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Economic outlook: Worse to come


Wanna Matanachai and Paul Wanglee of Goldman Sachs (Asia) LLC discuss the economic outlook for Thailand with Thanong Khanthong in Hong Kong


What is the general perception foreign investors have of Thailand?

Wanna: They do not see concrete measures in place to cope with the property over-supply situation. They don't really have a clear view, or you can say that the system is not transparent enough for investors to know what the level of the bad debts is or where we are in the cycle of bad debts whether the bad debts have peaked. People would be willing to invest if they knew that the bad debt situation has begun to improve.

What are economists saying about the Thai economy?

Paul: They are actually somewhat positive. But I think we need to see some direction in terms of new economic figures on where the economy is headed.

There are two scenarios, and they are quite different. One scenario is that exports start to pick up in Thailand as in the rest of Asia. And the current account deficit starts to shrink in Thailand, which will dig itself out of the hole that way. That's the external side of the economy, and that would be a positive scenario.

The negative scenario is that exports don't pick up, and the current account deficit continues to widen. That would be a worst case scenario. But we have yet to see clear signs of the emergence of either of these scenarios.

The internal issue is bad debts. That must be resolved.

What is your prediction for Thailand over the next 12 months?

Paul: We think that not all of the bad news is out yet. But valuation-wise, we're somewhat close to the bottom. Valuations are pretty cheap.

The market is trading at about 11 times its 1997 earnings.

Wanna: It remains unclear whether the E (earnings) are there. This is based more on the more optimistic scenario that exports will pick up and things will start to improve. And that would help Thailand to lower interest rates and lower the bad debt burden of Thai finance companies and Thai corporations. If that does not happen, we might not have any earnings there. So it is difficult to say at this juncture.

Earnings might be flat again this year?

Wanna: From now on it's very macro, I think.

Are other countries in the region suffering from the same malaise as Thailand or is Thailand being singled out as facing the most daunting fundamental problems?

Wanna: We are looking at Indonesia. Indonesia does not really have an over-supply in the property sector. On the macro front, it seems that the government is doing a good job curbing the over-heating in the economy. And even without a soft landing, the economy is still going strongly. Inflation is below 7 per cent. Luckily, Indonesia has oil exports to help on the trade side. In the non-oil export side, it is not doing that well.

The overall picture in Indonesia is that the current account deficit has been widening a little bit, but not alarmingly so.

Thailand has a really high current account deficit, probably the highest among the emerging-market countries. We don't have much room to be wrong.


Looking at the Thai banking sector, are there any bargains from an investors' point of view?

Wanna: Investors are pretty confident in Thai Farmers Bank and Bangkok Bank, as you may know. But the question is whether they should get in now or wait a bit longer. There is no need to rush in now. We are not seeing very much earnings growth. If you are in for the long term, it is a great time to buy Thai banks. But I don't know many people who can do that.

Paul: The problem is that we don't see a big catalyst in the near future that outweighs the negatives hanging over the market. Some of the dents that overhang the market right now are the fact that a lot of companies will need to raise capital, so there will be a large supply of equity in the market if it picks up. Second, a lot of foreign investors are still neutral to overweight in Thailand, so they have more stocks than they think they should have in their portfolios.

What is the outlook for the finance sector. Is it getting worse or better?

Wanna: It's going to get worse before it gets better. In terms of the cycle, perhaps the bad debts have not peaked for finance companies. There are too many finance companies, 91 of them in the system.

A consolidation?

Wanna: Consolidation is good for the long term. It is difficult because if you are in finance companies, you want to be in good ones. If you have good ones, you don't want to sell your finance companies. You would have to be given a lot of incentives. But it's bound to happen, although people are struggling with the problem.

From the regional perspective, are Thai banks cheap?

Wanna: The valuations are getting very cheap, but the question is more about fundamentals. We don't really have that much earnings growth. But in the long term, we're optimistic. It depends on good management. The big banks, especially, have good management which should help them ride out the current bad situation and become stronger looking forward.

Is the Thai economy suffering more from structural or cyclical problems?

Paul: It is more cyclical. I look at companies such as Siam Cement and see how quickly their Japanese and American joint ventures are going into the petrochemical, machinery, electrical and automotive sectors. These are companies that are growing at 30 to 50 per cent a year.

That is the future of Thailand. That's the structural change they want to make. They want to make change from low-value-added producers of textile and footwear to products like air-conditioners, television tubes, computers, automobile parts and engines. These are the things that they have been successful producing.

If you look at the auto plants that are going up, it shows that the Japanese and Americans have confidence in Thailand.

They believe that the population can be educated and that the infrastructure is in place. There is a big advantage in what we call critical mass in Thailand.



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