Thai Rak Thai likely to clash with IMF

The Thaksin government's working relationship with the International Monetary Fund is not likely to be entirely smooth, Thanong Khanthong writes.

Thaksin Shinawatra yesterday hinted that he would hold talks with the International Monetary Fund shortly after forming the new government.

It is still too early to spell out details of the planned talks, but the telecom billionaire made it clear throughout the election campaign that he does not hold the IMF in high regard.

Thaksin and his economic advisers have argued that the economic programme initiated by the Chuan government and the IMF over the past three years has further damaged the economy.

So the Thai Rak Thai government's first order of business will be to stop the deflationary forces, stabilise the economy and create a sustainable recovery through a new economic paradigm.

In fact, the country has already completed the three-year IMF programme, and is no longer subject to the policy conditions of the IMF bailout package. Therefore, the new government will be free to draft and administer its own economic policies without any IMF intervention.

The post-IMF programme simply involves monitoring the progress of structural reforms - chiefly corporate debt restructuring, financial sector restructuring and legal amendments.

In December, the IMF's executive board expressed cautious optimism about the recovery, which was still hampered by weak market sentiment and the baht's weakness, among other factors.

Still the executive board said it believed growth of 4 to 5 per cent this year was within reach.

The IMF's executive board would like to see the speedy implementation of reforms to accelerate corporate debt restructuring. In particular, the board emphasised an urgent need to strengthen the legal framework for debt restructuring, with respect to the design and application of insolvency laws and the enforcement of creditor claims.

Finance Minister Tarrin Nimmanahaeminda agrees that debt restructuring is the most important economic issue.

"Right now there is a lot of mistrust between creditors and debtors, which has slowed down the pace of debt restructuring. I think we might need to go back [to re-examine legislation] to strengthen the legal framework," he said in December.

However, some key members of the Thai Rak Thai have already expressed a desire to revise the bankruptcy law to provide more protection to debtors, who they argue have been unfairly treated by creditors.

For instance, one proposed amendment would restore some leverage for credit card debtors (Bt40,000 and below). Another would address the problems of companies or individuals with debts of at least Bt 2 million, and would allow such parties to ask for court restructuring.

At present, the law only allows restructuring of debt for a minimum of Bt10 million.

However, these are not likely to be implemented, given that there are more important items on the Thai Rak Thai agenda, according to a report from Merrill Lynch Phatra Securities Co.

The IMF would like the new government to concentrate on tackling the bad debts in the government-run banks and the asset-management companies (AMCs) and let the private banks handle their own AMCs.

But the Thai Rak Thai has proposed a universal buy-out of bad debts through a national AMC.

The party's scheme remains the subject of debate, as no one knows whether a national AMC could really put the banking sector back on a lending track and reduce the public's debt burden.

One way of reforming the financial sector is to privatise the state banks. This is what the IMF would like the new government to continue doing.

But the Chuan government was not able to find suitable buyers. The Hong Kong and Shanghai Banking Corp recently pulled out of a deal to acquire the Bangkok Metropolitan Bank. Meanwhile, Siam City Bank has been unable to ink an appropriate deal.

Thaksin is now considering whether to merge the Bangkok Metropolitan Bank and Siam City Bank and turn the new entity into an SME bank. The new bank would provide credit support to the small and medium-sized enterprises - a key part of Thai Rak Thai's campaign platform.

The IMF would like the new government to extend the August 14th Banking Restructuring Programme, due to expire at the end of this year. This would ensure investors' confidence that if worse comes to worst, the private banks would still have official capital to turn to if they failed to raise enough capital to satisfy international standards.

This is a rare area of agreement. The Thai Rak Thai has made it clear that it would like to continue this restructuring programme.

To modernise the financial system, the IMF has urged the new government to seek early passage of the Financial Laws, the Bank of Thailand Act and the Currency Act, drafted under the Chuan government. These laws have been removed from the parliamentary process due to the dissolution of the House of Representatives.

The Thai Rak Thai has not stated clearly what it intends to do with these laws, but its priorities are to work on the budget amendments so that it might extract money to fulfil its campaign pledges - which are projected to cost Bt30 billion to Bt40 billion a year.

While encouraging the government to continue pursuing a macroeconomic policy to support the recovery, the IMF believes that the next government should try to adopt fiscal consolidation in the medium term.

This means that taxes would have to be raised to generate enough revenue to pay for the runaway public debt. At the moment, public debt stands at Bt2.8 trillion, about 56 per cent of the gross domestic product.

But the Thai Rak Thai has pledged to cut the corporate income tax from 30 to 25 per cent to stimulate investment. Thaksin has also said he would like to keep the 7-per-cent value-added tax unchanged. The law requires the rate to be raised to the original 10 per cent by October.

While the Chuan government has had an excellent working relationship with the IMF, there is no guarantee that the Thai Rak Thai is interested in nurturing it.

Apart from the sharp differences in economic philosophy, Thaksin's party is burdened by political pressure to fulfil its campaign pledges.