II. Thailand: An Aggregate Balance-Sheet Analysis1
1. The financial structure of an economy—that is, the composition and size of the assets and liabilities of its main sectors—provide important information about its vulnerability to crisis. Indeed, Thailand’s own experience in 1997 is a vivid example of how a vulnerable balance sheet in one sector (the corporate sector, in this case) can deteriorate dramatically in the event of changing asset prices (real estate prices and, subsequently, the exchange rate) and can spill rapidly into other sectors of the economy (the banking and the public sector) via balance-sheet linkages.
2. More generally, the analysis of stock variables that defines the balance-sheet approach forms an important complement to the more standard flow analysis of macro economic variables, such as current account and fiscal deficits. It permits a point-in-time assessment of the existing mismatches in a country’s main balance sheets: namely, currency, maturity, and capital structure mismatches. These mismatches, in turn, define individual sector’ exposures to liquidity and solvency risks, and more generally, an economy’s vulnerability to shocks transmitted through movements in exchange rates, interest rates, and other asset prices. If this vulnerability is perceived to be high, balance-sheet mismatches can in themselves trigger the sharp movements in asset prices that are typically associated with a loss of confidence, thereby generating insolvencies and sowing the seeds for a full-blown crisis with potential spillovers (through balance-sheet linkages) into all sectors of the economy. Indeed, balance-sheet mismatches in one or more sectors have been at play in all major capital account crises of recent years.
3. At the same time, balance-sheet analyses are subject to limitations. First, they capture assets and liabilities at a specific point in time, which has only limited value from a forward-looking perspective, particularly in the presence of sizeable flow imbalances (e.g., budget or current account deficits) that generate a rapid increase in liabilities (public or external debt) from one period to the next. Second, data limitations typically pose a constraint on drawing reliable conclusions. Third, even if sufficient data were available to construct aggregate balance sheets at the sectoral levels, these fail to signal potential problems in individual institutions or segments of a sector, which can snowball into a wider problem, just as sectoral difficulties can trigger an economy-wide crisis.
4. With these caveats in mind, this chapter analyzes the aggregate balance sheets of Thailand’s main sectors at end-2002 and compares them with the situation prior to the 1997 crisis. It applies the framework proposed in Allen et al. (2002). While data limitations preclude an in-depth analysis of each sector’s exposure to the various risks, the available information provides nevertheless evidence that Thailand has come a considerable way in reducing balance-sheet mismatches. Although weaknesses remain in terms of individual sector’ risk exposures—with the corporate sector still being highly leveraged and banks burdened by nonperforming loans—the economy’s large potential financing gap that existed prior to the crisis as a result of currency and maturity mismatches has disappeared. Adequate monitoring of balance-sheet exposures, nevertheless, remains important to detect potential mismatches early on. This calls for improvements in the collection of data to allow for a more complete analysis of on- and off-balance sheet exposures on a regular basis.
B. The Overall Picture: 2002 Versus 1997
5. Information on Thailand’s aggregate balance sheet matrix—while patchy—suggests a considerable reduction in vulnerabilities since the crisis. Based on the partial information shown in Table 1, gathered predominantly from public sources, it is possible to derive a number of important conclusions about the evolution of Thailand’s aggregate balance-sheet vulnerabilities since June-1997, when the crisis erupted:
Thailand’s aggregate balance-sheet position at end-2002 marks a sharp turnaround from the fundamental mismatches that defined the dawn of the crisis (Table 2). In June 1997, Thailand had a potential aggregate financing gap (that is, total maturing foreign-currency liabilities in excess of liquid foreign assets) of about $12 billion—not including off-balance sheet obligations.2 The vulnerabilities were buried in the sectoral balance sheets (banks and non-banks), while the government’s (on-balance) reserve position appeared sound. However, the Bank of Thailand’s (BOT’s) large negative net forward position—i.e., its future obligation to sell foreign against domestic currency which had been built up to stem depreciation pressures—presented an additional drain on the country’s foreign assets, raising the potential financing gap to $41 billion. At end-2002, in contrast, Thailand’s liquid foreign assets exceeded its short-term liabilities by an estimated $22 billion, and the BOT’s negative net forward position had virtually disappeared (and has recently turned positive in response to forward interventions aimed at stemming a baht appreciation).
The maturity and currency mismatch in commercial banks vis-à-vis nonresidents, which was at the heart of Thailand’s 1997 crisis, has practically disappeared. In June 1997, about one-quarter of commercial bank’ liabilities, i.e., some $49 billion were foreign liabilities, of which $29 billion fell due in the short term. With liquid foreign assets (cash and deposits at foreign banks) of only $3 billion, the sector’s potential short-term foreign financing gap (assuming no rollover) was enormous. In contrast, at end-2002, bank’ liquid foreign assets exceeded their short-term foreign liabilities (including projected amortization of long-term debt) by $3 billion.
The corporate sector—while still exposed to currency risk—is also in much better shape than it was prior to the crisis. Although the non-bank sector’s maturity and currency mismatches with regard to nonresidents were not much lower at end-2002 than they were prior to the crisis (with maturing debt having fallen from $19 to $14 billion), its exposure to exchange-rate risk has decreased considerably. The reason is that, in 1997, banks had hedged their currency mismatch by onlending domestically in foreign currency, thereby effectively transferring the currency risk to the domestic corporate sector. Commercial banks held foreign-currency claims against the domestic non-bank sector of about $32 billion (not shown in Table 2), bringing the latter’s total foreign-exchange exposure (including external debt) to $94 billion. The maturing part of these claims added to the non-bank sector’s already high short-term liabilities to nonresidents. At end-2002, bank’ foreign-currency onlending amounted to an estimated $8 billion (derived as total foreign-currency loans to non-banks minus loans provided to nonresidents), implying a drop in the non-bank sector’s overall foreign-exchange exposure to $40 billion—only 40 percent of its pre-crisis level, but still equivalent to one-third of GDP.
The corporate sector’s exposure to exchange-rate risk is further mitigated by natural and financial hedges. The “true” currency mismatch, while difficult to assess, is smaller than implied by the above calculations, as a potentially sizeable share of foreign-exchange liabilities is owed by export-oriented firms. In addition, about 20 percent of corporate’ total foreign-currency debt is reportedly hedged financially with domestic banks as counterparties. This activity partly explains commercial banks’ sizeable forward exposure in the foreign-exchange market of about $10 billion.3 In compliance with prudential regulations, however, banks’ overall net foreign-exchange position is considerably smaller—and indeed positive—reflecting their large net asset position of $11 billion in the spot market.4
|Rest of the|
|Issuer of liability (debtor)|
|General government and Bank of Thailand|
|Total other liabilities||21.0||16.32/||13.0||50.4|
|in foreign currency||14.4|
|in domestic currency||36.0|
|Short term (original maturity)||0.6|
|o/w in foreign currency|
|Medium and long term||12.4|
|Nonfinancial public enterprises|
|in foreign currency||9.4||9.7|
|in domestic currency||0.0||11.1|
|Short-term (original maturity)||0.0||0.4|
|o/w in foreign currency|
|Medium and long term||9.4||19.1|
|Financial sector 1/|
|in foreign currency||12.2 3/|
|in domestic currency||156.2|
|Deposits and other short-term||4.2|
|o/w in foreign currency|
|Medium and long term||7.0|
|Equity (capital) 5/||27.3|
|Non-bank private sector|
|in foreign currency||8.4||21.4||29.9|
|in domestic currency||4.1||125.1|
|Short-term (original maturity)||8.9|
|o/w in foreign currency||8.4|
|Medium and long term||16.7|
|Rest of the world|
|Currency and short term 4/||38.9||9.4||48.3|
|Medium and long term||0.0||5.6||4.0||9.7|
|Position In December 2002|
|Liquid assets 1/||39||9||…||…||…||48|
|Projected maturing long-term obligations||6 2/||2||1||4||5||12|
|Net liquid assets (financing gap)||33||3||-1||-12||-14||22|
|Net liquid assets, incl. BOT’s net forward position||32||3||-1||-12||-14||22|
|Memorandum item: net forward position of BOT 3/||0||…||…||…||…||0|
|Position in June 1997 4/|
|Liquid assets 1/||32||3||…||…||…||36|
|Net liquid assets (financing gap)||32||-26||…||…||-19||-12|
|Net liquid assets. incl. BOT’s net forward position||4||-26||…||…||-19||-41|
|Memorandum item: net forward position of BOT 3/||-29||…||…||…||…||-29|
6. While these considerations provide comfort about Thailand’s present external position, particularly in light of its sizeable current account surpluses, weaknesses remain at the sectoral levels. Both banks and corporates are exposed to risks as a result of balance-sheet mismatches. The apparent currency mismatch in the corporate sector, which translates into credit risk to banks in the event of a sharp depreciation, is only one example. These and other balance-sheet weaknesses represent possible contingent liabilities to the public sector that could potentially raise the already sizeable public debt burden. Vulnerabilities within the individual sectors are discussed in the subsequent three chapters of this paper—going beyond an examination of aggregate balance sheets. The following sectoral analysis sets the stage for those more in-depth discussions, while at the same time comparing the sectoral exposures at end-2002 with those at the onset of the 1997 crisis.
C. Sectoral Analysis
The Government Sector
7. The balance sheet of the government sector, while in many respects weaker now than prior to the crisis, is considerably more resilient to currency risks (Table 3).5 On the negative side, the liabilities of the government sector have tripled since 1997—a legacy of the crisis, notably the heavy cost of financial sector restructuring-—and are now equivalent to 40 percent of GDP. Clearly, a high debt level—besides implying budgetary costs in terms of interest payments—reduces a government’s room for maneuver, and makes it, in general, more susceptible to adverse shifts in market sentiment. In the case of Thailand, however, the perception of sovereign risk is currently low, as reflected in its investment grade ratings and low sovereign spreads. Currency risk, in particular, which was central to the crisis—and marked the weak spot in the government’s balance sheet once the BOT’s forward position was included—was low at end-2002. indeed, the public sector, as defined here, had a sizeable net foreign asset position, which has risen further over the first half of 2003.
|Financial Sector||NFPF’s||Private non-banks||Rest of the world||Total|
|Position In December 2002|
|o/w in foreign currency||…||…||0.0||38.1||38.1|
|Liabilities (excluding currency)||21.0||…||16.3||13.0||50.4|
|o/w in foreign currency||…||…||…||…||14.4|
|Short term (estimate)||11.6||3/||…||…||5.5||17.1||4/|
|Net liquid assets||-2.3||…||…||33.4||31.2|
|Net foreign-currency assets||…||…||…||…||23.6|
|Including net forward position||…||…||…||…||23.2|
|Position In June 1997 5/|
|o/w in foreign currency||0.0||…||…||32.3||32.3|
|Liabilities (excluding currency)||10.5||…||…||5.7||16.2|
|o/w in foreign currency||0.0||…||…||5.7||5.7|
|Net liquid assets||0.5||…||…||32.3||32.3|
|Net foreign-currency assess||0.0||…||…||26.6||26.6|
|Including net forward position||…||…||…||…||-2.0|
8. The government sector’s balance sheet is currently not an obvious source of vulnerability, though further consolidation would create more room for maneuver. The public debt ratio is sensitive to various shocks that directly affect revenues and financing needs of the public sector. With lower debt at the outset, the government would have more room for pursuing countercyclical fiscal policies in the event of economic downturns. This is particularly important in the presence of remaining weaknesses incorporate’ and bank’ balance sheets. Finally, risks may also arise from a future buildup of contingent liabilities in the context of increased reliance on quasi-fiscal activities—such as lending by specialized financial institutions (SFIs).
Non-Financial Public Enterprises
9. Based on the partial information available, non-financial public enterprises are currently not displaying major balance-sheet mismatches (Table 4).6 NFPEs have liabilities of $21 billion (some 16 percent of GDP), and more than 80 percent of their debt is government-guaranteed. Thus, NFPEs could potentially present sizeable contingent liabilities to the government. That said, the sector as a whole has positive net worth, and most NFPEs are profitable, providing net contributions to the budget. Moreover, with a debt-to-equity ratio of about 1, and moderate short-term obligations, NFPEs aggregate position appears at present fairly sound and resilient to plausible shocks. Although nearly half of their debt is in foreign currency, most of NFPE’ external obligations are contracted on a long-term basis, and with anticipated net debt repayments of around $0.7 billion annually, the sector is expected to reduce its foreign exposure over the coming years.
|o/w in foreign currency||…||0.0||…||…||…|
|o/w in foreign currency||…||…||…||9.4||9.7|
|Short-term (estimate) 2/||…||1.7||…||1.1||2.8|
The Financial Sector 7
10. The aggregate balance sheet of the financial sector does not reveal particular weaknesses (Table 5)8. As symptomatic for banks, the aggregate balance sheet shows a considerable potential financing gap, with deposits and other short-term liabilities exceeding liquid assets by a substantial amount. That said, the ratio of liquid-to-total assets of about one-quarter—compared with less than 10 percent prior to the crisis—defines a relatively liquid financial system by international standards. Also, in terms of sectoral exposures, the financial sector’s balance sheet at end-2002 shows a fairly even distribution, marked by small net asset positions vis-à-vis the other three sectors (i.e., the government sector, including the BOT, the non-bank sector, and the rest of the world). This is in sharp contrast to the situation at end-1997, when the banking sector had a large net liability position vis-à-vis the rest of the world. Finally, the ratio of capital (excluding loan-loss provisions) to total assets of about 8 percent suggests an, in aggregate, adequately capitalized system—while an almost identical ratio at end-June 1997 signifies the limitations of such a point-in-time assessment.9
|Government||Non-bank sector||Rest of||Total|
|Position in December 20021/|
|Liquid (estimate) 2/||20.9||3/||5.8||7.2||13.0||9.4||42.7|
|Deposits and other short-term. (estimate) 4/||9.4||3.9||128.5||132.4||6.2||148.0|
|Net assets (including currency)||1.8||3.5||-3.0||0.5||1.8||6.1|
|Net liquid assets (including currency)||10.9||1.9||121.3||-119.4||3.2||-105.3|
|Excluding loan loss position||13.7|
|in percent total assets||7.9|
|Net open foreign exchange position 5/||1.1|
|Position in June 1997 6/|
|Liquid (estimate) 2/||10.7||…||…||7.8||3.2||21.7|
|Deposit and other short-term (estimate)||9.1||…||…||140.4||30.1||179.6|
|Net assets (including currency)||2.1||…||…||67.8||-44.5||25.4|
|Net liquid assets (Including currency)||1.6||…||…||-132.6||-26.9||-157.9|
|Excluding loan loss provision||18.6|
|in percent of total assets||7.8|
|Net open foreign exchange position (end-1996)||1.2|
11. The financial sector is exposed to market risk in the event of rising interest rates. This results from the fact that most security investments (some 70 percent in commercial banks) are in long-term paper and that loans are typically contracted on fixed rates for the first few years. In contrast, only one-quarter of deposits are time deposits beyond one year, implying a considerable maturity mismatch. Notwithstanding this assessment, the adverse impact of rising interest rates on banks’ financial position is mitigated, to some extent, by the use of swaps and the practice of transforming loan contracts from fixed to flexible rates after the first few years.
12. The main weaknesses in banks’ balance sheets, however, are not apparent from the aggregate presentation in Table 5. Banks remain highly exposed to credit risk, and the adequacy of their capital position has to be viewed in light of the relatively poor quality of loan portfolios. Nearly 17 percent of commercial bank’ loans are nonperforming (more than one-fifth in private banks) and almost one-third of performing loans has been restructured with considerable risk of becoming nonperforming again.10 Although, the largest private banks have built cushions for shocks, some institutions may be underprovisioned—particularly in light of a possible overvaluation of collateral. Finally, the aggressive lending by state-owned banks in the recent past and the various government-mandated initiatives that are being pursued by SFIs signal a greater exposure to credit risk at these institutions, representing potential future liabilities to the government.
The Non-Bank Sector
13. The non-bank sector—while considerably less exposed than prior to the crisis—remains nevertheless vulnerable (Table 6). Foreign-currency debt of Thailand’s corporate sector (including NFPEs) has fallen from more than $90 billion prior to the crisis to $40 billion at end-2002—with $30 billion owed by private companies. Moreover, as discussed earlier, a sizeable share of the private sector’s short-term external debt obligations is financially hedged—though hedging beyond one year is largely absent. Thus, indebted firms are still exposed to currency risks—but aggregate exposure is much lower than in 1997 and is likely to decline further over the coming years in the presence of sizeable current account surpluses. In addition, domestic-currency liabilities of the non-bank sector have also fallen by an equivalent of $50 billion since June 1997, However, data for listed companies (covering about one-quarter of corporate liabilities) suggest ongoing weaknesses in firms’ capital structure—measured by the aggregate debt-to-equity ratio—at a lime when excess capacity is still high.
|Position In December 2002|
|o/w in foreign currency||…||…||…||…||…||…|
|o/w in foreign currency||0.0||8.4||0.0||21.4||29.9||39.5|
|Debt-to-equity ratio for SET-listed companies 4/||1.6||1.8|
|Position in June 1997, including NFPE 5/|
|o/w in foreign currency||…||…||…||…||…||…|
|o/w in foreign currency||0.0||32.1||…||61.8||…||93.9|
|Debt to-equity ratio for SET-listed companies (end-1996)||…||1.6|
14. A reliable assessment of the corporate sector’s balance-sheet vulnerabilities is hampered by data limitations as well as considerable variation across firms. First, as indicated above, debt-to-equity ratios are only available for a relatively small subset of Thai companies, measured by total liabilities. Second, important information on off-balance sheet positions is not available on a systematic basis. Third, the aggregate positions in Table 6, which are incomplete in themselves (regarding short-term liabilities, for example) consolidate across households and businesses, with earlier analysis using firm-level data for listed companies suggesting considerable variation across firms.11 To the extent that liquidity or solvency problems in specific segments of the non-bank sector cannot be offset by net (liquid) asset positions in others, the aggregate position tends to hide potential risks that could spill over to other parts of the economy.12
15. Thailand has come a long way since the crisis in reducing its external vulnerabilities. The large potential financing gap with the rest of the world, that lay at the root of the 1997 crisis, has turned into a surplus, as large official reserves—uncompromised by forward exposures—exceed the country’s short-term financing needs. Similarly, bank’ onlending in foreign currency to domestic firms, which transferred the currency risk to the corporate sector but spilled back into the banking sector via large-scale defaults, has shrunk to one-quarter of its pre-crisis level.
16. Nevertheless, weaknesses in balance sheets remain. Public debt is much higher now than it was prior to the crisis, reflecting mainly the costs of financial sector restructuring, and the recent recourse to quasi-fiscal activities, if expanded, is creating new potential risks. The financial sector, which is still burdened by non-performing and restructured loans, is exposed, in particular, to credit risk in the event of an economic slowdown as well as market risk arising from higher interest rates. Finally, corporates still have a sizeable level of foreign debt—even though their exposure to currency risk is reduced in the short term by financial hedges—and seemingly high debt-to-equity ratios. However, data limitations restrict an analysis of the capital structure to listed firms, which display considerable variation across companies, revealing the limitations of an aggregate analysis.
Allen, M., C.Rosenberg, C.Keller, B.Setser, and N.Roubini,“A Balance Sheet Approach to Financial Crisis”,IMF Working Paper, WP/02/210, 2002.
HaksarV., and P.Kongsamut,“Dynamics of Corporate Performance in Thailand”,IMF Working Paper (forthcoming).
Prepared by Christina Daseking.
The calculations of the potential gap assume that (i) in addition to official reserves, only bank’ deposits with foreign institutions are liquid assets; and (ii) none of the short-term liabilities are rolled over.
Banks’ negative forward exposure is not included in Table 2, as it is unclear how much of it is to foreign counterparties. If the counterparties were exclusively residents the exposure for the country as a whole would be unaffected (which is implicitly assumed in Table 2).
Banks’ total foreign-exchange position (spot plus forward) is limited to 20 percent of their capital (15 percent for any individual currency). Thus, a large net foreign asset position in the spot market needs to be financially hedged, at least up to this limit, in the forward market.
The coverage used here for the government sector, which includes the BOT, is unconventional for Thailand. For a detailed discussion of public debt and contingent liabilities using the conventional coverage (i.e., general government, non-financial public enterprises, and FIDF) see Chapter III.
Sec Chapter III for a more in-depth analysis of NFPEs.
For a more in-depth analysis of financial sector issues, see Chapter IV.
The financial sector, as defined here, includes commercial banks, specialized financial institutions, and finance companies.
The derived capital-asset ratio is not directly comparable with the BIS minimum of 8.5 percent, as it does not weigh the assets by risk. The ratio on a risk-weighted basis has been considerably higher than 8.5 percent, as discussed in Chapter IV.
Chapter V discusses progress in financial and corporate restructuring and analyzes the economic costs associated with high levels of nonperforming loans.
See International Monetary Fund (2002), and Haksar and Kongsamut (forthcoming).
Indeed, this is the same logic that calls for an analysis of sectoral balance sheets, in the first place.