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Privatisations will help foot bills of bankrupt financial sector

 

REVENUE raised from the impending privatisations of state enterprises will be used primarily by the Thai government to foot the bills of the bankrupt financial sector, whose bailout costs are estimated at between 10 to 20 per cent of gross domestic product (GDP), according to IMF officials.

Hubert Neiss, director of the International Monetary Fund's Asia-Pacific Department, said in an interview with The Nation yesterday that the idea of raising revenue from the privatisation of the state enterprises to cover the costly bailout of the financial institutions was proposed by Finance Minister Tarrin Nimmanahaeminda with subsequent backing by the IMF.

Neiss, in charge of the support programmes for both Thailand and South Korea, said the cost of cleaning up the financial system is divided into two parts -- the principal and the carrying costs or interest charges.

For the principal, the revenue will come largely from the privatisation of state enterprises, while the carrying costs will be borne directly by the government's budget, he explained.

From the outset, the IMF programme required Thailand to achieve a budget surplus equal to 1 per cent of GDP to pay for the cost of restructuring the financial sector.

Now, with Thailand having turned the corner with its improved macroeconomic outlook and with a more stable currency, the IMF has conceded its conditions for Thailand are too severe.

This paves the way for the Thai government to increase spending and post a budget deficit instead, allowing the government some breathing space to alleviate poverty and unemployment and stimulate the economy.

Since the main portion of the funding to pay the costs of the financial sector restructuring will no longer come solely from the budget, Tarrin has worked on privatisation as a key strategy to raise revenue for this specific purpose.

Neiss said it is difficult to estimate the total bailout costs of the Thai financial system, but explained that in most countries suffering a financial crisis the cost normally ranges from 10 to 20 per cent of GDP and is spread out over a 10-year period. He added that the carrying costs for cleaning up the Thai financial system would represent about 1-2 per cent of GDP.

Since Thailand's combined output of goods and services (GDP) stands at about Bt5 trillion, the cost of cleaning up the failed financial institutions will eventually reach Bt500 billion to Bt1 trillion. This total cost, which comes as a result of the bursting of Thailand's financial bubble, will be distributed over a period of about 20 years, an enterprise that will have to be assumed by the state, said Reza Moghadam, the IMF's senior economist and representative in Thailand.

The Thai government has closed down 56 finance companies, nationalised four banks and guaranteed both the deposits and debts of the remaining financial institutions in a desperate attempt to shore up confidence in the financial system.

So far the Financial Institution Development Fund (FIDF), a bailout arm of the Bank of Thailand, has pumped in more than Bt1 trillion -- Bt450 billion of which went to the suspended finance companies -- to prevent the financial system from failing. This figure was provided by Prime Minister Chuan Leekpai when he took office more than three months ago.

Nonetheless, taxpayers will eventually have to foot the bills of the FIDF, which received most of its advance money from the printing press of the central bank, by borrowing in the interbank market and from issuing short-term bonds with a coupon rate of 18-19 per cent. The advance money will have to be repaid by the Thai government.

However, the inflationary pressure from the printing has been offset by central bank bonds, which have been overwhelmingly subscribed to by the banks because they carry attractive coupon rates and are risk-free.

Privatisation is one of five areas presently under discussion between Thailand and the IMF. The Finance Ministry intends to initially raise Bt100 billion from further divesting its stakes in four blue-chip state enterprises -- Thai Airways International Plc, Bangchak Petroleum Plc, Electricity Generating Plc and PTT Exploration & Production Plc.

Neiss and Moghadam also indicated that the worst part of the Thai banking crisis was over after the Thai government stepped in to nationalise First Bangkok City Bank, Siam City Bank, Bangkok Metropolitan Bank and Bangkok Bank of Commerce, whose assets account for about 16 per cent of the total banking system. The takeover of these four medium-scale banks, Neiss added, was advised by the IMF, the World Bank and other banking specialists.

IMF officials expect the remaining banks will gradually be able to complete their recapitalisation plans, which can be extended over a period of time. However, the initial phases have to be completed within the first quarter of this year.

Asked about the affects of the auctions of Bt800-billion worth of assets of the 56 closed finance companies, which might trigger an asset collapse in Thailand, Neiss said a balance would have to be achieved between dumping the assets or holding onto them longer than was necessary.

BY THANONG KHANTHONG and VATCHARA CHAROONSANTIKUL

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