Economic Mid-Year 2001

Long night ahead
for white knight

Cholada Ingsrisawang

ECONOMY

Expectations that the goverment could
apply a quick-fix solution to economic woes and bring back the boom times have given way to reality.
Although Premier Thaksin has moved quickly to introduce key policies, the court case against him for alleged non-disclousure of assets continnues to create uncertainty about the future of his adminstration

The image of Thaksin Shinawatra as a white knight leading the new government and the country to new-found prosperity slowly faded in the first half of the year, replaced with the growing realisation that the country's fundamental woes would take years, if not decades, to overcome.

Although the government's policies are highly controversial, even the biggest critics concede that strong progress has been made in translating Thai Rak Thai's ambitious campaign promises into action.

With exports stalling because of the slowdown in the United States and Japanese markets, and private investment and demand flat, Mr Thaksin and his finance minister, Somkid Jatusripitak, have discarded the market-Ied approach taken by the previous government in favour of strong state-Ied solutions.

One of the biggest of these is the Thai Asset Management Corp, a debt workout agency, details of which were fleshed out in February in the first of the government's high-profile workshops among policymakers, civil servants and private-sector leaders.

The TAMC, which is set to begin operations in July, will take over 1.3 trillion baht in bad loans from local banks, the theory being that pooling creditor claims can expedite corporate debt restructuring and industrial reform.

Workshops on the equities market, tourism, illegal drugs and small and medium-sized enterprises soon folIowed, although with mixed results.

Another discernible change in policy and style brought about under the Thaksin government has been the attitude toward international institutions. While maintaining that ThaiIand's borders remain open to foreign investment, tourists and goods, there is little question that the government will focus on protecting Thai firms first.

The mindset extends to delaying previous plans for market liberalisation, thus shielding local firms longer from the pressures of global competition.

The common refrain taken by ministers is that international standards and norms cannot be adopted wholesale, but must be "tailored" and "structured" relative to domestic business practices, social norms and the overall economic environment.

On the fiscal side, complementing the government's high-profile programmes such as village investment funds and debt suspension for farmers, are standard measures to improve the budget process, speed up allocation of funds and rationalise new state spending programmes.

Monetary policy, which since 1998 had been kept loose to spur economic growth and corporate debt restructuring, was abruptly reversed by the government in May.

M.R. Chatumongol Sonakul, the well-respected but outspoken governor of the Bank of Thailand, was sacked after a week-long public debate between the central bank and the government over interest rates.

The central bank had insisted that with inflationary pressures non-existent, interest rates should continue to be maintained low to help boost growth, a stance favoured by many analysts and economists.

But the government insisted that deposit rates of 2-2.5% were encouraging companies to refinance their foreign debt, leading to capital outflows and putting pressure on the baht.

Low interest rates had done little to revive the economy, government economists argued, while the fall in
deposit revenue was hurting consumption.

Under the new central bank governor, M.R. Pridiyathorn Devakula, the key 14- day repurchase rate was increased in June, the first rise in at least 13 months and aimed at righting "distortions" in the money market.

M.R. Pridiyathorn, a long-time banker and former president of the Exim Bank, said monetary policy would be changed to focus on stabilising the exchange rate and foreign reserves, a different approach from the policy under M.R. Chatumongol, which made controlling inflation the prime goal of the central bank.

At the same time, the government also took steps to break the "liquidity trap" within the financial system through an expanded role for state banks.

Outstanding bank loans continued to contract throughout the first half of the year due to low loan growth, write-offs of bad loans and deleveraging or refinancing by top companies.

With credit risks rising in the weak economy, banks themselves had taken a more cautious line on lending to small and medium-sized companies, while top firms increasingly turned directly to the bond market to take advantage of lower funding costs.

The result was that liquidity continued to pool in the money market, with the excess estimated as high as 600 billion baht from the inability or unwillingness of banks to lend.

State banks such as Krung Thai Bank were directed to accelerate lending plans. The central bank also signalled that it would re-evaluate bank regulations, with an eye on removing costs for commercial banks which, in turn, would presumably allow them to boost lending at lower interest rates.

A new People's Bank, operated through the Government Savings Bank, was launched in June as a micro-credit programme to help finance new business startups and rural entrepreneurs.

The Small Industry Finance Corp was "upgraded" to the status of a commercial bank dedicated to small and medium-sized businesses, while the Small Industry Credit Guarantee Corporation gained increased resources to support lending by other state financial institutions.

Yet all of the measures announced by the government in the first half did not come soon enough to ease pressures from abroad.

Export value in US dollars for the first quarter was $20.7 billion, a drop of 2.7% from tle same period the year before and making the Commerce Ministry's official growth target of 9.4% for 2001 seemingly impossible to reach.

Higher global oil prices led to an import bill of $20.8 billion in the first quarter, 9.5% higher than the same period the year before and leading an overall trade deficit of $100 million for the quarter.

Political uncertainties surrounding the fate of Prime Minister Thaksin and his ongoing case before the Constitutional Court also played a role in muting investor confidence in the first half of this year.

Thai Rak Thai's seemingly unshakable dominance in Parliament could be thrown into jeopardy if the court was to uphold charges by the National Counter Corruption Commission that Mr Thaksin violated asset disclosure laws while serving as a deputy prime minister four years earlier.

A guilty verdict would lead to a five-year ban from political office and immediate concerns about whether the three-year-old Thai Rak Thai Party would be able to continue if its leader and founder was removed from the limelight.

The various pressures on the economy led the Bank of Thailand to announce in April that it was cutting its growth forecast for 2001 to 2.5-4%, from 3-4.5% earlier. But economists were cautiously optimistic that increased fiscal spending, coupled with gains in the economies of major trading partners, would lead to higher growth in the second half of the year and 5% growth for 2002.