I. Overview

1. Four years since the onset of the financial crisis, Thailand’s economic recovery remains fragile and is now threatened by a sharp slowdown in external demand. In this regard, the 2001 Article IV consultation discussions provided an important opportunity to review Thailand’s progress in putting in place the policies needed to sustain the recovery. As background for the consultation, this Selected Issues paper focuses on assessing progress, and providing detailed information and analysis, on key aspects of the structural reform and macroeconomic policy agenda.

2. Bank and corporate sector restructuring policies formed a key focus of the Article IV discussions. Significant progress has been made in bank restructuring but substantial risks remain. Thailand has emerged from the regional crisis with two-thirds of its banking system still in private hands. Private banks have reduced their distressed assets, returned to profitability, and over the last three years have raised substantial new capital. Progress at state banks, on the other hand, has lagged. Moreover, debt restructuring has been slow and has been impeded by an inadequate legal framework. Thus, the corporate sector remains highly leveraged. The slowing recovery and dependence on real estate collateral also pose risks to banks’ capital and profitability. Against this background, Chapter II reviews the progress that has been made in restoring a well-functioning banking sector, and assesses the many risks and challenges that still lie ahead.

3. An important initiative to accelerate bank and corporate restructuring is the recent establishment of the Thai Asset Management Corporation (TAMC). The TAMC has been granted special legal powers and a flexible framework to manage and resolve distressed assets. The TAMC is thus a potentially powerful tool to accelerate corporate debt restructuring, particularly in the state sector. However, its objectives are set out only broadly in the enabling legislation and the exact details of its operation are still to be specified by its Board. The success of the TAMC will depend crucially on a number of factors, including consistent application of the principle of value maximization, and the transparency and even-handedness of its operations. Chapter III provides a detailed analysis of the TAMC’s key features, assesses its impact on the banking system, and draws on international experience to identify critical success factors.

4. An inadequate legal framework has been a major impediment to corporate debt restructuring. The TAMC’s special legal powers are indeed a recognition of this impediment. However, these powers will not extend to debt resolution outside the TAMC, where private banks will continue to be burdened with a high level of distressed assets. Legal reform would assist private banks in dealing with problem loans, and would also have the longer-term benefit of reducing the risks of lending and increasing the availability of credit. Against this background, Chapter IV discusses the main features of the existing legal framework for debt restructuring, and identifies the remaining weaknesses. This chapter also draws lessons from best international practice for the Thai insolvency law, and briefly discusses the reform of other economic laws that can increase the availability of credit to corporations by reducing the riskiness of new lending.

5. Even with an acceleration of bank and corporate restructuring, questions will remain about medium-term growth prospects. Rates of output growth since the crisis have been considerably lower than those witnessed in Thailand in the previous two decades. In view of this, Chapter V assesses the conditions needed for Thailand to return to a growth rate of at least 5–6 percent in the medium-term. An acceleration of debt restructuring and a de-leveraging of the corporate sector, as well as pursuit of prudent macroeconomic policies are prerequisites. However, the question remains whether such growth rates are indeed achievable given the resources base of Thailand. The chapter uses a growth accounting framework to show that the exceptionally high GDP growth rates in Thailand during the 1980s and early 1990s were largely driven by capital accumulation, as well as by some total factor productivity (TFP) growth. In the medium-term, with only limited expected capital and labor accumulation, a pick-up in TFP growth would be needed to achieve higher output growth. This chapter also reviews some of the policies needed to achieve a pick-up in TFP.

6. Finally, the costs of dealing with the banking crisis in Thailand have been reflected in a recent sharp increase in public debt. Thailand’s financial crisis has been among the most severe of the Asian economies, and its cost to the public sector has been significant. Over two-thirds of the increase in debt is directly attributable to the financial sector restructuring costs. The remainder is mainly due to expansionary fiscal policies in support of the economic recovery. Public debt is expected to rise over the next few years as the costs of financial sector are fully realized. It is important now to implement policies to put the public debt on a declining path in the medium-term. Chapter VI documents the recent evolution of public debt. The chapter also analyzes the medium-term outlook for government debt and provides an analysis of the sensitivity of the debt projections to changes in underlying assumptions.