ECONOMY
Stability provides recovery platform
Manufacturing, consumption and exports are up and interest rates are down. What's missing is confidence that the turnaround can be sustained
Parista Yuthamanop
Thailand entered the 21st century on track for economic recovery, with broad stability in interest, exchange and inflation rates.
Manufacturing production showed gains, bolstered by strong exports in the first half. Domestic consumption and private investment also showed moderate improvement, helped by low interest rates maintained by the Bank of Thailand.
But while broad economic data showed cause for optimism, public confidence in economic recovery remained muted.
Equity investors, for instance, saw the Stock Exchange of Thailand lose nearly 30% from January to June, the worst market performance in the region behind Indonesia's.
External factors, led by concerns over the US economy and volatility in global technology shares, was a major reason cited by investors.
Local political uncertainties and sluggish progress in corporate debt restructuring also helped dampen investor sentiment.
But exports remained a bright star in the economy, growing 30.4% in US dollar terms in the first quarter year-on-year.
Manufacturing also grew across the board with rising exports and stronger domestic demand.
Strong global demand for computers helped put integrated circuits and electronic parts at the top of Thai exports. Gains were also shown in the auto, petrochemicals, steel, jewellery and textile industries.
Low interest rates, continued fiscal stimulus programmes and slight gains in consumer confidence helped boost domestic consumption, with department store, car and motorcycle sales, and value-added tax collection all posting gains.
Auto sales grew 62.1% in the first quarter from the year before due to stronger domestic demand. Private investment also posted positive gains on higher car sales, capital goods imports and cement sales.
But industrial capital utilisation averaged 57.6% from January to April, suggesting that production overcapacity remained high within the economy.
 Biggest recipient
The property sector, the biggest recipient of credit from the financial sector, remained weak, as increases demand remained insufficient to absorb supply.
Imports increased by 39.2% in dollar terms in the first four months from the year before, as stronger consumption and private investment led to increased imports of intermediate products, raw materials and capital goods.
The trade and service accounts continued to post surpluses, helping the current account post a total surplus of $3.73 billion in the first quarter.
But net capital movement showed an outflow of $4.83 billion in the first quarter, as private companies and financial institutions continued to retire foreign currency debt.
Central bank officials said outflows were sufficiently financed from trade and service surpluses. Foreign direct investment totalled $720 million in the first quarter, with regulators projecting total investment of $4.3 billion for the year.
The decline in short-term foreign debt has helped boost overall economic stability. Total external debts declined to $72.1 billion as of March, compared to $86.1 billion at the end of 1998.
Private sector debt has fallen to $35.44 billion at the end of March from $54.6 billion at the end of 1998. Short-term debt decreased to $12.3 billion, compared with $23.5 billion at the end of 1998.
Despite the brighter macroeconomic picture, economists agree that authorities will face increasing challenges ahead to sustain growth momentum amid increasing fiscal constraints.
Addressing non-performing loans in the system, which totalled 1.95 trillion baht in April, will remain a major policy challenge over the next several years.
 Structural reform
Implementing structural reform to promote long-term industrial competitiveness will also be a major task.
Meanwhile, interest rate increases by the US Federal Reserve are expected to help slow the US economy in the second half.
This could pose a major risk for the Thai economy, given that the US is one of the country's biggest export markets. But signs that the Japanese economy has begun to improve after a decade of recession could help boost regional activity.
While debt restructuring has made significant progress under the Corporate Debt Restructuring Advisory Committee, officials agree that future gains will rest with the courts. Debts topping one trillion baht will have to be settled in court.
Even so, the central bank says it is confident that local banks have sufficient capital for operations to the end of next year.
Debt write-offs, continued restructuring and transfers to asset management corporations are expected to bring non-performing loans down to around 10% of total outstanding credit by the end of the year, compared with 36% at the end of April.
Krung Thai Bank alone plans to transfer bad loans totalling 530 billion baht to a state-owned asset management company, beginning in the third quarter.
The central bank announced in May that it had reached agreement with HSBC Holdings to purchase a 75% stake in Bangkok Metropolitan Bank for around 37 billion baht.
This would make it the third state-owned bank sold to foreign investors, following Nakornthon's sale to Standard Chartered and Radanasin's to United Overseas Bank.
Privatisation of Siam City Bank is expected to be delayed for several months after the central bank rejected bids by US investment fund Newbridge Capital.
Thailand formally exited the three-year reform programme under the International Monetary Fund in June. Fund officials said the economy was on track for up to 5% growth in 2000, although noted that corporate debt restructuring remained a major task.
But the overall improvement in the macroeconomy and financial sector raised hopes that credit agencies, such as Moody's Investors Service, would upgrade Thailand's sovereign rating in the second half, thereby boosting investor sentiment.
One major uncertainty, however, is in the political arena. The Chuan Leekpai government must call for new elections by November, and questions remain about whether reform policies would remain on track under a new coalition.
The next government will face hard decisions on public debt management, state enterprise privatisation and fiscal stimulus policies amid tighter budget constraints.
How to boost the country's long-term industrial and human resource competitiveness and implement a Òknowledge-based economy'' remains a major challenge.
Overall, employment posted slight gains in the first half, with new employee registrations in the social welfare system increasing in the first quarter.
Demand for job skills such as computers and English are sharply higher, reflecting the impact of globalisation in the local economy and the influence of information technology. |
ECONOMY -