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Buy non-performing loans, govt advised

May 29, 2000

THAILAND should try to "live down" its financial crisis, by formulating a specific plan for the government to nationalise the banking system's bad debts, said Dresdner Bank Group chief economist Klaus Friedrich.

Friedrich, once an adviser to former German Chancellor Helmut Kohl, told The Nation the scale of the Thai banking crisis was so serious, the government's intervention to help carve out bad debts was necessary.

"I think you really need to clean up the banking system first, before you can expect to have sustainable economic recovery," he said. "At this point, you're not out of the woods yet."

Friedrich quoted Paul Volcker, a former US Federal Reserve Board chairman, as saying a country facing financial crisis should not try to tackle the problem all at once, given political and resource constraints, but rather should try to "live down the crisis".

"You should have a very specific plan as to how you will deal with bad debts. The government can take the bad debts out little by little," he said.

"You can stretch it out over five-to-10 years."

At the height of the Thai financial crisis, non-performing loans (NPLs) totalled about 60 per cent of total credit, virtually bringing the Thai credit system to a grinding halt.


"you really need to clean up the banking system first, before you can expect to have sustainable economic recovery."

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Of these bad debts, Bt800 billion, which belonged to 56 defunct finance companies, have been auctioned by the Financial Sector Restructuring Authority.

Last year, NPLs peaked at 47 per cent before decreasing to 37 per cent in February of this year.

The high level of problematic loans in the banking system has stalled credit flows, making life extremely difficult, particularly for small- and medium-sized companies.

Recent selling of Thai stocks can also be attributed to investors' concerns about the persistently high level of NPLs.

The Thai market has shed 37 per cent this year, becoming the region's harbinger.

The government has been following a market-oriented strategy by facilitating corporate debt restructuring, instead of buying the bad debts outright.

Moody's Investors Service, in its banking system outlook, rated the Thai banking system at the bottom of 73 countries, ahead of only Indonesia and Russia (see table).

Friedrich said although alternative financing had taken place -- large companies managing their own leasing or bond issues -- the economy could not recover without a sound banking system.

"As Bill Gates has said, 'you might not like banks, but you still need banking'," he said.

He was rather impressed with the Thai authorities' ability to hold down inflation despite the financial crisis, Friedrich said.

This relative price stability will provide breathing room for the monetary authorities to keep interest rates low, to assist in bank debt restructuring.

"But the Finance Ministry and the Bank of Thailand must work together closely.

"With low inflation, the central bank can do a little money printing to help in this effort," he said.

It was understandable that, for political reasons, the Thai government might be reluctant to spend massive amounts of public money to carve out the bad loans, but at least it could do it gradually with a very clear plan on the table, he said.

In the medium outlook, Thai authorities would have to determine an appropriate level of the current account that might support an economic growth rate of four-to-five per cent, Friedrich said. The Thai economy, which has yet to undergo genuine restructuring, had of late been supported by the current account surplus -- derived from export earnings -- and government deficit spending, he said.

"But what will be an appropriate current account level to support economic growth at four-to-five per cent? This is an important question that you have to try to answer," he said.

The financial crisis has forced an external adjustment on Thailand, which has gone from a current account deficit to a current account surplus country, thanks to its currency devaluation. The current account measures the combined flow of goods and services.

In pre-crisis times the Thai current account deficit hit eight per cent of gross domestic product, which was not sustainable. The deficit, about US$1 billion a month, had to be financed by foreign borrowings. Now the current account surplus has reversed to US$1 billion a month, helping to keep the fragile Thai economy afloat.




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