Thailand
Selected Issues

This Selected Issues paper reviews the aggregate balance-sheet analysis that describes the improvement in Thailand's overall balance sheet since the crisis, and also highlights the potential vulnerabilities. It assesses the public debt and contingent liabilities, and developments in the banking sector. It discusses the operations of Specialized Financial Institutions and related regulatory issues, the financial and corporate sector restructuring, and also presents an overview of developments in nonperforming loans and assets. It reviews the growth without credit feature of Thailand, which explains how firms have financed their operations after the crisis.

Abstract

This Selected Issues paper reviews the aggregate balance-sheet analysis that describes the improvement in Thailand's overall balance sheet since the crisis, and also highlights the potential vulnerabilities. It assesses the public debt and contingent liabilities, and developments in the banking sector. It discusses the operations of Specialized Financial Institutions and related regulatory issues, the financial and corporate sector restructuring, and also presents an overview of developments in nonperforming loans and assets. It reviews the growth without credit feature of Thailand, which explains how firms have financed their operations after the crisis.

I. Overview

1. Thailand has made significant progress in strengthening the economy since the crisis. As a final closure on the crisis, Thailand paid off all remaining obligations related to the Fund-supported program in mid-2003, some two years ahead of schedule. Although the progress is encouraging and economic prospects brighter than a few years ago, there is scope to reduce vulnerabilities further and enhance medium-term growth prospects. The papers in this Selected Issues volume examine the key sectors of the economy in this context.

2. The first paper, Thailand: An Aggregate Balance-Sheet Analysis, describes the improvement in Thailand’s overall balance sheet since the crisis. It provides aggregate balance sheets for each of the main sectors in the standard taxonomy (the general government and the Bank of Thailand, non-financial public enterprises, the financial sector, and the non-bank private sector) at end-2002 and compares them to the pre-crisis position: The focus is on highlighting potential vulnerabilities.

3. The analysis reveals that Thailand has made significant progress in reducing balance-sheet mismatches since the crisis. Nevertheless, individual sectors still exhibit weaknesses—with high debts in the corporate sector and substantial non-performing loans (NPLs) still on banks’ balance sheets—which require close monitoring. In addition to the sector specific conclusions, the paper argues that the government should strive to improve data collection to enable more frequent assessments of on- and off-balance sheet exposures.

4. The second paper is on Public Debt and Contingent Liabilities. Thailand’s fiscal position deteriorated rapidly as a result the 1997 crisis. The still moderately high debt-to-GDP ratio is sometimes singled out by observers as a source of fiscal risks. Consolidation has begun with the current fiscal year. At the same time, however, there has been increasing concern that the government is using state-owned specialized financial institutions (SFIs) outside the budgetary process to pump-prime the economy. Against this background, this paper presents medium-term debt projections and attempts to assess contingent liabilities, especially those from public enterprises.

5. The paper finds that public debt dynamics are expected to remain manageable in a baseline case and contingent liabilities from public enterprises are not that large. The debt-to-GDP ratio is expected to decline over the next eight years except for a two-year period where FIDF off-balance sheet liabilities are expected to be realized. Various sensitivity analyses are considered, highlighting in particular that mismanagement of the fiscal devolution process could lead to public debt about 5 percent of GDP above baseline by 2005/06. An analysis of contingent liabilities shows that potential liabilities in SFIs are not that large and have actually fallen somewhat over the last few years, largely on account of improvements in the structure of balance sheets. The potential liability to the government from non-financial public enterprises (NFPEs) is limited by the fact that most of the NFPE’ debt belongs to profitable NFPEs. The sector as a whole is estimated to have positive net worth and is a net contributor to the budget. The most substantial contingent liability is the blanked guarantee on bank deposits and selected bank creditors.

6. An analysis of Recent Developments in the Banking Sector, including Specialized Financial Institutions (SFIs), is the focus of the third paper. The paper starts with a description of the structure of the banking system. It then details the state of banks and their remaining balance sheet vulnerabilities. The paper also includes a discussion of the operations of SFIs, and related regulatory issues.

7. The paper notes that Thailand’s banking sector has continued to recover in the current environment of low interest rates and strong growth. However, progress has been uneven and capital adequacy remains a concern for some banks. Restructured loans are still a risk: their reentry as NPLs remains high and erratic and banks have limited capital cushions against a further deterioration in asset quality. The paper notes that if the recent pickup in lending activities by state-owned financial institutions is inconsistent with prudent risk management practices, it raises concerns about the level playing field and fiscal implications. The paper also documents that banks have become increasingly exposed to interest rate risk.

8. The fourth paper, Financial and Corporate Sector Restructuring, discusses the progress in cleaning up the balance sheets in the financial and corporate sectors. It presents an overview of developments in non-performing loans and assets, together with the results of panel regressions to identify how NPLs have affected performance of corporates and banks. The paper also documents the progress made by the government’s asset management company, the TAMC, and provides a discussion of some strategies to reduce impaired assets further.

9. The paper emphasizes that, although progress has been made in restructuring the financial and corporate sectors, further advances are needed to lift long-term growth prospects. Panel regressions show a robust correlation between NPLs and sectoral share prices and credit growth, as well as credit growth in banks. This suggests that reducing the level of distressed assets would improve the prospects for bank intermediation and activity. The paper argues that given the slow progress in private sector restructuring, this may motivate a more active role for the government in reducing distressed assets still in the system.

10. The final paper looks at Growth Without Credit in Post-Crisis Thailand. A striking feature of the post-crisis Thai economy has been that while the economy has grown a cumulative 20 percent since bottoming out during the crisis, real credit to the private sector has declined by nearly a corresponding amount. This paper puts Thailand’s experience in an international perspective and provides evidence on non-bank sources of financing.

11. The main finding is that Thailand’s experience is not unique from an international perspective and firms have resorted to a number of non-bank financing sources. A comparison with 13 other recent crisis cases suggests that the boom-bust credit cycle in Thailand, while more pronounced, was not unique, nor the most severe in the sample. In the recovery, firms have relied on internal financing, trade credits, direct finance in the capital markets, and loans from SFIs. Thailand’s experience in fact shows that corporate deleveraging need not jeopardize growth prospects.

Thailand: Selected Issues
Author: International Monetary Fund