Credit woes may scuttle recovery

THAILAND’S economic recovery, buoyed by manufacturing production and exports, could suffer another crisis if the credit system is not restored quickly enough, an Asian Development Bank report has warned.

“Asian Development Outlook 2000” was released yesterday in Bangkok by the Manilabased development bank.

The report said Thailand’s biggest immediate challenge was to restructure the financial sector and solve the problem of nonperforming loans.

“If lending does not resume quickly, viable companies that survived the crisis may eventually succumb to sustained liquidity problems,” the report said.

“This could cause another wave of business closures and higher unemployment. Many commercial banks have so far been reluctant to restructure problem loans and accept actual losses [haircuts].”

Lending by Thai banks has continued to contract, falling by 10.13 per cent in the first three months of this year.

ADB economists admitted the problem in the Thai banking sector was tough, because it was also linked with debt restructuring in the corporate sector.

“If the corporate sector restructuring improves, it will also help the banking sector,” said Yoshihiro Iwasaki, director of the ADB’s programmes department.

However, the bank – whose annual board of governors meeting will be held in Chiang from May 6 to 8 – sharply criticised the way Thai banks were restructuring their loans, alleging they were taking an easy path.

“Most have opted for less painful rescheduling, such as stretching out the amortisation schedule.

“However, this merely postpones solving the problem,” the report said.

“Problem loans will resurface once the extended repayment period is reached, unless additional liquidity is introduced rapidly into the system through foreign capital inflows.”

However, after the crisis in 1997 and 1998, economic growth in Thailand resumed in 1999, expanding by 4.1 per cent.

The ADB expects the Thai gross domestic product to grow by 4.5 per cent this year and 4.6 per cent next year.

But growth rates would not return to precrisis levels, it said.

“Capacity utilisation in the manufacturing sector should reach normal levels of around 70 per cent in the first half of 2000, which should be reflected by a return to positive private investment levels,” the report said.

“While the recovery in 1999 was primarily exportdriven with additional support from public stimulus measures and tourism, domestic consumption must rise if GDP growth is to continue in 2000 and 2001,” it said.

In the medium and long term, Thailand faced the challenge of upgrading its industries and improving its productivity, because wage increases had undermined the competitiveness of its labourintensive industries.

But eventually Thailand’s competitiveness could only be achieved by industrial upgrades.

“This requires substantial investment in specialised education, research and development, and other knowledgeenhancing measures,” it said.

“This should help the industry sector further develop a hightechnology base in computers, electronics and other technology and knowledgeintensive products and services,” the report said.

BY Thanong Khanthong