FISCAL Although deficit spending and the financial crisis have taken their toll on state coffers, the government found breathing space to revive the economy

Stimulating time for the economy

Wichit Sirithaveeporn

Increased stability in exchange, interest and inflation rates in the second half of 1998 gave the government room to turn its attention toward spurring the domestic economy by fiscal stimulus measures.

On March 30, the government unveiled a 130-billion-baht package of new spending programmes, tax cuts and measures to reduce energy prices.

Some 53 billion baht, borrowed from Japan under the Miyazawa fund, were earmarked for creating 486,000 new jobs, largely in rural communities, through small-scale infrastructure and public works programmes.

Another 54 billion baht was freed up by tax cuts to help boost consumer purchasing power and reduce business costs.

Value-added tax was cut to 7% from 10% until March 2001. A personal tax exemption on the first 50,000 baht of net income was announced, equal to an additional 2,500 baht per year per person. The 1.5% VAT for small businesses was eliminated.

Another 23.8-billion-baht worth of energy tax cuts were made; electricity prices were reduced by 0.2587 baht per unit; prices for liquified petroleum gas were cut; and excise tax on fuel oil was cut to 5% from 17.5%.

Overall, the programme was aimed at easing the social impact of the crisis by expanding welfare benefits, spurring new investment and job creation and expanding public health, education and environmental protection programmes.

Technology development, industrial restructuring and public sector reform were other key goals of the March programme.

Four months later, the Finance Ministry followed with new measures to boost private investment, promote recovery in the property sector and support small- and medium-sized enterprises.

The August 10 programme featured tariff cuts on nearly 500 categories of capital goods and raw materials, aimed at reducing production costs.

Three new funds were set up to invest in local firms.

First was a $500-million Equity Fund, managed by the International Finance Corporation and funded through the government, local and foreign investors. The fund will invest in large companies which have completed or in the process of debt restructuring.

Second was a $100-million Thailand Recovery Fund set up by the Asian Development Bank to invest in medium-scale enterprises, while the third was a one-billion-baht venture capital fund for small firms.

To support the property sector, the August package approved 50-billion-baht worth of bond issues through the Government Housing Bank and the Secondary Mortgage corporation to help provide long-term, fixed-rate credit for new homebuyers.

Real estate transfer fees were cut, estimated to cost the government 2.5 billion baht in revenue until the end of 2000.

The National Housing Authority was also mandated to purchase up to 15-billion-baht worth of unfinished housing projects through 2001. The measure is expected to create 20,000 new housing units for the lower- and middle-income earners, as well as reduce non-performing loans held by local financial institutions.

Finally, the August investment programme approved new capital increases for the Small Industry Finance Corporation and the Small Industry Credit Guarantee Corporation to support business expansion.

Another 100 million baht was allocated for the establishment of financial advisory centres for small- and medium-sized enterprises.

Public debt

But deficit spending over the past several years, coupled with the financial crisis, has taken its toll on state finances.

The public debt, as of Sept 30, totalled 959.68 billion baht in direct borrowings, with 598.64 comprised of local debt and the rest from overseas.

Government guarantees on state enterprise borrowings totals another 911.2 billion baht.

In contrast, the country's domestic public debt stood at 317 billion baht in 1996, with foreign debt of 372.8 billion.

How worrisome the country's public debt will be in the future depends largely on the pace of recovery.

Suparat Khawatkul, director-general of the Fiscal Policy Office, says if exports, investment and local consumption pick up, pressure on the government to maintain stimulus measures and state spending will ease.

Some of the costs reflect the government's efforts to spur growth and ease the social impact of the crisis through jobs programmes, educational, health and social welfare spending.

But the biggest reason behind the ballooning debt has been the cost of the financial crisis. The Finance Ministry issued 500 billion baht in bonds to help refinance liabilities incurred by the central bank's Financial Institutions Development Fund, and more issues are expected in the future.

As of September, liabilities of the Financial Institutions Development Fund stood at 959.58 billion baht.

Still on the hot seat

Another 300 billion baht in state funds was set aside to help recapitalise local banks and finance companies under the August 1998 financial reform programme.

The Bank of Thailand has also seen its debts increase over the crisis, but in line with international standards, these liabilities are separated from the government budget.

As of September, the central bank had foreign debt equivalent to 520.69 billion baht.

Falling interest rates and higher liquidity in the money market allowed policy makers to shift borrowings to the local market in the form of bond issues and treasury bills.

The Finance Ministry issued 40 billion baht in bonds in 1999, with another 110 billion baht in bonds, treasury bills and promissory notes expected to be issued next year to cover the fiscal budget deficit.

Regulators say the new bond issues will also help support development of the local debt markets.

Privitisation

Government efforts to privatise state enterprises took a step forward in 1999 after parliamentary approval of the Corporatisation Act.

The new law will allow state enterprises to be transformed into limited or public limited companies. As of mid-December however, Implementation of the law still awaited formal approval by His Majesty the King.

Still, progress toward privatisation slowed throughout the year. Political sensitivities and resistance among state enterprise employees was one key factor. Improved market and economic conditions also reduced the urgency of privatisation, highlighted in the early stages of the crisis as key towards restoring investor confidence.

Policy makers say they remain dedicated towards state enterprise privatisation and the goal of boosting economic efficiency, improving public services at lower costs.

The government announced overall framework for establishing independent regulatory bodies for key sectors, including energy, transport and water.

Each sector regulator will be responsible for managing licensing, reviewing and setting tariffs, overseeing service quality and setting competition regulations.

Key duties will be to promote competition and support consumer interests. An arbitration mechanism will be set up to deal with complaints raised by consumers or service operators.

While further progress in state enterprise privatisation will have to await formal implementation of the Corporatisation Act, many agencies are moving ahead to prepare for future changes.

• Energy: The National Energy Policy Office in 2000 will continue with reforms to eventually split policy-making and regulatory duties into separate bodies.

The Electricity Generating Authority of Thailand has already completed valuation of assets. But plans to corporatise Egat have met strong resistance from staff.

The cabinet in late November approved a framework for the privatisation of the Ratchaburi power plant, with an initial public offering expected to be completed by August 2000.

The role of the two main power distribution agencies, the Metropolitan Electricity Authority and the Provincial Electricity Authority, will also change. Eventually, independent power companies will be allowed to market directly to end users, using transmission networks of distribution firms by paying a service fee.

• Telecommunications: The Telephone Organisation of Thailand is expected to begin its process of privatisation by October 2000.

The organisation has already begun taking steps toward corporatisation, including restructuring operations into distinct profit centres and strengthening accounting systems. Asset valuation has already been completed in preparation for an eventual share offering.

The Communications Authority of Thailand has taken similar steps, and is awaiting final clearance of the Corporatisation Act before initiating steps to transform into a limited company.

• Water: Labour conflicts has hindered progress in the privatisation of both the Metropolitan Waterworks Authority and the Provincial Waterworks Authority. Other difficulties has been in legal reforms - under the current structure, regulation over waterworks falls on district and municipal authorities, the Public Works Department and other agencies.

Reforms would set up a central regulator to oversee private firms and concessionaires.

• Transport: A privatisation study was completed in 1999 for Thai Airways, the state airline carrier. Progress is now being made on a five-year operational plan, with a public offer of 230 million shares now held by the state planned in 2000.

The Airports Authority of Thailand plans to convert into a holding company in late 2000, after divesting its stake in the New Bangkok International Airport Co.

For the State Railway of Thailand, the cabinet has already approved plans to split operations into three functions: rail track, rail stations and signalling operations; train operations; and management of the SRT's land assets, totalling 240,000 rai nationwide.

Privatisation would allow private operators to offer rail services, paying a service fee for using SRT assets. A new company would be established to manage and develop land and properties, with funds raised used for laying new track and developing existing routes.

Trade liberalisation

Efforts to spur regional trade will take a giant step forward starting Jan 1, when members of the Asean Free Trade Area will slash import tariffs to 0-5% for 85% of all trade lines.

Tariffs for the remaining trade products will be cut by 2003. Economists and policy makers hope the reductions will help boost regional trade and investment flows to Asean countries.

The Afta agreements can be broken down into five groups:

• Goods listed on the Inclusion List, divided into fast track items where tariffs are cut to 0-5% by 2000, and normal track items, where tariffs are cut to 0-5% by 2003.
• Goods on the Temporary Exclusion List . Industrial items are to be transferred to the inclusion list over a five- year period ending 2000 in equal steps, with tariffs cut to 0-5% by 2003.

Unprocessed agricultural goods have to be transferred to the inclusion list by 2003 in equal steps.

• Goods on the Sensitive List, with tariffs cut to 0-5% from 2003 to 2010.
• Items on the Highly Sensitive List will have tariffs cut over 2003-2010, but final rates are open. Countries can also maintain safeguard measures to protect domestic industry. Rice is the only item listed on the list.
• The General Exception List are items excluded from the tariff reduction scheme, covering goods deemed dangerous to public health, livestock or agriculture.

According to the Finance Ministry, Thailand has committed to slashing tariffs to 0-5% for 85% of all trade lines, or 9,103 items, starting January 1. By 2001, 90% of all items will have their tariffs reduced.

But one concern of free trade proponents has been whether some Asean members will seek to protect key industries and withdraw items from the liberalisation scheme.

Malaysia, for instance, has insisted that automobiles will remain excluded from the scheme, to protect its car industry. Indonesia and the Philippines has also signalled that they might withdraw petrochemicals from the scheme.

But a compromise in November allowed all sides to save face, whereby unspecified compensation would be given to countries hurt by Malaysia's insistence that tariffs on cars be maintained.

Thai authorities, meanwhile, decided against withdrawing palm oil from Afta in retaliation. Import tariffs on palm oil, a major product of both Malaysia and southern Thai provinces, will be cut to 20% by 2002.

 

 

 

 

 

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