Thailand: Selected Issues
Author: International Monetary Fund
Publication Date:
03 Mar 2000
eISBN:
9781451836813
Language:
English
Keywords:
ISCR; CR; export; cost; Thailand; deficit; debt stock; debt impact; ratio peak; central government debt; fiscalized interest cost; Public sector; Financial sector; Public enterprises
Download PDF (631.2 KB)

This Selected Issues report on Thailand discusses the rapid growth years of the country before and after the 1997 balance-of-payments crisis. The report discusses development of the crisis and the steps taken to normalize the situation; credit growth before and after the crisis; public debt dynamics in the aftermath of the crisis; export performance before and after the crisis; and an analysis of the role of fiscal policy that led to the 1997 crisis. The report also highlights weaknesses that were threatening the sustainability of Thailand's economic growth.

Abstract

This Selected Issues report on Thailand discusses the rapid growth years of the country before and after the 1997 balance-of-payments crisis. The report discusses development of the crisis and the steps taken to normalize the situation; credit growth before and after the crisis; public debt dynamics in the aftermath of the crisis; export performance before and after the crisis; and an analysis of the role of fiscal policy that led to the 1997 crisis. The report also highlights weaknesses that were threatening the sustainability of Thailand's economic growth.

VI. Public Debt Dynamics in the Aftermath of the Crisis1

103. Public sector debt has risen sharply in recent years, but an analysis of the medium-term debt dynamics indicates that the debt to GDP ratio should soon begin to decline. The crisis-related expansion in government deficits and financial sector restructuring costs have contributed to a rapid increase in public sector debt over the last several years. Gross public sector debt has increased from just under 15 percent of GDP in 1995/96 to 56 percent of GDP at end 1998/99. The rapid increase in public sector debt has in turn focused more attention on the medium-term fiscal outlook. The following analyzes the medium-term debt dynamics, concentrating on a relatively conservative baseline scenario that is based on a continuation of existing policies (which build in a number of revenue-raising and expenditure-reducing measures). Under this scenario, the debt to GDP ratio is projected to peak at just under 64 percent in 2000/01 and then revert to 57 percent by 2004/05. Two alternative scenarios are also considered. Overall, the prospects remain good for a reduction in debt levels in the future, while the historical record also supports a tendency to keep public debt levels under control (Box 1).

104. Compared with other countries affected by the Asian crisis, the increase in public debt in Thailand has been relatively large. Indonesia is the only country that had a more pronounced increase in the debt-to-GDP ratio than Thailand. Korea, similar to Thailand and Indonesia, also experienced a significant increase in debt, much of which is related to financial sector restructuring costs. Philippines and Malaysia had higher pre-crisis debt ratios, but also appeared to have suffered less severe increases in public debt. These cross-country comparisons, however, need to be interpreted with great caution as the coverage of the public sector is not uniform across countries and, perhaps more importantly, the treatment of financial sector restructuring costs also differs. Caution is warranted in comparing both the absolute levels of public debt as well as the crisis-related change in public debt.

uA06fig01

Public Sector Debt of Selected Country

(in percent of GDP)

Citation: IMF Staff Country Reports 2000, 021; 10.5089/9781451836813.002.A006

Source Country authorities and staff estimates.

105. The following analysis focuses on gross public debt and thus excludes other significant components of government net worth. Gross public debt is defined as the sum of central government debt, nonfinancial public enterprise (PE) debt, and debt related to financial sector restructuring. Public debt, however, is not the same as public net worth, which is conceptually an equal if not better indicator of fiscal prospects. For example, the existence of sizeable public sector deposits in the banking system, which in Thailand amounted to 10 percent of GDP at end-1998/99, is not factored into the analysis. In addition, the stock of public enterprise sector debt needs to be interpreted carefully as the PEs are estimated to have positive net worth and the government, as owner of the PEs, could actually be viewed as owning equity equivalent to PE net worth.2 In the other direction, any contingent liabilities of the public sector are also excluded from the debt stock, but these, with the exception of those associated with financial sector restructuring (most of which are already incorporated into the debt stock), are believed to be quite small.

Debt and Deficits in the Past

In the decade prior to the crisis, fiscal policy in Thailand was characterized by rapidly declining debt-to-GDP ratios and overall surpluses.

The ratio of central government debt to GDP fell precipitously from its peak of 36 percent in 1985/86 to a low of less than 4 percent in 1995/96. The debt ratio was driven down by a succession of sizeable fiscal surpluses that peaked at over 5 percent of GDP, with the primary balance reaching a peak of more than 6 percent of GDP. In contrast, the first half of the 1990s were characterized by rising debt to GDP and overall deficits on the order of 4 percent of GDP, with the overall deficit reaching as high as 6 percent of GDP.

uA06fig02

Consolidated Centeral Government

(in percent of GDP)

Citation: IMF Staff Country Reports 2000, 021; 10.5089/9781451836813.002.A006

uA06fig03

Ratio of Interest Payments to Growth

Citation: IMF Staff Country Reports 2000, 021; 10.5089/9781451836813.002.A006

Source: GFS; IFS; and staff calculations.

Despite the period of sustained deficits, the debt-to-GDP ratio was kept in check by a favorable relationship between interest rates and growth. Even though Thailand was incurring relatively large overall and primary deficits in the first half of the 1990s, the debt-to-GDP ratio grew by only around 20 percentage points of GDP. The debt was restrained by the growth rates that far exceeded the interest rate on debt. The ratio in the adjacent figure indicates the impact of interest rates and growth on the evolution of the debt-to-GDP ratio: a value less than one means that the impact is toward a reduction in the ratio (e.g., a value of 0.9 means that the debt-to-GDP ratio would have been only 90 percent of its value in the prior year had the government run a primary balance of zero). Because of this favorable relationship, the government was able to run primary deficits averaging 2.8 percent of GDP for the 1975/76-79/80 period, but even so the debt-to-GDP ratio increased by an average of only 0.6 percent of GDP during this period.

106. Assumptions about the future path of macroeconomic variables are an important determinant of the medium-term debt dynamics. The baseline scenario assumes a gradual pickup in real GDP growth rates to 5.5 percent (Table 1), fueled largely by a projected recovery in private consumption. Private consumption, therefore, is projected to increase from 54.7 percent of nominal GDP in 1998/99 to 59.3 percent of GDP in 2004/05. Average real interest rates on public debt are expected to decline over the medium term, converging to around 3.3 percent of GDP (roughly, the pre-crisis average). The assumption that real GDP growth exceeds the real interest rate on debt contributes significantly to a reduction in the debt-to-GDP ratio. Theoretical reservations notwithstanding, sustained periods of real growth rates exceeding real interest rates are common. In addition, the sensitivity of the results to assumptions about growth is explored below.

Table 1.

Thailand: Medium-term Debt Dynamics

(Baseline scenario)

article image
Source: Staff estimates

A minus sign indicates a cost (i.e., a transaction that increases debt). Includes all financial sector interest and principal costs regardless of whether they are fiscalized.

A. Baseline Scenario

107. The public sector debt-to-GDP ratio is projected to peak in the next few years and then decline back to the current level (Table 1, and Figures 1 and 2). The turnaround in public debt is driven by a consolidation in the public sector deficit and the favorable impact of GDP growth. The consolidation in the public sector deficit follows from a steady but gradual turnaround in the fiscal position of the central government, which is projected to switch to an overall surplus by 2004/05 and primary surplus by 2002/03. Modest reductions in the PE balance and costs of financial sector restructuring also contribute to the public sector consolidation. Favorable growth and exchange rate projections, however, are the primary contributor to the reduction in the debt-to-GDP ratio. These factors combine to reduce the ratio by around 5 percentage points in each of the last four years of the projection period (at the same time interest payments amount to only 2-3 percent of GDP).3 Moreover, this is primarily explained by the impact of GDP growth; keeping the exchange rate constant throughout the projection period would result in an increase of less than 1 percent of GDP in the 2004/05 debt stock. Finally, for simplicity, privatization receipts are ignored.

Figure 1.
Figure 1.

Thailand: Central Government Fiscal Data and Projections 1/

Citation: IMF Staff Country Reports 2000, 021; 10.5089/9781451836813.002.A006

Source: Thai authorities; and staff estimates.1/ Excludes costs of financial sector restructuring.
Figure 2.
Figure 2.

Thailand: Medium-term Public Sector Debt and Balances

Citation: IMF Staff Country Reports 2000, 021; 10.5089/9781451836813.002.A006

Source: Staff projections.

108. The revenue assumptions are relatively conservative, but are still the main force behind the consolidation in the central government balance. Revenue increases average around ½ percent of GDP over the medium term, but nonetheless would result in both total revenue and tax revenue in 2004/05 being below the GDP ratios prevailing in the pre-crisis 1990s. The revenue increase is fueled by the planned return of the VAT rate to 10 percent in March 2001, by growth in private consumption (which boosts consumption tax revenue), and by modest improvements in collection of other taxes associated with the turnaround in economic activity. (The item “tax revenue buoyancy” in table 1 is comprised of the latter two effects.)

109. The projections also incorporate conservative assumptions regarding the future path of non-interest central government expenditure. Total non-interest expenditure and net lending is assumed to be greater in 2004/05 than the levels prevailing in the pre-crisis 1990s. With the exception of foreign financed expenditures, non-interest expenditure is projected to remain constant at the 1999/2000 level. Foreign financed expenditures, however, are expected to gradually decline as crisis related programs unwind. The decline is projected to be less than 1 percent of GDP relative to 1999/2000 and would leave foreign financed expenditures as a ratio of GDP slightly above the 1996/97-1997/98 average.

110. The public enterprise balance is projected to stabilize relatively quickly at a deficit of 1 percent of GDP. While it is difficult to project the future balances of the PEs, especially retained income, the assumed consolidation would still entail a deficit that is larger than the 0.7 percent of GDP average for the 1990/91-1995/96 period. In addition, for the reasons highlighted above, the inclusion of the PE sector debt and deficits needs to be interpreted carefully. The PE sector, however, accounts for only a quarter of the 5½ percentage point decline in the debt-to-GDP ratio.

111. The bulk of the public costs of financial sector restructuring have already been incorporated into the debt stock, although some uncertainty about future costs remains. The debt stock as of 1999/2000 includes the costs associated with financial sector restructuring regardless of whether these have been explicitly fiscalized through the issuance of government bonds; for example, as of end-1998/99 B 500 billion or around 10 percent of GDP had been fiscalized through the issuance of bonds. In addition, the associated interest costs, again regardless of whether they have been fiscalized, are also added to the costs of financial sector restructuring—fiscalized interest costs amounted to 0.7 percent of GDP in both 1997/98 and 1998/99. In addition to the future interest costs, the medium-term projections assume that the net present value of restructuring the state-owned banks is around 6 percent of GDP and that there are no additional costs associated with restructuring the private banks.

B. Sensitivity Analysis

112. In a scenario with lower real GDP growth, the medium-term debt dynamics are less favorable largely as a result of the mechanical effect of lower GDP (Table 2 and Figure 2). Instead of peaking in 2000/01 as in the baseline, the debt to GDP ratio peaks at 64 percent of GDP in 2002/03 and by 2004/05 is projected to be roughly the same as in 1999/2000. Mechanically, the lower growth rate of real and therefore nominal GDP explains the bulk (about three-quarters) of the higher 2004/05 debt stock in the low-growth scenario. Compared with roughly 5 percentage points a year in the baseline scenario, the reduction in the debt to GDP ratio from growth in this scenario is just over 4 percentage points in the outer years of the projection. Since the lower real GDP growth is assumed to be fueled by a more modest increase in private consumption growth, there is also reduced buoyancy on consumption taxes and therefore slower central government fiscal consolidation.

Table 2.

Thailand: Medium-term Debt Dynamics

(Low growth scenario)

article image
Source: Staff estimates

A minus sign indicates a cost (i.e., a transaction that increases debt). Includes all financial sector interest and principal costs regardless of whether they are fiscalized.

113. An illustrative adjustment scenario demonstrates that quick, yet feasible, adjustment efforts could significantly improve the medium-term debt dynamics (Table 3). The adjustment scenario adds to the baseline scenario (1) a sustained reduction of 1 percent of GDP in domestic non-interest expenditure beginning in 2000/01 and (2) a phased implementation of a simplification of the personal income tax reform that eventually yields an additional 1 percent of GDP of revenue. The addition of these two policies would lead to a central government surplus by 2001/02 and a debt stock of just under 49 percent of GDP by 2004/05. Moreover, these policies would lead to the public sector being roughly in balance by 2004/05, compared with public sector deficits of more than 2 percent of GDP in the other scenarios.

Table 3.

Thailand; Medium-term Debt Dynamics

(Adjustment scenario)

article image
Source: Staff estimates

A minus sign indicates a cost (i.e., a transaction that increases debt). Includes all financial sector interest and principal costs regardless of whether they are fiscalized.

1

Prepared by Steven Barnett (FAD).

2

The implications arising from the exclusion of government assets and inclusion of PE debt is highlighted by instances of privatization. For example, if the government privatizes a PE and uses the proceeds to reduce government debt, then public debt would fall by (1) the amount of the sale proceeds, and (2) the reduction in PE debt following from the exclusion of the debt of the given enterprise (if assumed by the purchaser). Provided the sale price was fair, government net worth—other things equal—would not change, yet observed public debt would decline, and by a potentially non-trivial amount.

3

See the row labeled “Debt impact of nominal GDP growth and exchange rate” in Table 1. This row measures how much the debt to GDP ratio would have fallen if the overall balance in the given period was zero.

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Cover IMF Staff Country Reports
Thailand: Selected Issues
Author: International Monetary Fund
Volume/Issue:
Volume 2000: Issue 021
Publisher:
International Monetary Fund
ISBN:
9781451836813
ISSN:
1934-7685
Pages:
76
DOI:
https://doi.org/10.5089/9781451836813.002

Public Sector Debt of Selected Country

(in percent of GDP)

Consolidated Centeral Government

(in percent of GDP)

Ratio of Interest Payments to Growth

Thailand: Central Government Fiscal Data and Projections 1/

Thailand: Medium-term Public Sector Debt and Balances