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.


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.

III. Public Debt and Contingent Liabilities1

A. Introduction and Conclusions

1. Public debt is a key indicator for assessing economic vulnerabilities. Projections of public debt, and the sensitivity of these projections to different assumptions, are key inputs for formulating a prudent and proactive fiscal policy. Contingent liabilities could pose additional fiscal risks that may not be captured in a conventional assessment of debt dynamics. The following, therefore, in subsequent sections looks at both the conventional debt dynamics and contingent liabilities.

2. Public debt in Thailand is manageable. The baseline projection shows a declining debt ratio, except for a two-year (2004/05–2005/06) hump related to the expected realization of FIDF off-balance sheet liabilities.2 The alternative scenarios considered do not put debt on an explosive path although mismanagement of the ongoing fiscal devolution process could erode the improvements in the debt ratio in the baseline scenario.

3. The assessment of contingent liabilities focuses on state owned enterprises. Technically, contingent liabilities are obligations to make future payments if a certain event occurs.3 The likely cost to the government, thus, depends on both the value of the liability and the probability of the contingency occurring. The focus here is largely on assessing and quantifying potential liabilities—distinct from contingent liabilities in that there may not be a contractual obligation—in nonfinancial public enterprises (NPPEs) and specialized financial institutions (SFIs). This is related to, but by no means the same as, assessing the extent of quasi-fiscal activity. Quasi-fiscal activity, for example, could manifest as lower profits in an enterprise rather than higher potential liabilities—implying that quasi-fiscal activity need not imply an increase in potential liabilities.

4. The main findings regarding potential liabilities are:

  • Potential liabilities in the SFIs are not that large and have actually fallen somewhat over the past few years. This holds, notwithstanding the expansion in lending by SFIs, largely because of improvements in the structure of the SFI balance sheets.

  • NFPE debt, most of which is guaranteed by the government, has been falling over the past few years, but still stands at around 16 percent of GDP. The potential liability is smaller, however, as most of the debt belongs to profitable NFPEs. Moreover, the sector as a whole has positive net worth and is a net contributor to the budget.

  • The most substantial contingent liability is the blanket guarantee on deposits and select bank creditors, amounting to around 100 percent of GDP.

B. Government Debt

Background and recent debt developments

5. After falling for several years, government debt rose rapidly during the crisis but has recently stabilized.4 In the decade preceding the crisis, government debt fell by over 25 percentage points of GDP on account of sizable primary surpluses and high economic growth in excess of real interest rates. After the onset of the crisis, the debt ratio rose rapidly as public funds had to be used for liquidity injections in crumbling financial institutions. Accommodative fiscal policy in the wake of the crisis to support the recovery also contributed to the rising debt ratio but to a lesser extent. In three years the debt ratio had risen more than seven fold. Public debt, a broader aggregate which also includes the debt of non-financial public enterprises (discussed in detail in the next section) also rose from 15 percent before the crisis to about 55 percent by 1998/99.


Government and Public Debt

(In percent of GDP)

Citation: IMF Staff Country Reports 2004, 001; 10.5089/9781451836806.002.A003

6. The costs of the crisis were initially borne by the FIDF which is still carrying sizable liabilities. The FIDF initially provided liquidity support to 56 finance companies but as the crisis spread it provided additional support to a number of weak banks and state-owned financial institutions. In the immediate aftermath of the crisis, the FIDF funded itself primarily in the repurchase market where it effectively recycled liquidity from the stronger financial institutions as depositors moved funds from the collapsed institutions to strong institutions. By the end of 1996/97 FIDF liabilities (as percent of GDP) had risen by slightly less than 20 percentage points. Over time the government has issued government bonds to fiscalize FIDF’s losses. The first issue of B 500 billion took place in May 1998 and then in October 2000 the government guaranteed another 112 billion of FIDF bonds. In June 2002 the government announced a transparent plan to fiscalize the remaining losses of the FTDF—estimated by the government at B 780 billion. Of this amount B 305 billion were fiscalized in the form of government savings bonds to retail investors in September. The issue was oversubscribed and the Bank of Thailand smoothly managed liquidity in the financial system during the transition.

7. Government and public debt ratios have stabilized in recent years and the change in public debt compares favorably with regional countries. Government debt stabilized beginning 1999/00 as primary deficits shrank (to less than 2 percent of GDP), the recovery took hold, and short-term interest rates declined. Moreover, the fiscal expansion in 2001/02, which was expected to raise the debt ratio, was considerably less that planned. A comparison of public debt with other regional countries shows Thailand was the only country where public debt as a share of GDP has declined in the last two years.


Change in Public Sector Debt, 2000–2002 1/

(Percent of GDP)

Citation: IMF Staff Country Reports 2004, 001; 10.5089/9781451836806.002.A003

1/ Includes general government, non-financial public enterprises (except for Kurea), and government liabilities associated with financial sector restructuring.

Debt Projections

8. The baseline debt projection incorporates an improving central government fiscal position (Table III.1). Given strong growth in revenues in the current fiscal year and slower expenditure disbursement in the first half of the current fiscal year, consolidation is proceeding faster than planned.5 On current trends the budgetary central government balance is expected to improve by 2 percent of GDP over last year, giving a slight surplus for the consolidated central government for the year and for the first time since the crisis.6 The medium-term projections are based on modest revenue buoyancy with the revenue-to-GDP expected to rise from the estimated 16.3 percent in the current fiscal year to 16.6 percent by 2007/08. The baseline projections do not assume a reversion in the VAT rate to 10 percent. Wage expenditure is expected to grow at 5 percent annually and the other categories of primary expenditure are assumed to grow in line with nominal GDP. The projections also include preliminary estimates for the direct government costs in the recently announced government initiative for housing for the poor.7

Table III. 1.

Medium-Term Fiscal Projections 1/

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Source: IMF staff estimates based on authorities’ data.

On a Cash and fiscal year basis, fiscal year ends an September 30. Differs from GFS in the trestment of financial sector restructuring in that government principal costs are excluded from the fiscal balance measures.

Excluded from debt projection.

9. The projected debt trajectory is downward sloping except for two years of maturing FIDF off-balance sheet liabilities. The bulk of these obligations under yield maintenance and gain-loss sharing and liquidity support to financial institutions are to fall due in 2004/05–2005/06 for a total amount of some B 550 billion. A recognition of these in the FIDF balance sheet accounts for the “hump” in the debt trajectory. In addition, the projections also build in remaining issues of government bonds for fiscalization of the remaining liabilities of FIDF (assumed at B 200 billion in 2003/04 and B 275 billion in 2005/06). These only change the composition of government debt between central government and FIDF and do not affect the level of government debt. The expected increase in the debt-ratio notwithstanding the baseline projection is for a manageable path of debt. Government debt is expected to rise only slightly above 40 percent of GDP at its peak, and public debt is expected to remain below 55 percent.


Total Public Debt Projection

(In percent of GDP)

Citation: IMF Staff Country Reports 2004, 001; 10.5089/9781451836806.002.A003

10. The main risks to the debt trajectory include mismanagement of the ongoing fiscal devolution process and a sustained low growth shock. The decentralization law governing the ongoing devolution process calls for local revenues to rise to 35 percent of total revenues by 2005/06.8 At the same time, the total transfer of VAT revenues to local governments cannot exceed 30 percent of gross VAT collections.9 Given the weak administrative capacity to raise local taxes, this requires substantially increased intergovernmental transfers from the central government, to the tune of 3.7 percent of GDP in 2005/06 (from an estimated 1.4 percent of GDP in 2000/01). If these transfers are not offset by reduced central government expenditure, the debt ratio is expected to rise to about 60 percent by 2005/06 before beginning to decline. The growth shock assumed in the sensitivity analysis is 2 percent lower growth each year. Given the proximity to the assumed real interest rate of 4.2 percent this delays the consolidation in the debt position but does not seriously threaten it. The other shocks also appear to be likely manageable.

C. Contingent Liabilities

State Financial Institutions

11. Potential government liabilities from the SFIs are estimated by calculating the cost of liquidating them, in particular, the five largest SKIs are examined (BAAC, EXIM, GHB, GSB, and SME), with the IFCT excluded because the government is not the majority owner.10 The premise is that the potential liability is tied to the cost of settling with all of the SFI’s depositors and creditors. The cost to the government would be the additional funds needed to do this after all the capital and proceeds from asset sales were exhausted; the value of asset sales is approximated by using different assumptions on loan recovery rates.11

12. Even under highly conservative assumptions, the potential liability posed by SFIs is quite small. Specifically, as of March 2003, it stood at around 3½ percent of GDP (text table). This figure is based on a loan recovery rate of 50 percent, which in many respects is quite low under normal circumstances. It is equivalent, for example, to assuming that ½ of the loan book becomes NPLs, and that the recovery rate is zero. Moreover, this figure includes loans to NFPEs of around 3 percent of GDP, which should be netted out if the NFPE debt is incorporated into the analysis, As an upper-bound, assuming a zero recovery rate on all loans yields a potential liability of 13½ percent of GDP.

SFI Potential Liabilities 1/

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Sources: BOT: and staff calculations

See text for description of methodology.

Assumes 50 percent of loans go bad, with a recovery rate of 60 percent fur mortgages and 30 percent for all others.

13. Under more reasonable assumptions about recovery rates, the SFIs pose virtually no potential liability. The assumption here is that 50 percent of the loan book goes bad, but that the recovery rate depends on the type of loan. In particular, for mortgage loans the recovery rate is assumed to be 60 percent, given the collateral backing, and for other loans just 30 percent. These are still fairly severe assumptions about loss rates. Nonetheless, the potential liability under this scenario is less than ½ percent of GDP.

14. The potential liability in SFIs has actually fallen over the last two years, due in part to increases in their capital and deposits from government. This holds for the two scenarios where there is some recovery rate on outstanding loans. The decline is small, around ¼ percent of GDP in 2002 and somewhat less in 2001, depending on the assumptions. Nonetheless, this stands in sharp contrast to the growth in credit (see Chapter IV) in SFIs and the government’s increased use of SFIs to carry out policy. The decline, for example, in the potential liabilities in 2002 is related primarily to changes in the composition of liabilities, and in particular increased capital accounts in some SFIs.12

15. The change in potential liabilities may not be a good prosy for measuring the extent of quasi-fiscal activity. A loan, for example, under a government quasi-fiscal program would have the same impact on measured potential liabilities as a regular loan by the SFIs. Thus a switch in the composition of the loan book, but not the total amount of loans, would leave potential liabilities unchanged even though there was an increase in quasi-fiscal activity. In addition, as noted above, quasi-fiscal activity financed for example through retained earnings would actually show up as decrease in potential liabilities.

Nonfinancial Public Enterprises

16. It is difficult to assess the implications of NFPE debt on debt sustainability or government net worth. As providers (usually) of market services, NFPEs perform a fundamentally different role than government. This distinction depends in part on the degree that NFPEs are driven by market considerations as opposed to government policy objectives. Moreover, debt is just one component of the balance sheet, and is unlikely to reflect the value of the government’s ownership. Finally, privatization can complicate the analysis to the extent that it could lead to a sharp fall in NFPE debt, as well as possibly government debt depending on how the proceeds are used.



(Percent of GDP)

Citation: IMF Staff Country Reports 2004, 001; 10.5089/9781451836806.002.A003

Source: MOF

17. The NFPE sector in Thailand includes firms that differ dramatically across many dimensions. A sample of the larger NFPEs, out of 51 that the MOF publishes data on, is in Table III.2. The firms range from large and profitable enterprises engaging primarily in commercial activities, such as PTT (a petroleum company) and Thai Airways (the national airline), to NFPEs that have a stronger policy bent to them, such as the NHA. The NFPEs also differ in terms of employees, with the sector as a whole employing around 230,000 people, which is less than one percent of the labor force (and slightly more than 1 percent of non-agricultural employment). NFPEs also come under different laws, as some are corporatized, traded on the SET, and have some private ownership, whereas others are completely government owned and covered by special legislation.

Table III.2.

Summary Information on NFPEs, 1997–2002

(Baht billions)

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Sources: MOF; and staff calculations.

18. The NFPE sector as a whole has substantial positive net worth, is generally profitable, and is a net contributor to the budget. The net worth of the sector at end 2001/02, using total capital as a proxy (that is assets less liabilities), stood at B 843 billion or 16 percent of GDP. A more accurate measure, however, would make adjustment for the market value of the equity as well as allowances for the equity held by private investors. The sector has also been profitable in 5 of the last 6 years, with profits in 2001/02 of about 2 percent of GDP. NFPEs have also been net contributors to the budget in each of the past 6 years (defined as remittances to the budget less subsidies), including B 26 billion (½ percent of GDP) in 2001/02.

19. NFPE debt has been falling over the past few years, while the composition has been broadly unchanged. It declined from a peak of 19 percent of GDP at end-1999/2000, to 16 percent of GDP as of March 2003; indeed, there was even a nominal decline over this period, from B 971 billion to B 881 billion (see text chart).13 The majority of NFPE debt is guaranteed by the government, and the share has been roughly constant at around 85 percent. Around half of the debt is in foreign currency, a ratio that has also been fairly constant over this period. As of March 2003, total foreign currency debt was around US$10 billion.14

20. The potential burden to the government is probably substantially lower than the stock of NFPE debt. The narrowly interpreted contingent liability would be 13.4 percent of GDP, or the portion of government guaranteed debt—more broadly, the total NFPE debt of 16 percent of GDP could be viewed as the potential liability. However, for the reasons cited above, the NFPE sector in balance sheet terms would actually be a net asset to the government and not a liability. Nonetheless, there could be some firms that represent potential liabilities to the government, and particularly those firms that regularly make losses.

21. The debt of loss-making firms, however, is fairly small. It is around 4 percent of GDP, and amounts to roughly a ¼ of outstanding NFPE debt, A firm is defined as loss-making if it made losses in 2 of the last 6 fiscal years (1997/98–2001/02). Nine of the 21 larger NFPEs meet this criterion. The largest debtor of these, the Expressway and Rapid Transit Authority of Thailand (11 percent of NFPE debt) actually made a profit the last two years. The next largest is the State Railway of Thailand (6 percent of NFPE debt), who regularly makes losses but has recently come under government pressure to improve performance. Finally, the NHA, which is one of the bodies that will help implement the government’s housing initiatives, also typically makes losses but is fairly small in terms of debt (3 percent of NFPE debt).

Other Contingent Liabilities

22. By far the largest contingent liability is the blanket guarantee of depositors and creditors of financial institutions. As of end-2002, the guarantee covered deposits and credits slightly in excess of 100 percent of GDP. Specifically, deposits worth B 5,343 billion (98 percent of GDP) and other credits to financial institutions of B 193 billion (4 percent of GDP). The blanket guarantee was issued in 1997 to boost confidence in the financial system, and covers depositors and most creditors of banks, finance companies, and credit fonciers; the guarantor is technically the F1DF. Although the contingent liability is potentially massive, the likelihood that the guarantee would be called in total is remote. Ultimately, the potential cost to the government depends on the health of the financial sector (sec Chapter IV).

23. The government ownership in financial enterprises could in principle also generate contingent liabilities, but most of these are already addressed above. The blanket guarantee of deposits and creditors would cover the potential liability in government owned commercial banks, the SFI sector is addressed above, and most other financial institutions (asset management companies in particular) would be directly or indirectly included in the FIDF numbers. However, to the extent that government owned financial or nonfinancial institutions have off-balance sheets items, such as guarantees, then there could be additional potential government liabilities.


Prepared by Reza Baqir and Steven Barnett.


The FLDF was established in 1985 during the previous financial crisis to provide public support to the financial system. It is an independent body within the Bank of Thailand (BOT) which maintains separate financial accounts and is overseen jointly by the BOT and the Ministry of Finance.


International Monetary Fund, Fiscal Affairs Department, Manual on Fiscal Transparency, (Washington: International Monetary Fund), 2001 has a more thorough discussion of contingent liabilities.


In this paper government debt is defined as the sum of central government debt and liabilities of the Financial Institutions Development Fund (FIDF). Debt ratio is defined to mean the ratio of debt to nominal GDP.


The on-budget consolidation has been offset by increased quasi-fiscal activities, in particular through policy related expansion in the credit extended by government-owned specialized financial institutions. The size of the fiscal stimulus provided by these institutions is difficult to estimate. As an upper-bound, total credit provided by SFIs in 2001/02 increased by 1.8 percent of GDP (measured as increase in credit in the fiscal year divided by fiscal year GDP). Through the first half of the current fiscal year. SFI credit has risen by about B 43 billion, or approximately 0.8 percent of estimated current fiscal year GDP.


Consolidated central government includes budget operations and the extrabudgetary funds balance. For the purposes of the debt projections, the surpluses of the latter are not included as the surpluses of these funds—primarily the social security fund—are for servicing future obligations.


Initial estimates of the government subsidy for the construction of 600,000 low-cost units are about 55 billion baht (or roughly one percent of GDP) which are uniformly distributed over 2004/05–2007/08. The total cost to the National Housing Authority (NHA) for building these units is estimated at about 5 percent of GDP and contingent liabilities could arise if NHA cannot sell these units, or borrowers default.


The revenue ratio is calculated as total local government revenues (inclusive of transfers from the central government) divided by central government revenues (net of VAT transfers to local governments mandated under the Decentralization Act).


VAT revenues which are passed down to local governments consist of three parts: 10 percent of total VAT collections as the sharing part of local government; 5 percent of VAT from provinces (other than Bangkok) to Provincial Administrative Organizations; and additional VAT transfers under the Decentralization Act. The 30 percent constraint is expected to be reached in the current fiscal year.


These are: the Government Savings Bank (GSB), Bank for Agriculture and Agricultural Cooperatives (BAAC), Government Housing Bank (GHB), and the privately-owned Industrial Finance Corporation of Thailand (IFCT)), which account for 95 percent of SFIs assets. The EXIM (Export-Import Bank of Thailand) and the SME Bank specialize in lending to small and medium-sized enterprises and trade financing.


More specifically, the Liquidation cast is calculated by first looking at the total liabilities on the balance sheet, less capital accounts and deposits from government. The potential liability is calculated by then subtracting the value of assets, which are split into those that would be recovered fully (such as claims on the BOT, other financial institutions, or the government) and those where losses could occur, basically loans (but technically defined in what follows to include claims on the private sector and NFPEs, and other assets).


In 2002, the increase in balance sheet liabilities is B 103 billion, of which B 33 billion is capital and B 26 billion government deposits, implying an increase of B 43 billion in liabilities that would need to be settled in case of liquidation. However, assets that are fully recoverable increased by B 7 billion, implying (with rounding) the increase in potential liabilities of B 37 billion under the zero recovery scenario. Adding the increase in loans of B 96 billion, which at a 50 percent recovery rate implies a value of B 48 billion, yields the decline of B 11 billion in potential liabilities.


The MOF debt data only covers slightly more than ½ of the NFPEs (information on the others is not readily available), but the excluded firms are unlikely to have substantial debt. For example, based on 2001/02 balance sheet data, the firms included in the MOF debt data account for more than 97 percent of total liabilities.


The MOF debt data includes the National Village Fund in the NFPE sector, but this debt (just over 1 percent of GDP) is excluded from the subsequent analysis. The National Village Fund is an intermediary that helps implement the government’s Village Fund policy, and as such is not really a NFPE. Moreover, the activities of the Village Fund are incorporated into the authorities GFS data as an extrabudgetary fund

Thailand: Selected Issues
Author: International Monetary Fund