The Phoenix gets its wings clipped

THE mood swing from euphoria to panic in the Thai stock market has hit suddenly and very dramatically. Almost two weeks ago Michel Camdessus, the former managing director of the International Monetary Fund, announced that he would confer upon Thailand the institute's highest honour, summa cum laude, and all because of its planned graduation from the "IMF University" in June.

But the financial markets were not impressed with the IMF's scorecard on Thailand: they frantically sold Thai equities in his face.

If you think that the American activist Robert Naiman, who "pied" Camdessus during his Bangkok appearance, was rude, then the foreign institutional investors were even ruder. While Camdessus was slightly embarrassed by the cake-in-the-face incident, Thailand was positively chagrined by the beating it took from the sudden pullout of the foreign institutional investors.

The SET index shed some 100 points, losing almost 25 per cent, between January and the past Wednesday before making a slight rebound over the last two days. The sharp downward adjustment of equity prices has made life extremely difficult for the under-capitalised Thai banks and those cash-strapped companies who depend on the equity market for their liquidity. Is Thailand losing the confidence game again after all the effort it has taken to put the broken pieces of the financial crisis back together?

In a way, it appears that the Thai market is being punished once more for its crime of complacency. For if you read the IMF's or the World Bank's reports on Thailand closely, you'll find that they are not all that happy with Thailand's slow progress in banking reform and corporate debt restructuring. But both institutions have to give Thailand a passing grade. What else can they say - it would only upset the financial markets even more.

There are several theories behind the dramatic fall of the Thai equities. First, Thai equities rose substantially between November and December, outperforming other regional markets. So it was natural that the international money managers would take their profits in January or February to boost the performance of their funds or to meet the redemption needs of their clients.

Second, the Morgan Stanley Capital International index, which provides a benchmark for institutional portfolio investment in the emerging markets, has moved to cut the weighting in Thai equities from 5 to 4 per cent in favour of the Taiwan, Malaysia and Korea markets. Passive institutional investors simply took the advice at face value and adjusted their portfolios accordingly, resulting in the sharp slide of the Thai market. Given the relatively small size of the Thai market, it only needs a couple of billion baht to send the SET index off on a roller-coaster ride. Now the index, which almost broke through the 500-level earlier this year, is dangling below 400 points.

Third, some foreign investors were quite concerned with the new NPLs creeping into the banking system. Banthoon Lamsam, the chairman of the Thai Bankers' Association, recently expressed reservations about the economic recovery because he was still witnessing new NPLs at his bank. Although the net NPLs have fallen from a peak of 47 per cent last year to 30 per cent, the new NPLs will still become a burden for the banks. This has dampened the sentiment of the bank stocks.

The fourth and perhaps most important factor is that foreign investors are very disappointed with the see-saw fight between creditor banks and Thai Petrochemical Industry Plc. The lack of progress in debt-restructuring negotiations, which should have been completed in December, has immensely undermined confidence in the Thai bankruptcy framework.

If the TPI case cannot be resolved, it will be very difficult to move other debt-restructuring cases forward. They view that since the Thai economy still relies heavily on the banking system, creditors should get enough protection for their lendings so that they have the incentive to take further risk to lend money to support the economic recovery.

If the court battle surrounding TPI is not resolved to international expectations, it will send a very negative signal to the financial markets. Debtors who have money to pay will be tempted not to pay, believing that the creditors and the law cannot do anything against them. This moral hazard, if it is allowed to get out of control, will put an end to the Thai recovery.

BY THANONG KHANTHONG