With a view to mitigating the impact of the current economic crisis, stabilizing the economy, and returning Thailand to its recovery path, the Government has implemented a number of significant measures, including increasing government expenditures for the poor and the underprivileged, postponing corporate income tax payments, and restructuring the financial sector. Most recently, the Government introduced an economic stimulus package on March 30, 1999. The package consisted of increases in public expenditures and reductions in taxes and energy prices. The March 30 package was aimed at increasing employment, alleviating the impact of the crisis on the poor, stimulating private consumption and investment, and reducing the cost of living.

                These measures have yielded clear results. Economic stability has been achieved. Interest and inflation rates are low, and the exchange rate stable. The current account has been in surplus, and exports have increased steadily. International reserves have been rebuilt to satisfactory levels. Many production and consumption indicators have improved steadily during the first half of 1999 (Attachment 1). To further promote economic recovery, support the economic restructuring process, and enhance the long-run competitiveness of the private sector, the Cabinet approved today a set of measures to encourage private investment. This new set of measures consists of four parts: (1) tax and tariff measures; (2) equity investment measures; (3) measures to promote the recovery of the real estate sector; and (4) measures to improve financing for small and medium enterprises (SMEs).

                The establishment of the Thailand Recovery Fund and the Fund for Venture Capital Investment in SMEs which form part of the equity investment measures as well as the restructuring of the Small Industry Credit Guarantee Corporation and the Small Industry Finance Corporation which form part of the measures to improve SME financing were jointly proposed by the Ministry of Finance and the Ministry of Industry to the Cabinet.

                The measures approved by the Cabinet are summarized in Attachment 2, and are described in further detail below.

1. Tax and tariff measures

                The Cabinet has approved several important tax and tariff measures to promote private investment, lower production costs, improve
corporate liquidity, and reduce consumer prices. Furthermore, the Cabinet has also eliminated the registration requirement for the import and
export of gold. The tax and tariff measures are described below.

            1.1 Tariff measures
                The Customs Department collects import duties on over 9,000 items. As part of its continuing efforts to improve the tariff structure, the Ministry of Finance is in the process of preparing a comprehensive reform of the country’s tariff structure in line with the country’s development and forthcoming international commitments. Under the ASEAN Free Trade Area (AFTA) agreement, for example, import duties will have to be reduced to 0-5 percent on 85 percent of total product items, representing over 7,000 items, on January 1, 2000. Furthermore, under the Information Technology Agreement (ITA), 153 items will be exempt from import duties. Given the difficulties faced by producers due to prevailing economic conditions and these forthcoming international commitments, the Cabinet approved a variety of tariff measures to lower costs and enhance competitiveness.

                In identifying these tariff measures, the Ministry of Finance has consulted with the Federation of Thai Industries and the Thai Chamber of Commerce. The measures focus on capital goods, raw materials, and products that are not being produced domestically. The proposed tariff measures are detailed in Attachment 3 and include:

(1) Reduced tariffs on capital goods, raw materials, and other products.

(1.1) Capital goods

• Tariff reduction on machinery and mechanical appliances and parts; electrical machinery and equipment and parts; and
  measuring, checking, precision instruments and apparatus from 5 and 20 percent to 3 percent for 326 items.

(1.2) Raw materials

• Tariff exemption on fish or crustaceans, molluscs or other aquatic invertebrates for breeding, which previously faced a tariff rate of 60 percent.
• Tariff reductions on raw materials for cosmetic, pharmaceutical, food and other industries including lanolin, jojoba oil, vitamin premix, dried glands and organs for medical use from 10 percent to 5 percent; and on artificial waxes and prepared waxes from 20 percent to 10 percent for 26 items.

• Tariff exemption and reduction on chemical products which are inorganic chemicals, organic chemicals, fertilizers, and miscellaneous chemical products from 5 and 10 percent to 1 percent for 148 product items; from 10 percent to 5 percent for 69 items; and tariff exemption on 5 products which previously faced a 5 percent import duty.

• Tariff reduction on 11 plastic items from 20 percent to 10 percent.

• Tariff reduction on lupins, alfalfa, and canola meal from 10 to 40 percent down to 5 percent for 5 items.

• Tariff exemption on 5 cotton items which help to improve the quality of textile products and which previously faced a 5 percent import duty.

• Tariff reduction on copper cathode from 6 to 1 percent.

• Tariff reductions on 12 iron items including Tin Mill Black Plate (TMBP) iron and Hi Carbon iron from 2, 10, and 12 percent to 1 percent.

• Tariff exemptions on precious metals including pearl, silver, and platinum for 21 items which previously faced import duties

of 1, 5, and 10 percent. Tariff reductions on artificial jewelry from 30 and 60 percent to 20 percent for two items.

• Tariff reduction on other raw materials including skins and other parts of birds from 20 and 35 percent to 10 percent; on waste and scrap glass from 5 to 1 percent; and on glass rods from 10 percent to 5 percent for 6 items.

(1.3) Other products

                                                The tariff rates of three other products will be restructured in line with the new Harmonized System.
The above tariff reductions and exemptions are on a permanent basis, except for the following reductions which are temporary.

                                              -The tariff reductions on inorganic chemicals, organic chemicals, TMBP iron, and Hi Carbon iron to 1
percent are valid until 31 December 2003, when the tariff rates will be increased to their respective rates in the tariff structure or set at appropriate rates to be considered by the Ministry of Finance.

                                                -The tariff reduction on copper cathode to 1 percent is valid until 31 December 2000,
when the Ministry of Finance will re-consider the appropriate rate.

                The Cabinet has decided to remove the 10 percent import duty surcharge which was collected
since October 15, 1997 on items with a tariff rate over 5 percent.

                These measures will directly assist producers in a wide range of industries. For example, the food processing industry will benefit from the tariff reduction on TMBP iron. Producers in the pharmaceutical and cosmetic industries will benefit from lower tariffs on key inputs. The textile industry will benefit from lower cotton and chemical tariffs, while the electronics industry will benefit from lower copper cathode duties. Furthermore, producers in general will face lowered production costs because of the reduced tariffs on chemicals and machinery. At the same time, the removal of the
import duty surcharge will lessen the degree of protection provided to industry and encourage more efficient production.

                Consumers will also benefit from these measures in the form of lower prices of goods. The Cabinet has mandated the Ministry of Commerce to monitor the prices of items which have been affected by the tariff reductions.

                    It is expected that the Government will lose revenue of approximately 4,985 million baht a year as a result of these tariff changes.

                While current tax regulations allow businesses to calculate depreciation expenses according to any generally accepted accounting method, any changes in the method used require the approval of the Director-General of the Revenue Department. In practice, the majority of businesses currently employ the straight line method of depreciation.

                To encourage private investment and enhance the productivity of  the private sector, under the measure approved by the Cabinet, businesses can now freely choose the double declining balance method of depreciation, by which assets can be depreciated at twice the rate of the straight line method. Furthermore, businesses can fully depreciate the remaining book value of the asset in the last accounting period of the useful life of the asset.

                This measure will be applied to fixed assets such as machinery and parts, office equipment, forklifts, aircraft, boat, and other vehicles, but does not apply to passenger cars. The measure applies only to assets acquired after the date when this measure enters into effect.

                The use of the double declining balance method of calculating depreciation expenses will increase the after tax cash flow of businesses during the initial period of the life of the acquired assets without having any long term effect on government revenue.

1.3 Eliminate the Export and Import Registration  Requirement for Gold

                    On October 15, 1990, the Cabinet approved the deregulation of  the export and import of gold and mandated the Ministry of Finance to amend the necessary rules and regulations accordingly. To this end, the Ministry of Finance has amended regulations to allow the general public to register for licenses for the export and import of gold. To further liberalize the export and import of gold and support industries such as jewelry and electronics that require gold as an input, the Cabinet has eliminated the registration requirement for the import and export of gold.

        The Government has continuously supported business restructuring efforts, including the crucial debt restructuring process. To further support such restructuring efforts, the Government recognizes the need to provide equity investment to support new investments as well as assist the recapitalization of restructuring companies. To this end, the Cabinet has approved the establishment of three new funds: the Equity Fund; the Thailand Recovery Fund; and the Fund for Venture Capital Investment in SMEs. By helping to lower the debt to equity ratio of Thai businesses, investments by these funds will lower costs and reduce risks to both the real and financial sectors.

2.1 Equity Fund

            The Ministry of Finance has mandated the International Finance Corporation (IFC), an international financial institution which is part of the World Bank Group and registered in Thailand, to establish an Equity Fund to invest in large-scale enterprises in Thailand which are competitive, including those which have already completed or are in the process of debt restructuring.

            The fund will have initial start up capital of 500 million US dollars or approximately 18,500 million baht, which may subsequently be increased to 1 billion US dollars or approximately 37 billion baht. Fifty-five percent of the fund will come from investors who are nationals or residents of Thailand, consisting of the public sector (20 percent), the Thai private sector (20 percent), and IFC (15 percent). The remaining 45 percent will come from international private investors to be selected by IFC.

         2.2 Thailand Recovery Fund

                            The Ministry of Finance and the Ministry of Industry has mandated the Asian Development Bank (ADB) to establish the Thailand Recovery Fund to invest in competitive, medium-scale enterprises in Thailand. The Oversea Economic Cooperation Fund (OECF) has also expressed strong interest in jointly investing in the fund. The fund will have an initial start up capital of 100 million US dollars or approximately 3.7 billion baht.

                            Both the above funds will be professionally and privately  managed on a commercial basis.

2.3 Fund for Venture Capital Investment in SMEs

                            The Cabinet has also approved the establishment of the Fund for Venture Capital Investment in SMEs, for which the Ministry of Finance has allocated 1 billion baht of funds drawn from structural adjustment loans. Additional investors are also possible.

                            The fund will be a closed-end fund with a life of 10 years and will invest in competitive SMEs. The primary objectives of the fund are to strengthen the competitiveness, management, and financing capability of SMEs. At the appropriate time, the fund will recoup its investment by selling its shares in the new stock market for SMEs, to the proprietor of the SME, or to other investors.

                            A committee will be established to set out the investment policy of the fund. A separate committee will be set up to select a private company to manage the fund. The fund will seek the cooperation of private sector bodies such as the Federation of Thai Industries and the Thai Chamber of Commerce in proposing commercially viable investments.

3. Measures To Promote the Recovery of the Real Estate Sector

                    The Government has undertaken several important measures to facilitate the recovery of the real estate sector. These include legal measures such as the Amendment to the Land Code (No.8) B.E. 2542, and the Condominium Act (No.3) B.E. 2542. However, the real estate sector, in particular the residential property sector, still faces two significant structural problems. First, consumers are unable to find long-term financing for residential mortgages on sufficiently attractive terms. Second, many real estate developers are experiencing financial difficulties and are unable to complete their projects, leading to a large number of unfinished housing developments. A large number of home buyers are unable to occupy the housing for which they have already paid. At the same time, prospective buyers are unwilling to risk making new purchases.

                    To address systematically these problems and help people to obtain housing, the Cabinet has approved a set of measures to promote the recovery of the real estate sector. These measures have three main components: (1) providing long-term, fixed rate mortgage financing through the Government Housing Bank (GHB) and the Second Mortgage Corporation (SMC); (2) enhancing the role of the National Housing Authority (NHA) to take over and complete unfinished residential projects; and (3) reducing the real estate transfer fee.

                        Though several private financial institutions have begun to offer mortgage financing on more attractive terms, they are unable to provide fixed rate financing on a sufficiently long term basis since they rely on short-term deposits for their funding. Furthermore, they also charge high fees on top of their interest charges and provide limited loan to collateral value. To provide an alternative for prospective low-to-middle income home buyers, the Cabinet has approved the provision of long term, fixed rate residential mortgage financing at attractive terms through the GHB and the SMC. This financing will allow more people to own homes and decrease the excess supply of housing. The details of the measures are as follows.

                                    (1) GHB will provide mortgages with a 30-year repayment period with an interest rate fixed every 3 or 5 years depending upon the customer. To this end, GHB will issue 46 billion baht in bonds over a period of nine months starting from August 1999. The issue will be guaranteed by the Ministry of Finance for the first three- or five-year period. Upon the maturity of the bond, the Ministry of Finance will determine whether or not further guarantees are appropriate. GHB will lend 21 billion baht on its own directly. The remaining 25 billion baht will be onlent to other financial institutions for the purpose of granting mortgages on the same terms and conditions as GHB to low and middle-income home buyers.

This financing can be used for

1. Purchasing completed housing projects, including houses, commercial buildings for residential purposes, and condominiums;
2. Purchasing empty land only in real estate projects that have been given the right to develop land;
3. Providing mortgages to homebuyers of unfinished housing projects;
4. Providing loans for residential construction on the borrowers’ land;

                            The financing cannot be used for purchasing or selling property among family members nor be used by a project owner or project owner’s family members to buy a house in their project.

                            GHB will provide mortgages with a maturity determined by the borrower, but not exceeding 30 years. The lending amount will be up to 90 percent of the property’s market price, but no more than the value of collateral and may not, in any case, exceed 5 million baht.

                                (2) The SMC will issue 4 billion baht in bonds with a Ministry of Finance guarantee during the first 3- or 5-year period. The funds will be used for purchasing mortgages from commercial banks and other financial institutions that have the same terms and conditions as those of the program described above. The first 20 percent of loss incurred must be borne by the financial institutions.

                Financial difficulties have prevented property developers from completing their projects and have also prevented home buyers from taking possession of their homes. To address this problem, the Cabinet has approved an enhanced role for the National Housing Authority (NHA) to purchase, take over, and complete such projects.

                NHA will only consider buying projects that are over 50 percent complete, and will give priority to projects where the original buyers account for over 60 percent. To ensure that the benefits of this measure accrue to low and middle-income home buyers, there are additional conditions regarding the final sale price of the units. In the case of condominiums, the retail price should not exceed 1 million baht per unit, while in the case of a house, the price should not exceed 2 million baht per unit. No more than 10 percent of the units in a project offered to NHA may exceed these limits.

                To ensure transparency, NHA will publicly announce its guidelines and conditions for purchasing projects, project valuation, and other procedures. Furthermore, information regarding the decision behind every project considered will be subsequently disclosed.

                The period for purchasing projects will be 2 years, until 31 December 2001, and the funds employed will not exceed 15 billion baht. It is expected that this measure will help to create approximately 20,000 housing units for low- to middle-income people, as well as reduce the burden of non-performing loans on financial institutions.

                3.3 Reducing real estate transfer fees

                    To support the above two measures and assist the recovery of the real estate sector, the Cabinet approved the reduction of the real estate transfer fee from 2 percent of the appraised value to 0.01 percent for single houses, twin houses, townhouses, commercial buildings used for residential purposes, and condominiums. The reduction is subject to the following terms and conditions.

1. The transfer of building or building with land such as single house, twin house, townhouse or commercial building is in accordance with the Land Allocation and Control law.
2. The transfer of condominiums is in accordance with the Condominium Act.

                    The reduction of transfer fees will be effective on the date following its announcement in the Royal Gazette until December 31, 2000. By reducing transaction costs, this measure will help to stimulate real estate transactions and promote the recovery of the sector. The revenue loss from this measure is estimated at approximately 2,500 million baht through to the end of 2000. As the reduced fees will affect the income of the district administrative organizations (DAO), the Cabinet has approved the compensation of the DAO for its foregone revenue by using the additional balance remaining from the March 30 economic stimulus package.

4. Measures to improve SME financing

                    The Government fully recognizes the importance of SMEs in generating employment. For this reason, the Government has enacted a series of ongoing measures to support SMEs. These include, among others, arranging over 35 billion baht in credit for SMEs through the specialized financial institutions and the Bank of Thailand, as well as establishing a special stock market for SMEs. To further enhance the long-term effectiveness of SME financing, the Cabinet has approved the restructuring of two critical specialized financial institutions, the Small Industry Credit Guarantee Corporation and the Small Industry Finance Corporation, as well as the establishment of Financial Advisory Centers for SMEs. The details are as follows.

                    4.1 Restructuring the Small Industry Credit Guarantee Corporation

                        A major constraint facing SMEs in obtaining financing is a lack of sufficient collateral. To alleviate this constraint, the Small Industry Credit Guarantee Corporation (SICGC) was established under the Small Industry Finance Corporation Act B.E. 2534 to provide credit guarantees on the uncollateralized portion of SME loans. The SICGC has start-up capital of 400 million baht. Its major shareholders are the Ministry of Finance; the Government Saving Bank; the Industry Finance Corporation of Thailand; and the members of the Thai Bankers’ Association.

                        The ability of the SICGC to provide services needed by SMEs is hindered by the scope of its guarantee operations, its fee structure, and its process of paying compensation to financial institutions. For this reason, the Cabinet has approved the restructuring of the SICGC as follows:

                                (1) SICGC will be recapitalized by 4 billion baht in 1999 and by another 4 billion baht in 2003. This recapitalization will allow SICGC to expand the scope of its credit guarantee services to cover approximately 2 percent of the total amount of credit extended to SMEs by the year 2008. The performance of the SICGC will be carefully reviewed prior to the second round of capitalization. Further business expansion following 2008 may warrant a further reconsideration of SICGC’s capital needs.

                                (2) The scope of services will be expanded to cover enterprises that own fixed assets up to 100 million baht, up from the present ceiling of 50 million baht. The maximum credit guarantee will also be enlarged from its current level of 10 million baht to 20 million baht. Services will also be provided to financial institutions which are not shareholders of SICGC as well, unlike current practice.

                                (3) The internal operation of the SICGC, especially with regard to risk evaluation, will be improved to increase the effectiveness of the credit guarantee system. A credit guarantee evaluation committee and an internal auditing committee will be appointed to increase transparency and efficiency.

                                (4) The initial credit guarantee fee will be reduced from 2.00-2.75 percent to 1.75 percent. Subsequent fees will depend upon the quality of the customer and of the screening process of the associated bank.

                                (5) A detailed plan for branch expansion, including the establishment of four regional branches by 2000, will be prepared. The management and staff will be improved to enhance the effectiveness of SICGC.

                                (6) Guidelines for compensation will be revised to allow financial institutions to receive compensation from the SICGC much earlier than before. Financial institutions will be able to claim compensation when legal proceedings are initiated against a borrower as opposed to the current practice of requiring such cases to be settled prior to any compensation.

                                The above measures will improve the effectiveness of the credit guarantee process, encourage financial institutions to use SICGC more, and improve financing for SMEs.

                    4.2 Restructuring the Small Investment Finance Corporation

                        The Small Investment Finance Corporation (SIFC) was established under the Small Investment Finance Corporation Act B.E. 2534 to provide short and long-term financing for SMEs with fixed assets of less than 50 million baht. The SIFC has initial start-up capital of 300 million baht. Its major shareholders include the Ministry of Finance; the Government Savings Bank; the Industrial Finance Corporation of Thailand; the Crown Property Bureau; and members of the Thai Bankers Association.

                        The Government recognizes that the SIFC has a critical role to play in providing financing for SMEs. However, SIFC currently lacks the capability to fully carry out this role. For this reason, the Cabinet has approved the restructuring of the SIFC as follows.

                        (1) SIFC will be recapitalized by 2.5 billion baht in 1999 and by another 5 billion baht in 2003. This should allow SIFC to increase its loans as a percentage of total loans granted to SMEs to approximately 2 percent by 2008. As with the SICGC, the performance of the SIFC will be carefully reviewed prior to the second round of recapitalization. Further business expansion following 2008 may warrant a further reconsideration of SIFC’s capital needs.

                        (2) SIFC will expand the scope of its services to cover SMEs that own fixed assets including land upto 100 million baht, up from the current ceiling of 50 million baht, and increase the loan ceiling for each customer from 25 million baht to 50 million baht;

                        (3) SIFC will strengthen the credit evaluation, approval and monitoring process to improve the quality of the loan portfolio. It will also develop the use of agency loans in addition to the direct loans currently provided.

                        (4) The management structure, management, and staff will be improved to enhance the effectiveness of the SIFC.

                        (5) SIFC will expand its branch network, which will be increased to six by 1999 and eleven subsequently.

                        (6) SIFC will introduce advisory services to assist customers in upgrading their operations and financial management.

                        (7) SIFC will consider the possibility of joint investment with target customer groups.

                        The above measures will allow SIFC to play a key role in providing financial and technical support to SMEs.

                4.3 Establishing Financial Advisory Centers for SMEs

                    To help SMEs in addressing financial problems such as sourcing financing, improving financial management, and restructuring debt, the Cabinet approved the provision of support for the establishment of Financial Advisory Centers for SMEs. These centers will be established by the Federation of Thai Industries and the Thai Chamber of Commerce and will have a policy and management committee appointed by the Cabinet.

                    The centers will provide financial advisory services to SMEs as well as collect financial data regarding SMEs to assist with the formulation of SME policy. The centers will operate for two years beginning in October 1999 and will have universities as its regional centers and the Chamber of Commerce or the Federation of Industry of each province as its provincial offices.

                    To facilitate the operation of the advisory centers, the Cabinet has mandated the Ministry of Finance to provide not more than 100 million baht in support.