It is my pleasure to present this updated progress report on Thailand’s economic reform. In the past year, we have made substantial progress in our economic reform program. Macroeconomic stability has been achieved for quite some time. The baht has been stable with minimal volatility, and inflation and interest rates are lower than they were prior to the crisis. The current account has been in surplus, and our net foreign reserves are at comfortable levels.

        The real economy also shows clear signs of recovery. During the first and second quarter of 1999, real GDP increased by 0.8 and 3.5 percent on a year-on-year basis respectively. Encouragingly, many production and consumption indicators such as manufacturing production, exports, imports of intermediate goods and raw materials, and tax collections suggest that the recovery will be even stronger in the third quarter of this year.

This improved macroeconomic setting will further assist us in our efforts to restructure the financial sector. Bank recapitalisation has progressed well. While the level of non-performing loans remains high, the pace of corporate debt restructuring has improved significantly following the passage of key legislative reforms.

While significant challenges remain, the reforms that we have put in place will not only allow the economy to recover, but will also establish a more solid foundation for sustainable growth.

Tarrin Nimmanahaeminda

Minister of Finance, Kingdom of Thailand

November 1999

It has been almost two years since the onset of the currency and financial crisis in Thailand. In resolving the crisis, the government has taken a systematic approach in designing and implementing policies to facilitate recovery as well as to lay an improved foundation for future growth. Broadly speaking, the phasing of government measures can be broken down into (1) stabilization; (2) stimulation; and (3) structural reforms.

Because the Thai crisis was a combined currency and financial crisis, the government placed a high priority on stabilizing the currency and the financial system. Lack of confidence in the currency led to continued depletion of our international reserves, and lack of confidence in the financial system led to widespread deposit runs.

The government placed great emphasis on rebuilding international reserves to restore confidence in the currency. These measures, which included appropriate monetary and fiscal policies, have yielded clear results. We have increased net international reserves from its low of 0.8 billion USD in August 1997 to 29 billion USD in August 1999. The currency has been stable at around 37 baht/USD for most of 1999 after depreciating to as high as 53.7 baht /USD in January 1998. The policies which have successfully brought about macroeconomic stability and recovery are discussed in Chapter 1 (Macroeconomic Framework and Policy).

The government has systematically addressed the financial crisis by restructuring the financial sector. This includes intervening in ailing financial institutions; strengthening supervision and prudential guidelines; providing a recapitalization scheme to strengthen viable financial institutions; and addressing the problem of non-performing loans (NPLs). These measures have re-established confidence in the financial system, allowed substantial progress in bank recapitalization, and laid the foundation for improved financial intermediation. These measures are discussed in detail in Chapter 2 (Financial Sector Restructuring).

It is extremely difficult for an economy as open as that of Thailand to simultaneously pursue policies to stabilize and stimulate the economy. Once a certain degree of macroeconomic stability had been achieved, however, the government consistently undertook measures to stimulate the economy. For FY 98, the government increased the size of the overall public deficit from an initial target of a surplus of 1 percent of GDP to an actual deficit of 3 percent of GDP. The overall deficit for FY 99 is estimated at 5.5 percent of GDP. This figure reflects the 130 billion baht, or over 2.5 percent of GDP, economic stimulus package of expenditure increases, tax reductions, and energy price reductions announced on March 30, 1999. This stimulus package in discussed in Chapter 3 (March 30 Economic Stimulus Package). For FY 00, the overall public sector deficit is targeted at 5.0 percent of GDP.

The March 30 economic stimulus package focussed primarily on increasing government spending and private consumption. To further promote economic recovery, support the economic restructuring process, and enhance the long-run competitiveness of the private sector, the government announced a set of measures to encourage private investment on August 10, 1999. These measures consist of four parts: tax and tariff measures; equity investment measures; measures to promote the recovery of the real estate sector; and measures to improve financing for small and medium enterprises.

The government is fully cognizant of the widespread social ills caused by the crisis. In implementing its recovery program, the government therefore undertook numerous measures to provide a social safety net to protect the most vulnerable elements of society. Providing assistance to those with low and reduced incomes also has a strong stimulative impact, which further assists economic recovery. These measures are discussed in further detail in Chapter 5 (Social Safety Net).

The measures undertaken by the government aim not only at resolving the current crisis, but also at improving our foundation for long-term growth. Among these important structural reforms include legal reform, privatization, tariff reform, and bond market development. These reforms are discussed in Chapter 6 (Structural reforms).

The financial and currency crisis in mid-1997 had a severe impact on the Thai economy. After experiencing a real compound annual growth rate of over 9 percent between 1986 and 1996, real GDP contracted by 1.3 percent in 1997 and 9.4 percent in 1998. Government measures to resolve the crisis have since significantly improved the macroeconomic setting and outlook. Real GDP increased by 0.8 percent and 3.5 percent on a year-on-year basis during the first and second quarters of 1999, respectively.

Net international reserves--gross reserves less the forward obligations of the Bank of Thailand--declined from over USD 30 billion in May in 1997 to its lowest point of USD 1.1 billion in July 1997. Between August 1997 and September 1999, the Bank of Thailand unwound over USD 20 billion of its forward obligations. This represents nearly all of the offshore forward obligations of the Bank of Thailand. The remaining forward obligations largely represent on-shore transactions for the purposes of managing domestic liquidity. Net international reserves have increased substantially to USD 29.4 billion as of 24 September 1999. By year-end, gross reserves should equal nearly 240 percent of short-term external debt. As a proportion of total external debt, short-term debt decreased from 41.5 percent in December 1996 to 21.8 percent in June 1999.

The improvement in our net international reserves contributed to strengthened confidence in the currency. The baht appreciated from its low of 53.7 baht to a USD in January 1998 to 38.4 baht to a USD in August 1999. Exchange rate volatility has also been minimal. Volatility measured by standard deviation declined from 1.56 in January 1998 to 0.38 in August 1999.

The decline in inflation has allowed the government to continuously bring down interest rates. Short-term interest rates in the overnight repurchase market declined from its peak of over 23 percent in September 1997 to less than 2 percent in March 1999. Lending rates have also come down from 14.25 percent to 9.75 percent. The careful policies of the government have created sufficient confidence to allow interest rates to come down substantially without affecting exchange rate stability.

The real economy also shows clear signs of recovery. As shown in Table 1 and 2, quarterly GDP data from the Nation Economic and Social Development Board show that the economy bottomed out in the third quarter of 1998 and has begun to recover. On a year-on-year basis, real GDP increased by 0.8 percent and 3.5 percent during the first and second quarters of 1999, respectively.

Source: National Economic and Social Development Board (NESDB)

Source: National Economic and Social Development Board (NESDB)

Many key production and consumption indicators point to an even stronger recovery in the third quarter.

Imports of intermediate goods and raw materials, in USD terms, increased by over 10 percent and 22 percent on a year-on-year basis in July and August, respectively, significantly higher than the 8.1 percent year-on-year growth rate for the second quarter. The level of these imports in recent months is higher than they have been since October 1997. High intermediate and raw material imports indicate high future production.

Exports, in USD terms, also improved notably in July and August 1999, increasing by 8.2 percent and 14.6 percent on a year-on-year basis, compared to the 5.5 percent year-on-year increase in second quarter.

Average daily electricity usage by the industrial sector in July 1999 stood at 97.7 million kilo-watt-hours (KwH), higher than the 91.2 and 94.2 million KwH recorded in the first and second quarter, respectively.

Employment in the formal sector, as proxies by the number of workers registered in the social security system, has increased steadily since the beginning of the year. The August 1999 figure stood at 5.56 million, up by over 150,000 since January 1999. Prior to January 1999, the number of registered workers had declined continuously since September 1997.

Imports of consumption goods increased by over 41 percent on a year-on-year basis in August 1999, compared to –1.8 percent and 14.4 percent for the first and second quarter of this year.

Automobile sales in August 1999 were nearly 19,000 units, almost double what they were a year ago (over 93 percent year-on-year basis).

The external sector also shows encouraging signs. The current account swung from a deficit of 2.0 percent in 1997 to a surplus of 12.8 percent in 1998. This surplus was caused largely by a sharp drop in imports, which declined by over 33 percent in USD terms. Export performance in 1998 was largely lackluster and decreased by 6.8 percent in USD terms.

The current account surplus in expected to decline to 9.0 percent in 1999. With the economic recovery, imports have increased by 8.3 percent on a year-on-year basis during the first eight months of 1999. Encouragingly, exports have also begun to pick up. In the first eight months of 1999, exports increased by 3.3 percent in USD terms on a year-on-year basis. Prior to the crisis in 1996, Asia accounted for over 60 percent of Thailand’s exports. Regional recovery will further boost demand for our exports. Export growth is currently projected at 4.0 percent for 1999.

Income from tourism remains high. Total arrivals through Bangkok International Airport for the first five months stood at 2.57 million, an increase of 10 percent over the same period last year.

Source: The 8^th Letter of Intent

At the outset, the government needed to pursue strict monetary policies to rebuild international reserves, restore confidence in the exchange rate, and control inflation. With rebuilt reserves, a stable exchange rate, and lowered inflation, the government gradually and continuously lowered interest rates. Inflation and interest rates are at levels lower than prior to the crisis.

The low inflation and interest rate environment has provided an economic setting conducive to recovery. Lower inflation leads to a depreciation of the real effective exchange rate and enhances the competitiveness of our exports. Low interest rates also spur recovery by reducing the borrowing cost of both producers and consumers.

There are indications, for example, that private investment is beginning to recover. The Bank of Thailand compiles a private investment index based on a set of economic indicators such as the import value of capital goods, domestic cement consumption, commercial banks' credit for construction and manufacturing, and construction areas permitted in municipal zones. After continuously declining from 88.4 in July 1997 to 5.7 in December 1998, the index has started to recover, reaching 49.2 in August 1999. Year-on-year growth of the index, however, still remains negative, which in part reflects the excess capacity still available. Even more importantly, lower interest rates have been an important factor in slowing the growth of non-performing loans (NPLs) and improving the pace of corporate debt restructuring.

Unfortunately, lending has been slow to recover. Commercial bank credit, excluding lending from the Bangkok International Banking Facility (BIBF), increased by 0.7 percent in the eight months of 1999. In evaluating this figure, however, it is important to bear the following considerations in mind.

First, the ability of banks to lend has been limited because of capital constraints from operating losses and the need to provision against non-performing loan. Since banks have been able to recapitalize substantially, they will be able to resume lending in the future.

Second, credit growth reflects both the demand and supply for credit. Part of the slow growth in credit may reflect slow growth in the overall demand for credit. As noted earlier, private investment demand has been slower to recover.

Third, many corporations have chosen to access credit by directly issuing debt securities rather than borrowing from banks. Over 208 billion baht in debt instruments were issued in the first half of 1999. By contrast, only 5.3 billion baht and 25.8 billion baht were issued in the first and second half of 1998, respectively.

Re-establishing the normal functioning of the financial intermediation process remains one of our highest priorities. The measures that we have taken in this regard are discussed further in Chapter 2 on financial sector restructuring.

With regard to exchange rate policy, Thailand remains fully committed to allowing fundamental movements in the exchange rate to be determined by market forces. Any interventions will be restricted to smoothing out short-term volatility.

With the sharp contraction in GDP, the government needed to take significant measures to stimulate the economy. Given conditions prevailing during much of 1998, the role of stimulating the economy fell largely on fiscal policy for several reasons.

First, the fact that the commercial banks were not functioning normally because of the financial crisis made monetary policy less effective as a means of stimulating the economy.

Second, other components of aggregate demand were not likely to increase substantially at that time. The economic crisis had affected much of Asia, which represented over 60 percent of our export market. Strong increases in export demand were therefore not likely. Past over-investment had led to excess capacity, which made large increases in private investment demand also unlikely. Decreased personal incomes and unemployment had reduced private consumption demand.

Government spending therefore represented the most effective means of stimulating the economy. For this reason, the government has continuously relaxed its fiscal stance and increased the overall public sector deficit, as indicated in each Letter of Intent (LOI) signed with the International Monetary Fund (IMF). The overall public sector deficit for FY 98 was increased from a surplus of 1percent of GDP negotiated in LOI 1 to a deficit of 3 percent. For FY 99, the overall public sector deficit is currently estimated at around 5.5 percent of GDP. This includes the impact of the expenditure, tax, and energy price reduction measures included in our March 30 economic stimulus package, which will be discussed in detail in Chapter 3. For FY 00, the deficit is targeted at 5.0 percent of GDP.

Table: 4 Fiscal Balance

Source: The 8^th Letter of Intent

Large short-term capital inflows coupled with an inadequate supervisory and regulatory capacity led to the rapid growth of non-performing loans among financial institutions, affecting public confidence. To address these problems, the government has taken a systematic approach towards restructuring the financial sector by (1) segregating unviable financial institutions and addressing the FIDF problem; (2) strengthening supervision; (3) strengthening and recapitalizing viable finance institutions; and (4) addressing the NPL problems.

As part of the government’s efforts to segregate unviable financial institutions and strengthen the financial system, the government closed 56 finance companies in December 1997. To oversee the rehabilitation or liquidation process of assets of the 56 closed financial institutions totalling about 860 billion baht and to safeguard the interest of bona fide depositors and creditors of those financial institutions, the Financial Sector Restructuring Authority (FRA) was established on October 24,1997.

As of July 31^st, 1999 the FRA has auctioned most of the assets of the closed institutions and recovered about 180.9 billion baht. Of this amount, the receipt from core assets sales, which include financial loans and securities loans, was 146.8 billion baht. The remaining 34.1 billion baht was from sales of non-core assets comprising foreclosed assets and companies’ assets. The proceeds recovered will be subsequently repaid to creditors, the largest of whom is the FIDF.

The FIDF, a separate juristic entity under the Bank of Thailand (BOT), incurred huge liabilities from providing massive liquidity support to ailing financial institutions and created significant distortions in the country’s financial market. The government took two key measures to reduce the distortions caused by the FIDF. First, instead of allowing FIDF to extend unlimited credit to ailing financial institutions, the government intervened in weak financial institutions and wrote down their capital, changed management, and recapitalized them by converting FIDF debt to equity. Second, the government issued bonds totalling 500 billion baht (approximately USD 12.5 billion) to restructure the FIDF’s liabilities from short to long term with an aim to reduce distortions caused by FIDF’s huge borrowing requirements in the domestic short-term money market.

These measures, together with other monetary measures, have allowed short-term money market rates to decline from its peak of around 25 percent in January 1998 to 1.33 percent in June 1999.

The government fully recognizes the critical importance of a strong supervisory regime in resolving the current financial crisis as well as in preventing future crises from recurring. To this end, the government (1) has introduced new loan classification and provisioning (LCP) requirements; (2) is restructuring the Bank of Thailand; and (3) is introducing new legislation to support the supervisory regime.

In addition to requiring all financial institutions to sign Memoranda of Understanding (MOU) with regard to their plans to raise capital, the BOT introduced new loan classification and provisioning requirements, which are of international standard. Recognition of accrued interest income was reduced to 3 months, and provisioning requirements of impaired assets were tightened. The required provisions for non-performing assets are being phased-in over five accounting periods ending December 2000.

The BOT has begun to implement its Modernization Program aimed at redesigning the organizational structure, streamlining work processes, and changing its corporate culture. As part of this process, experts from G7 central banks have developed recommendations to strengthen central banking and banking supervision in Thailand. A school of examiners has also been set up at the BOT.

To further enhance the effectiveness of the regulatory and supervisory regime, the government is also introducing new supporting legislation.

A new Financial Institutions Act is being drafted to modernize the regulatory framework. Because the scope of operations of different types of financial institutions has increasingly overlapped with financial liberalization, the new Act will standardize regulatory framework of banks, finance companies, and credit fonciers. It will provide a legal basis for consolidated supervision of financial conglomerates. In addition, regulations will be significantly tightened in the areas of: insider lending; foreign exchange exposure; financial institutions’ non-financial activities; Bank of Thailand’s prompt corrective actions against troubled institution; resolution of insolvent institution; merger and takeover; disclosure standards; and penalty and prevention against fraud.

The new Bank of Thailand Act, which is in the final process of being drafted, aims at strengthening the BOT’s independence and accountability, especially in conducting monetary policy. Objectives of the BOT will be limited to maintaining price stability and safeguarding stability of the financial system. The backing requirement of the baht by foreign assets will become more stringent, while the BOT will have more flexibility in managing international reserves. With a view to ensuring transparency of BOT’s operations, the BOT will be required to, among others, preannounce its monetary policy direction and past performance in conducting monetary policy, report its operations to the cabinet and parliament, and disclose its financial account on a weekly basis. Finally, rules governing potential conflicts of interest of BOT executives and staff will be tightened, especially in order to strengthen supervision of the financial system.

An important reason for introducing new loan classification and provisioning (LCP) standards and requiring financial institutions to sign MOUs with the BOT is to facilitate the recapitalization of financial institutions by improving their transparency. Although some financial institutions, such as Bangkok Bank and Thai Farmers Bank, had been able to raise their own capital, declining credit quality and falling earnings caused by the financial crisis had become a major obstacle to further efforts to raise capital.

As part of the government’s efforts to restructure Thai financial system, the government introduced a series of measures on August 14^th, 1998. These measures provided: (i) the opportunity for viable financial institutions to recapitalize using public funds under clear safeguards; (ii) incentives for accelerating corporate debt restructuring and new lending to private sector; (iii) a legal basis for establishing private Asset Management Companies (AMCs); and (iv) clear resolution strategies for all intervened financial institutions in line with the government’s long-term objective of strengthening the financial system.

One year since the announcement of the August 14 plan, the Ministry of Finance has provided capital support to four financial institutions amounting to 38,396 million baht and is considering requests from another 11 financial institutions totaling 42,417 million baht. (See table)

Source: Ministry of Finance

Although the utilization of the government’s capital support scheme has been limited, the August 14 plan succeeded in creating confidence in the Thai financial system among depositors and investors. As a result, private financial institutions have been able to recapitalize without using public funds. From 14 August 1998 to end-July 1999, private financial institutions had recapitalized by over a 250 billion baht with another 67,995 million baht in the process of being recapitalized. Including public financial institutions, the total amount of public and private capital raised and in the process of being raised by the financial sector since August 14 is over 905 billion baht.

Regarding the resolution of the intervened financial institutions, Nakornthon Bank was auctioned by Standard Chartered Bank. Details of the sale of Radanasin Bank will be announced shortly, while the auction results of the Bangkok Metropolitan Bank and the Siam City Bank will be announced in the last quarter of this year.

Furthermore, 12 intervened finance companies and one intervened bank were successfully merged into a new entity named Bank Thai. The Bangkok Bank of Commerce was transformed into an AMC. The First Bangkok City Bank was fully merged into Krung Thai Bank, which has undergone reorganization and has been recapitalized by 185 billion baht by the government.

The government fully recognizes the severity of the NPL problem. Despite the substantial progress in financial sector restructuring, the level of NPLs still remains high. Total NPLs stood at 2.63 trillion baht (70 billion USD) in June 1999, representing 47.7 percent of loans outstanding, down 71.9 billion (1.9 billion USD) from May. The high level of NPLs constrains the ability of financial institutions to carry out their normal credit intermediation function.

However, the level of NPLs is likely to decrease steadily for several reasons. First, low interest rates, high liquidity, and recovering demand provide a favorable macroeconomic environment. Second, the pace of corporate debt restructuring has accelerated significantly. The number of cases, which have been restructured increased from 12,000 in January to over 89,000 in July 1999, representing a more than seven-fold increase. As of July, nearly 629 billion baht (US$16.6 billion), had been restructured.

Third, the framework for debt restructuring has been strengthened. A number of important legal amendments, including amendments to the Bankruptcy Act and Foreclosure law and an act establishing a Bankruptcy Court, have been passed. The CDRAC set up by the government has developed two important civil contracts, the Debtor-Creditor Agreement and the Inter-Creditor Agreement, which provide time-bound, enforceable processes for debt restructuring. To date, around 375 of the 700 debt restructuring cases targeted by CDRAC have signed the Debtor-Creditor Agreement. Eighty four Thai and foreign financial institutions have signed the Inter-Creditor Agreement.

Fourth, to facilitate the resolution of NPLs, a variety of measures to encourage the establishment of private Asset Management Companies (AMCs) have been announced, including the removal of tax disincentives.

The Thai government launched an economic stimulus package on March 30, 1999 in an attempt to stimulate aggregate demand. This stimulus package was introduced once the government had successfully stabilized the economy and identified external sources for loans to fund additional expenditures. The stabilization had restored public confidence in the economy, thereby creating a proper environment for the effectiveness of the stimulus package. This public confidence increased the likelihood that any fiscal stimulus would be re-spent rather than saved, generating a larger multiplier effect. At the same time, because the package was externally financed, it did not create a crowding out effect that would have hindered the recovery of the private sector.

The March 30 Economic Stimulus Package consists of three components: expenditure measures, tax measures, and measures to lower energy prices. The expenditure measures are intended to create employment for and increase the incomes of those severely affected by the crisis. The tax measures are designed to stimulate private investment and consumption by increasing disposable income and reducing the price of consumption goods. The energy price reduction measures are aimed at lowering the cost of living as well as production costs. These three components of the stimulus package will be discussed in greater detail below.

The expenditures under the stimulus package were externally financed from three sources: the Overseas Economic Cooperation Fund of Japan (250 million), the Japanese Export-Import Bank (600 million), and the International Bank for Reconstruction and Development (600 million dollars).

The expanded government spending measures directly target groups that have a high propensity to consume. These measures were also designed to provide a rapid fiscal injection. In order to accomplish these two objectives, the government has allocated these new expansionary funds to government agencies and state enterprises whose programs can be executed quickly. At the same time, the government has implemented administrative control mechanisms that are designed to ensure the rapid disbursement of funds for these programs.

The Ministry of Finance, the Bureau of the Budget, and the National Economic and Social Development Board jointly established a set of guidelines in designing these expenditure programs. These guidelines place primary importance on expenditures that will stimulate the economy, alleviate the negative social impact of the economic crisis, and create a foundation for future development. In total approximately 53.4 million baht has been allocated to fund six categories of programs. These categories include (1) investment and job creation programs designed to alleviate the social impact of the economic crisis (24.8 million baht); (2) improvement of quality of life (9.6 million baht); (3) improvement of the foundations of economic development (7.0 million baht); (4) improvement of the competitiveness of manufacturing and export industries (2.3 million baht); (5) improvement of basic infrastructure and the development of specific areas (0.9 million baht); and (6) enhancing the effectiveness of public administration (8.8 million baht).

Approximately 40.0 million baht of the total will be disbursed in fiscal year 1999. The remainder will be disbursed by the end of fiscal year 2000. The government will use these funds to employ approximately 86,000 educated workers and 400,000 unskilled workers. The measures also aim to alleviate the impact of the crisis by developing skills, increasing the earnings of the poor, and improving the social safety net and expanding social welfare for the disadvantaged. In addition, at least 28.6 million baht of the total has been allocated to projects that improve the foundation for sustainable economic development. Programs funded under this category aim to improve the quality of life, productivity, trade and economic activities, and public administration.

The tax measures adopted under the stimulus package include changes in personal income and value added taxes. These changes will stimulate consumption by increasing disposable incomes and reducing prices. Part of the measures is aimed at reducing the tax burden borne by small enterprises, which are important sources of employment generation.

The tax measures include (1) exemption on the first 50,000 baht of net income from personal income tax; (2) reduction in the VAT rate from 10 to 7 percent from

1 April 1999 to 31 March 2001; and (3) elimination of the VAT collected on gross revenue from small enterprises with annual sales between 600,000 and 1,200,000 baht. These tax measures are expected to reduce annual revenue by approximately 54,670 million baht, which translates into an estimated loss of 31,600 million baht for the remainder of the 1999 fiscal year.

The government has adopted several important measures to reduce energy prices and provide additional stimulus to the economy. These measures are expected to stimulate consumption by reducing household expenditures, as well as investment by reducing the costs of industrial production.

The energy price reduction measures include (1) reduction in electricity prices by 0.2587 baht/unit; (2) reduction in the price of liquified petroleum gas (LPG or cooking gas) by 0.9091 baht/kilogram; and (3) reduction of the excise tax on fuel oil from 17.5 to 5.0 percent.

The government has implemented a number of significant measures in order to mitigate the impact of the current economic crisis and returning Thailand to its recovery path. As a result of those measures, economic stability has been revived. Many production and consumption indicators have improved steadily during the first half of 1999. Reinforcing the recovery path, measures to encourage private investment has been launched on 10^th August 1999. The measures are aimed to further stimulate economic recovery, economic restructuring process, and long-run competitiveness of private sector. It is consisted of four main components: (1) tax and tariff measures; (2) equity investment measures; (3) measures to promote recovery of the real estate sector; and (4) measures to improve financing for small and medium enterprises (SMEs).

Tax and tariff measures are aimed to promote private investment, lower production costs, improve corporate liquidity, and reduce consumer prices. The government has also eliminated the registration requirement for the import and export of gold.

A comprehensive reform of the country’s tariff structure is being undertaken in line with the country’s stage of development and forthcoming international commitments. Given the economic hardships faced by producers and bearing the international commitments in mind, the measures are focused to lower costs and enhance competitiveness.

These measures will directly benefit producers in a wide range of industries. 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.

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

These tax and tariff measures also allow businesses to use the double decline balance method of depreciation by which assets can be depreciated at twice the rate of the straight-line method. The benefit of such method will encourage private investment and increase the productivity of the private sector. Furthermore, businesses can fully depreciate the remaining book value of the asset in the last accounting period of the useful life of the asset.

Furthermore, Ministry of Finance has eliminated regulations governing the general public to register for licenses for the export and import of gold, which would benefit the industries that demand gold as input.

The next is the equity and investment measures, which represents a vital support for new investment and the restructuring. In this connection, the government has established three new funds as follows:

The Equity Fund is tasked 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. The remaining will come from international private investors.

Thailand Recovery Fund will invest in competitive, medium-scale enterprises in Thailand. The Overseas Economic Cooperation Fund of Japan (OECF) has also expressed strong interest in jointly investing in the fund, which will have an initial start up capital of 100 million US dollars or approximately 3.7 billion baht.

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 withdraw its investment by selling its shares in the new stock market for SMEs, to the proprietor of the SME, or to other investors.

The third component of the 10 August is the measures to promote the recovery of the real 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.

The long-term, fixed rate residential mortgage financing is aimed to assist low and middle-income homebuyers with relaxed conditions to those offered at private financial institutions. GHB will provide mortgages with a 30-year repayment period with an interest rate fixed every 3 or 5 years depending upon the customer. GHB will lend 21 billion baht on its own directly. The remaining 25 baht will be lent to other financial institutions for the purpose of granting on the same terms and conditions as GHB to low and middle-income home buyers.

In this regard, SMC will issue 4 billion baht in bonds to establish a fund. That will be used for purchasing mortgages from commercial banks and other financial institutions that have similar terms and conditions with GHB specification. The first 20 percent of loss incurred must be borne by the financial institutions.

The National Housing Authority (NHA) is authorized to invest in unfinished housing projects and condominiums, particularly those for low and middle-income homebuyers. The price of a house should not exceed 2 million baht per unit when finished, while the retail price of condominiums should not exceed 1 million baht per unit. No more than 10 percent of the units in a project offered to NHA may exceed these limits.

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.

The reduction of 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 will be effective on the date following its announcement in the Royal Gazette until December 31st, 2000. This measure will help to stimulate real estate transactions and promote the recovery of the sector by reducing transaction costs.

The last component is the measures to improve SME financing. The government has allocated a sum of 35 billion baht in credit for SMEs through the specialized financial institutions and the Bank of Thailand as well as establishing a special stock for SMEs. These measures are aimed to enhance the long-term effectiveness of SME financing, the restructuring of two critical specialized financial institutions, the Small Industry Credit Guarantee Corporation and the Small Industry Finance Corporation, and to establish the Financial Advisory Centers for SMEs.

The SICGC will be restructured scope of its guarantee operations, fee structure, and compensation payment process to financial institutions that undermine its service potential. The restructuring of SICGC is as follows:

(1) SICGC will be recapitalized by 4 billion baht in 1999 and by another 4 billion baht in 2003. The goal is to expand the scope of its credit guarantee to 2 percent of the total amount of credit extended to SMEs by the year 2008.

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

(3) The internal operation of the SICGC, in particular risk evaluation, will be improved to increase the effectiveness of the credit guarantee system. A credit guarantee evaluation committee and 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.

(5) The branch expansion plan is being prepared, including the establishment of four regional branches by 2000.

(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.

As for the Small Investment Finance Cooperation (SIFC), the government recognizes that the SIFC has a critical role to play in providing financing for SMEs. The Details of the restructuring are given as follows.

(1) SIFC will be recapitalized by 2.5 billion baht in 1999 and by another 5 billion baht in 2003 and will increase its loans as total loans granted to SMEs to approximately 2 percent by 2008.

(2) SIFC will expand the scope of its services to cover SMEs that own fixed assets including land up to 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;

1. SIFC will strengthen the credit evaluation, approval and monitoring process to improve the quality of its loan portfolio.
2. The management structure, management, and staff will be improved to enhance the effectiveness of the SIFC.

(5) SIFC branch network will be expanded to six branches by 1999 and eleven branches subsequently.

(6) The advisory services will be introduced to assist customers in upgrading their operations and financial management.

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

These measures also include the introduction of Financial Advisory Centers for SMEs to assist SMEs in addressing sourcing financing, improving financial management, and restructuring debt. The centers will provide financial advisory services to SMEs, as will 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.

Besides the August 10 package to encourage private investment, the government, by the Board of Investment (BOI), has introduced a series of short-term incentives ending 31 December 1999 with an aim to bolster both the expansions of existing investments and new investments.

The import duty exemption on machinery will be granted to projects in selected industries producing primarily for export as well as existing projects that need to import replacement machinery using higher technology in order to heighten the productivity. In addition to import duty exemption, projects in 19 supporting industries will be provided an eight-year corporate income tax waivers regardless of location and foreigners may hold up to 100 percent of shares in these projects.

There are also supporting services for both Thai and foreign investors provided by BOI including a Foreign Expert Services, a One-Stop Service Center for Visas and Work Permits, BOI Help Unit, and a database of supporting industries that produce parts in all ASEAN countries. Moreover, BOI has acted as a clearing house for Thai investors seeking joint venture partner and foreign investors interested in acquiring equity in Thailand.

The government recognizes the severity of the social problems caused by the economic crisis. To address these social ills, the government put in place additional social safety net measures to cushion the impact of the crisis on the poor and the most vulnerable segments of society. These measures include programs under the Social Investment Project (SIP); the Social Sector Program Loan; and others.

With financial support from the World Bank (300 million USD), the Overseas Economic Cooperation Fund of Japan (OECF) (13,412 million yen), as well as the national budget, the Social Investment Project (SIP) includes both short- and long-term approaches to addressing social problems. The short-term approach involves expanding public investments to ease the impact of the crisis on the unemployed, promote social welfare and improve labor skills. This includes programs such as job creation and training, and the Low Income Public Assistance Scheme. The long-term approach involves strengthening local communities by establishing the Social Investment Fund (SIF) and the Rural Urban Development Fund (RUDF) to provide funds for various projects that will enhance the competitiveness of the community.

The direct beneficiaries in 1999 are projected to reach 200,000 people consisting of 71,013 trainees and 134,017 employees, and will decrease to 127,312 people--consisting of 105,830 trainees and 21,482 employees--in 2000.

As part of the Social Investment Project, the Government Savings Bank has established a Social Investment Office to oversee the process of validating projects proposed by local communities under the Social Investment Fund (SIF) and the Rural Urban Development Fund (RUDF), components of the SIP. The SIF provides grants for small projects with the objectives of building competitiveness. The RUDF provides loans to municipalities in 14 targeted provinces to improve infrastructure. The objective is to create and support employment in strategically important urban centers outside of Bangkok.

Together with funds drawn from the national budget, a 500 million USD social sector program loan from the Asian Development Bank will provide support for the unemployed, upgrade the quality of the educational system, and improve social welfare. Among the programs financed under this program loan are the promotion of private sector participation in upgrading skill for labor scheme, scholarships to reduce drop-out rates, and provision of health insurance for income earners. .

In addition to the SIP and the Social Sector Program Loan, the government has implemented other measures to mitigate the social impact of the current crisis. These measures include reducing inflation and interest rates; subsidizing the State Railways of Thailand and the Bangkok Mass Transit Authority; recapitalizing and enhancing the role of the Government Housing Bank to promote mortgage financing, especially for the poor; recapitalizing and enhancing the role of the Bank of Agriculture and Agricultural Cooperatives to support farmers; and restructuring the Small Investment Finance Corporation and the Small Industry Credit Guarantee Corporation to improve financing for small and medium enterprises (SMEs).

The government’s reform agenda includes measures designed not only to address the current crisis, but also structural reforms to improve the foundation for long-term growth. These structural reforms include legal reforms, privatization, tariff reforms, and bond market development.

A critical component of the government’s structural reform program is legal reform. The description and status of eleven key economic reform laws are summarized below.

An integral part of the government’s structural reform program, privatization is an important means of increasing the efficiency of the economy; ensuring that quality goods and services are provided to the Thai public at the lowest possible cost; and reducing the fiscal burden on the government.

The government has approached privatization in a systematic manner, addressing not only divestiture but also broader regulatory issues to ensure well-functioning markets. To this end, the Cabinet approved the Master Plan for the Reform of State-Owned Enterprises on 1^st September 1998 to serve as a basic guideline for the country’s privatization program. The Plan provides not only principles and objectives, but also timelines for the actions required to achieve objectives in each sector.

The Plan divides state enterprises into five main sectors: energy; telecommunications; transport; water; and others. The key achievements in each sector since the announcement of the Plan are described as follows.

On the legislative side, the passage of the Corporatization Act in April 1999 by Parliament marked a major step in Thailand’s privatization program. Under the Act, the State Enterprise Capital Policy Committee will supervise the process of transforming the legal status of the state enterprises into “company limited” or “public company” to facilitate the privatization process. Key candidates for corporatization include the Petroleum Authority of Thailand (PTT), the Telephone Organization of Thailand (TOT), and the Communications Authority of Thailand (CAT).

1. Combined holdings by MOF and SOEs (in the case of subsidiaries).

Maintaining an open, flexible, and competitive economy is a critical element of the government’s strategy to avoid future crises as well as promote long-term growth. Tariff reform is an integral part of our efforts to maintain such an open and competitive economy. In this regard, the Ministry of Finance established the Customs Tariff Restructuring Committee in December 1998, consisting of representatives from both the public and private sectors, to revise our tariff structure in line with economic developments and our international commitments under the WTO, APEC, and ASEAN Free Trade Area (AFTA).

Under the proposed new structure, products will be divided into three main categories: primary products; intermediate products; and finished products. While the final tariff structure is still under deliberation, it is expected that proposed structure will have lower maximum and average rates as well as substantially fewer rates to reduce tariff dispersion. The new proposed tariff structure is expected to be completed by January 2000, and will be gradually implemented to allow industries time to adjust.

Due to the need to issue government securities to offset losses and restructure the liabilities of FIDF, finance the government deficit, and recapitalize financial institutions, the government has placed emphasis on the development of the domestic bond market. To this end, a comprehensive master plan for the development of the domestic bond market has been drafted covering primary and secondary markets as well as the broad institutional and infrastructural issues.

In the primary market, the master plan calls for bond issuance with continuity, transparency, and predictability in line with international practices, and an adoption of auction techniques most beneficial to the Thai market. In the secondary market, the plan suggests actions to develop the primary dealer system to facilitate the conduct of open market operations and to establish facilities to promote trading of government and private securities. Regarding infrastructural issues, the master plan focuses on the settlement system, information disclosure, and code of conduct.

The BOT has also taken several significant initiatives to facilitate bond market development. First, the real-time delivery versus payment (DVP) project was started in April 1998 and is due to be completed by the third quarter of 2000. The system will include queuing and gridlock mechanism and employ the latest Digital Signature technology to ensure secured and smooth real-time delivery and payment transactions.

Second, the temporary suspension of the transfer of ownership prior to every coupon payment was abolished; ex-coupon payment no longer require the bond registrar to freeze registration before making coupon payments.

Third, the Securities and Exchange Commission Act was amended so that securities registered at the BOT can be presumed to be securities held by the registrar on behalf of those persons according to type, category, and amount as appear in the list of names prepared by the depositor.

Lastly, a real-time price quotation screen was provided to news wire services to improve information flows and pricing mechanism.

Posted: 01.07.2000 19:55