and acquisitions, will also accelerate asset deflation. If that is to happen, it will trigger widespread asset collapse.
The storm has not yet abated.