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Although progress has been patchy, there has been a genuine turnaround in the overall economy, but there are worries that the outcome of the general election could unravel many of the gains

ECONOMY

Recovery or false dawn?

CHOLADA INGSRISAWANG

From a broad perspective, the 2000 will mark the definitive end of the financial crisis which began three years earlier with the float of the baht.

By the end of December, the financial sector had largely stabilised, with non-performing loans down more than half from their peak in mid-1999 at around 2.7 trillion baht.

Despite rising oil prices and a weakening of the baht, inflation remained largely subdued throughout the year, allowing the Bank of Thailand to maintain a low interest rate policy to accommodate restructuring.

Export performance hit a historic high, averaging over $6 billion for most of the second half of the year and with overall growth expected to reach up to 20% for the year. The overall consensus was for economic growth of around 5% for the entire year.

However, even the most optimistic policy makers conceded that recovery remained far from broad-based. While exporters enjoyed surging sales and profits, scores of industries, led by building and furnishings as well as the property sector, remained moribund throughout the year.

Consumer and business moods turned downwards toward the second half of the year, with a drop in consumer spending and investment helping lead to a sell-off of equities and a weakening in the economy.

While some pick-up in demand could be seen throughout the year, excess capacity and continued consumer uncertainties helped restrain new investment and capital creation.

Heading into 2001, the greatest concerns remained on the recovery's sustainability - was this a false dawn ahead of a new downturn, or a tentative step toward a genuine resurgence for the economy?

One engine?

By far the most robust segment of the economy in 2001 was the export sector. Exports, in US dollar terms, are expected to reach $70 billion for the year, representing growth of 20% over 1999 and an increase of nearly 10 points from projections made earlier in the year.

Strong growth in global trade was one major factor behind Thailand's strong performance, which was led by the automobile, electronics and electrical appliances sectors.

Companies producing printed circuit boards, auto parts, pulp and paper saw a surge in orders leading to several firms announcing new expansion projects to boost production capacity.

As a result, employment saw relatively strong gains, with the Social Welfare Fund, which requires participation for employees at all firms with 10 or more workers, reporting 5.93 million members at the end of the third quarter, a 6.1% increase from the year before.

Fiscal spending in the first half, as investment projects financed from the 1999 Miyazawa programme took hold, also provided some stimulus. In any case, the government announced it would maintain a deficit spending programme into fiscal 2001, with a budget deficit of 105 billion baht projected on expenditures of 910 billion.

Still, economic uncertainties and muted wage increases helped restrain consumer spending, as people raised savings despite the lower returns gained from deposits.

Low commodities prices also contributed to the drain in disposable household income, although on the other hand, declines in food prices helped to keep overall prices in check.

Core inflation, which excludes energy and food prices, stood at just 0.7-0.8% in the fourth quarter, well within the 0-3.5% target range set by the central bank's Monetary Policy Board to the end of 2002. Even with the macro picture appearing rosy, some economists expressed questions on whether Thailand was heading into a new external balance problem.

While exports in the first 10 months of the year posted a strong 15.6% gain in dollar terms from the same period the year before, imports grew by 36.6%, reflecting in large part the substantial increase in energy costs.

Of greater concern was the rise in luxury imports, up 22% for the first nine months from the year before. While higher raw material and capital goods imports are considered key for a revival of industrial production, some pundits worried that the return to extravagant spending by some consumer groups could lead to a repeat of the bubble which sparked the crisis in the mid-1990s, but other economists believe that the threat of a second balance-of-payments crisis is mostly overblown, noting that foreign currency reserves at the end of 2000 stood at a healthy $32 billion against a significantly improved foreign debt position.

Low domestic interest rates over the past two years have fueled a rush by local companies to refinance their foreign obligations, both to save costs and reduce their currency risks.

The composition of foreign debt has also changed, with public sector obligations leading private sector debt and payment maturities lengthening.

The Bank of Thailand in September began repaying its loans to the International Monetary Fund which were taken out in 1997. Repayments are scheduled to continue into 2003, while other loans taken directly by the Finance Ministry over the course of the crisis have longer terms stretching over 10 years, reducing the immediate impact on external accounts.

The debt overhang

A potentially bigger threat to recovery, some analysts said, was the reluctance of financial institutions to lend. By the end of 2000, all banks had fully met the provisioning requirements set by regulators against their bad loans.

Non-performing loans at the end of October totalled 1.11 trillion baht, or 22.46% of total outstanding loans. This represents considerable improvement compared with mid-1999, when bad loans peaked at over 2.7 trillion baht, or nearly half of total loans.

A huge portion of the reduction came in September, when over 390 billion baht in bad loans were taken out of state-owned Krung Thai Bank and transferred to an asset management fund.

The NPL overhang continued to put pressure on local banks to adopt a defensive posture in new lending. While most bank executives said they were willing to lend, the best companies had little demand for credit, able to finance their funding needs through bonds or internal cashflow, while others represented too high of a credit risk.

Analysts generally agree that the huge pool of assets held by bank asset management firms will take years to work through, particularly given the weak position of the property market.

Another factor is that the vast majority of bad loans remaining are unlikely to be restructured out of court, meaning it could take years before creditors recoup some of their losses on the assets.

Policy choices

In the second half of the year, domestic politics took centre stage. The Jan 6 election would be the first under a new party list system, where voters would separately select a party as well as their local representative on the ballot.

The Thai Rak Thai Party, led by telecom tycoon Thaksin Shinawatra, jumped to an early lead in the race to form the next government on the basis of a populist platform including a three-year debt suspension for farmers and a one-million-baht revolving fund for every village in the country.

Thai Rak Thai announced it would set up a national asset management company to buy remaining bad loans from local banks, expedite state enterprise privatisation and listing on the stock exchange and implement numerous measures to boost rural development.

The incumbent Democrats campaigned largely on their successes in steering the economy from the brink of bankruptcy and focusing on medium- to long-term measures aimed at boosting national competitiveness.

Differences between the two parties largely hinged on one basic question - has the economy recovered? For Thai Rak Thai, the answer was no, and that sweeping new reforms and stimulus programmes were needed to avoid a new crisis, but for the Democrats, the perspective was mostly that the short-term challenges had largely been met, and that prudent fine-tuning was only needed.

While most potential voters appear to favour Thai Rak Thai's more aggressive approach, one question mark looming in the minds of investors was whether the party would be able to put its plans into practice.

Going into the election, Mr Thaksin had assembled an economic team around old-guard politicians and academics largely untested in public policy issues.

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