Since the crisis broke out in mid-1997 in Thailand and spread widely across the region and the globe, the market confidence in the baht and the Thai economy in general was largely damaged. The economic restructuring program, then, must be strong and comprehensive.

        During the first year of Prime Minister Chuan Leekpai’s government, Thailand has introduced a series of measures, with support from the IMF, the World Bank, the Asian Development Bank and bilateral sources, to overcome its currency and financial crisis, and to build a strong fundamental for the resumption of growth in 1999. To date, many encouraging signs of stability have emerged, reflecting stronger market confidence in our economic reform program despite the deteriorating external conditions.

         This progress report, the first in a series of biannual publications, provides an updated review of Thailand’s economic reform program as well as the progress we have made to date. This includes macroeconomic policy; the progress of financial sector and corporate debt restructuring; the social safety net; and market liberalization policy.

It is my pleasure to have this opportunity to detail our economic restructuring program in this first issue. I hope that “Thailand’s Economic Reform” will serve as a useful reference on Thailand’s efforts to overcome the crisis.

Tarrin Nimmanahaeminda
Minister of Finance
Kingdom of Thailand

     After having enjoyed a real compound annual growth rate of 9.6 percent between 1986 and 1996, Thailand suffered a sharp economic downturn with the combination of currency and financial crises in 1997 as a result of the unsuccessful defense of the currency and the weak banking system. Thailand faced four major macroeconomic problems :

1. Net international reserves were depleted because of the unsuccessful defense of the Thai baht.
2. There were systemic problems in the financial sector.
3. The real sector faced a serious liquidity shortage.
4. Regional economic turmoil was a significant constraint in the country’s ability to resolve its economic difficulties.

      Therefore, the government has taken a systematic but flexible approach in addressing these problems and strictly adhered to the economic program agreed with the International Monetary Fund. To date, Thailand has made steady progress in resolving the above problems.

       The economy has been weaker than anticipated, with a decline in real GDP of 0.4 and 8 percent in 1997 and 1998 respectively. A number of external and domestic factors are contributing to this outlook. The continued unsettled conditions in the region are a key factor, reducing export value below previous projections, and delaying the recovery in private capital flows. Domestically, both consumption and investment demand have been weaker than previously expected.

        Nevertheless, in recent months financial conditions have continued to improve. The strengthening of market confidence has extended beyond the exchange rate to declining inflation and interest rates, a rise in the stock market, and a leveling off in indicators of production and demand.

         Under the momentum of the policy initiatives described in this and the following chapters, output could begin rising steadily during 1999. Although growth for the year as a whole is likely to be about 1 percent, this implies a fairly rigorous rebound, reaching 3-4 percent by the fourth quarter of 1999 relative to the fourth quarter of 1998. The external reserve position will be further strengthened, while inflation will be further reduced.

         Given the weakness in economic outlook, fiscal policy has continued to be assigned the task of supporting domestic demand. The larger fiscal deficit targets for fiscal years 1997/1998 and 1998/1999 are therefore appropriate and consistent with the overall macroeconomic framework.

          The Thai government has adopted an expansionary fiscal policy for fiscal year 1998/1999 to stimulate domestic demand and employment and to finance economic and financial restructuring. The overall public sector deficit for fiscal year 1998/1999 was increased to 5 percent of GDP, compared to about 3 percent of the previous fiscal year. Note that these deficit targets do not include the fiscal cost of financial restructuring.

           In order to achieve the numerical targets, the government has implemented various revenue and expenditure measures including tax refunds due to exporters and corporations, temporary postponement of both the payment of corporate income tax and the remittance of state enterprises’ profits, and removing tax disincentives to corporate debt restructuring. Furthermore, as for fiscal year 1998/1999, the government plans to use foreign financing , about 1% of GDP, to support specific spending projects directed toward social safety net and related labor-intensive investment projects. The government will also continue to accelerate the disbursement of budgetary and nonbudgetary expenditures.

        As noted above that the deficit targets do not include the fiscal costs of financial restructuring, such restructuring tasks actually induce fiscal burdens to the central government in the national budget each year until the debts are fully amortized. In fiscal year 1998/1999, the government will fiscalize financial restructuring cost of around 1.5 percent of GDP. The preliminary estimates suggest that the interest costs associated with all restructuring operations could average around 3-4 percent of GDP on an annual basis in the next few years.

         When the actual magnitude of the net official reserves was disclosed for the first time in August 1997 showing the steep decline from over 33 billion USD at the end of 1996 to less than 1 billion USD at end-August 1997 as result of unsuccessful defense of the baht, the market panicked. Even though the government came up with a strong stabilization program supported by the IMF to regain international confidence, the baht continued to lose its value.

          Then, the government set highest priority on regaining confidence and stabilizing the currency value by successfully implementing a tight and prudent monetary policy which so far has delivered very positive outcomes in terms of controlling inflation; stabilizing exchange rate; and lowering interest rates.

         The increased in international confidence is reflected in the appreciation of the baht from 53.7 baht to the USD in January 1998 to around 36 baht to the USD in December. The government has also reduced interest rates without sacrificing exchange rate stability. The money market rates are now in the 4 - 6 percent range, levels below those prevailing prior to the crisis. Bank lending rates have also started to decline, allowing for emerging recovery.

      The balance of payment’s position of Thailand after the crisis has been mixed with rapid adjustments in both the current and capital account. The deteriorating international situation and falling export price have dampened export value for Thai goods and services and caused higher volatility to the rollover rate of maturing liabilities. Nevertheless, the current account balance of 1998 is estimated at 13.5 billion USD in surplus or about 11 percent of GDP, with adjustment coming mostly from the import side. With falling export prices from lowering overseas demand offsetting the relatively slight increased in export volume, the export value in dollar terms decreased by -3.1 percent this year. On the import side, the ongoing recession plunged the import value, down 32 percent this year. The current account balance is expected to record a surplus of about 11 billion USD or 8.5 percent of GDP in 1999 based on continued strength in export volumes and a possible rebound in import demand.

        The capital account balance position in 1998 is expected to record a larger deficit despite an increase of FDI and a recent rebound in the stock market. Regarding the outlook of the capital account in 1999, the deficit is likely to decrease, as the large stock of offshore forward and swap obligations will have been settled by end-1998 and the ongoing corporate debt restructuring package from 1998 will stimulate significant inflow of FDI into Thailand.

         The Bank of Thailand’s gross reserves level at end 1998 is projected at around 28.5 billion USD. Reserves will continue to provide more than full coverage of short-term debt and projected to reach 32 to 34 billion USD at the end of 1999.

          Thailand’s total external debt is at 86.7 billion USD. Although the total sum of external debt did not change much, its composition changed markedly. Short-term private debt decreased by 25 percent ( 34.3 to 25.9 billion USD). Reserve / private short-term debt ratio has increased from 0.79 in 1997 to 1.1 in 1998.

       Thailand’s financial sector restructuring is the cornerstone of the economic adjustment program and is premised on three main tracks: segregation of viable and unviable financial institutions; strengthening the operations and prudential supervision and regulation of the remaining institutions; and capital market reforms. Through this approach, the Government proceeded with clear principles of transparency, prevention of moral hazard, and consolidation.

          Prior to entering the IMF Stand-by arrangement in August 1997, the Bank of Thailand recognized the necessity to segregate viable financial institutions from unviable ones in order to maintain the integrity of the overall financial system and provide the basis for the subsequent reforms and rehabilitations. A total of 58 insolvent and liquidity strapped finance companies were suspended, 16 of them on 27^th June 1997 and another 42 on 5^th August 1997, leaving only 33 finance companies in operation. To prevent further bank runs and systemic risk, as well as to quickly restore public confidence, the Financial Institutions Development Fund (FIDF) was entrusted to provide a guarantee of the deposits and liabilities of the remaining financial institutions. This blanket guarantee will later be phased into a self-financed and limited deposit insurance scheme.

          In October 1997, two important institutions were created as part of the financial restructuring efforts, namely, the Financial Restructuring Authority (FRA), and the Asset Management Corporation (AMC). The FRA was established to review the rehabilitation plans of the 58 suspended finance companies and oversee their liquidation process. The FRA, on 8 December 1997, made an announcement to allow only two of the 58 suspended companies to resume business, Kiatnakin Finance and Securities Public Company and Bangkok Investment Company, while the remaining will undergo a liquidation process. Their assets worth about 860 billion baht were transferred to the FRA to be auctioned off in an orderly and transparent manner and proceeds subsequently repaid to the creditors.

         As of November 1998, the FRA has auctioned assets with a value of about 63 billion baht, comprising 36 billion baht in core assets (which are financial loans and securities loans, e.g. hire purchase loans, mortgage and commercial loans) and 27 billion baht in non-core assets (which are foreclosed assets and companies’ assets, e.g. repossessed vehicles, equity and debt paper, and art objects).

        The third asset sale on 15 December 1998, involved business loan tranches with an aggregate outstanding principal balance of approximately 10 billion USD as of 30 September 1998. The FRA published an the following day the partial results for nine of the totalling 45 tranches in the Business Loan and Unsolicited Bid sale to a total of four bidders and disclosed that negotiations are underway with a number of other bidders on a profit sharing arrangement for a significant portion of the remaining tranches. However, the unsold assets will be repackaged for a second round auction to be held within 3 months.

         The aggregate amount of the winning bids totaled 11,660 million baht, or average 37 percent of the aggregate outstanding balance of 31,757 million baht.

          The second institution, the AMC, is entrusted with the responsibility of bidding for the lowest quality assets of the 56 closed finance companies. They act, therefore, as a buyer of last resort to prevent fire sale of assets, which in turn could undermine underlying collateral values in the total financial system. The assets bought will be managed for resale later.

         Recognizing the need to strengthen capital bases to cushion against further deteriorating loan portfolio, a series of Memoranda of Understanding were periodically signed between the Bank of Thailand and commercial banks requiring the banks to maintain their capital adequacy ratio at a minimum of 8.5%. As of end-September 1998, commercial banks have successfully raised over 300 billion baht of new capital.

         The ultimate costs of financial restructuring will be offset, to some extent, by asset recovery, dividend and interest payments from institutions, privatization receipts and, ultimately, by the recovery of the economy. Nevertheless, it is recognized that there could be substantial remaining costs which will be borne by the government. As a first step toward meeting these costs, the government agreed to issue 500 billion baht of government bonds to restructure the liabilities of the Financial Institutions Development Fund. Additional losses will be fiscalized by the government over the next two years. Thus far, 400 billion baht worth of bonds have been issued, with a maturity ranging from 1 year to 10 years. This would provide a benchmark yield curve for the corporate sectors to re-access the capital market through the issuance of medium to long-term debentures.