Signs indicate Thailand on recovery path

May 24, 2000

PRODUCTION capacity for batteries, tyres, chemicals and compressors has reached 100 per cent, indicating that companies will have to start making investments soon to cope with the rising demand, said top Thai economic policy-makers. But the real estate and construction-materials sectors are still plagued by over-capacity and will take a few more years to recover, they added.

Speaking to a group of senior business and economic editors on Monday, Finance Minister Tarrin Nimmanahaeminda and his deputy, Dr Pisit Lee-ahtam, tried to inject a sense of optimism against the prevailing poor sentiment over the fragile state of the Thai economic recovery.

They argued that the Thai economy, which is expected to register 5-per-cent growth this year, is on track to recovery despite the recent massive sell-off in the stock market.

Tarrin argued that the stock market, which is moving as per the regional trend, should not be the only barometer to indicate the state of the Thai economy. He said several economic sectors have made a rebound, particularly exports, retail, car sales, and services.

"I have also received a report from the Bank of Thailand indicating that the production of batteries, car tyres, chemicals and compressors has reached full capacity. This means that companies will have to make new investments soon," Tarrin said.

The Board of Investment has also indicated that foreign direct investment is making a comeback. Applications for promotional privileges with the agency in the first four months of this year involved investments valued at Bt100 billion.

Pisit added: "Whether the Thai economy recovers or not depends on who you talk to. Of course, real estate is in a bad shape. We have excess office space of over two million square metres. So it is not easy for this huge space to be used up. But the supply of single homes has run out, and construction of new buildings will have to start soon."

The Chuan government has become alarmed after seeing the stock market lose about 30 per cent of its value since the beginning of this year. The steep fall had raised fears as to whether the Thai economic recovery is for real or otherwise. The dampened sentiment has stood in the way of corporates and banks raising capital at a time when the international financial markets have been virtually shut out for the Thai firms.

Still worse, the banking system is saddled with a high level of non-performing loans - 37 per cent of total loans. Bank lending too has been contracting for 15 consecutive months, raising concerns that good small- and medium-sized companies might not get liquidity support to stay afloat.

According to conventional wisdom, if the Bt6-trillion banking system is not repaired, the economic recovery process cannot be sustained. Over the past three years, Thai banks have lost about Bt700 billion of their shareholders' equity accumulated over the past three decades.

But Tarrin and Pisit argued that in spite of a slowdown in banking activity, the economy is being kept alive by alternative financing.

First, Thailand has been enjoying a massive turnaround in the current-account surplus, which has significantly contributed to the domestic liquidity. An average of US$1 billion is gained every month in current-account surplus, whose proceeds have been used to reduce the Thai corporates' external debt.

As a result, more than US$70 billion in private-sector debt accumulated during the pre-crisis has been brought down to US$32 billion at present. With lower foreign-currency debts, Thai corporates are now less sensitive to rising US interest rates.

Before the crisis, Thailand's shortfall in capital was offset by bank borrowings, which had created a huge current-account deficit.

Second, taking advantage of the low-interest-rate environment, Thai corporates have been rushing to raise money through bonds or debts. In 1999, they raised an overall Bt313 billion in bonds, compared with Bt31 billion in 1998 and Bt38 billion in 1997. And in the first quarter of this year, they continued to issue bonds to the tune of Bt66.7 billion.

By doing so, the Thai corporates have bypassed the traditional banking system.

Third, banking credit appears to have contracted because banks have embarked on debt restructuring with their clients. After restructuring the debts, they set aside 100-per-cent provisions and wrote off the debts.

In the debt write-off process, the banks will experience a shrinking of their assets, hence a contraction in their loan disbursements.

"This is the technical side of the banking system that most analysts have overlooked," said Tarrin.

Most important, the Thai economic recovery can be attributed to a resumption of confidence among the Thai consumers.

Domestic consumption currently accounts for 52 per cent of gross domestic product (GDP), compared with 25 per cent for exports and 10 per cent for government spending.

Tarrin defended the government's fiscal-stimulus programme by comparing it with that of the Japanese government.

He said that last year Thailand pumped 5.5 per cent of fiscal deficit spending equivalent to the GDP into the economy, which resulted in a positive GDP growth rate of 4.2 per cent.

At the same time, Japan raised its deficit spending to 9 per cent of GDP but ended up with a negligible result of merely 0.6 per cent economic growth.

BY VATCHARA CHAROONSANTIKUL and

THANONG KHANTHONG