Korn Chatikavanij, Thailand's Finance minister

The Thai finance minister's belief that the global crisis has presented the country with an opportunity to reshape its economy has seen him unleash plans for greater use of the capital markets, diversified exports and a boost in domestic consumption. Writer Brian Caplen

The savviest finance ministers are using the crisis as an opportunity to restructure their economies so that going forward they will be more robust and competitive. In Thailand, the aim is to reduce exports as a share of gross domestic product (GDP) by boosting domestic consumption and to increase funding possibilities for business by allowing more foreign ownership of banks and carrying out Big Bang-style capital market reforms (Big Bang being the name given to the stock market reform of London in 1986).

Thailand's finance minister, Korn Chatikavanij, is a former banker - he founded Finance One, which joint ventured with Jardine Fleming and then sold the operation to JPMorgan in 1999 - so he naturally sees the possibilities for using the capital markets as a springboard for growth. The present crisis, with its origins in the capital markets, has not caused him to think differently. The problem, he says, was not the scale of banking assets in Western countries, but that they were not based on productive activities. In Thailand, he says, the Asian crisis banks have been excessively conservative with deposit-to-loan ratios in the 80% range. "Banks were funding themselves entirely from deposits and so were not exposed to risky assets in the same way as Western banks. The negative side of that was that the costs of capital for borrowers remained high," says Mr Korn, who was interviewed in London during a break at The Economist magazine's emerging-markets summit last month.

"The challenge for countries within the Association of South-East Asian Nations (ASEAN) and for Thailand remains that capital markets play too small a role in the economy. We have reverted back to the bad old days when a handful of banks dominated as a source of financing for entrepreneurs and corporates. The capital markets have taken a back seat, and even with the revived stock market we have seen these past six months, the role of the capital markets as a provider of liquidity and funds for projects is much less than banks as a percentage of GDP."

Mr Korn says that because of a lack of competition, interest rate spreads between deposits and loans are very high. "From a cost perspective, we need to see more competition in terms of funds for corporates. We are coming up with our own little Big Bang, which will see significant changes to tax-related issues that have proven to be cumbersome towards broad capital market development. We are demutualising the stock exchange and we are liberalising brokerage fees with the idea of creating a greater sense of competition.

"Likewise, in the banking sector we are working with the central bank at coming up with a second banking masterplan that will focus on greater provision of microfinance to ensure the 15% of the population that cannot access the formal banking sector can be catered for."

Foreign investment

Apart from funding state-owned banks to support this activity, Mr Korn says that greater competition will come from allowing foreign banks to bid for government-owned banks that were taken over during the Asian crisis of 1997 and are due to be privatised.

"One of the best ways of challenging the monopolistic hold that the four or five leading local banks have on the domestic market is to introduce new players, and the only kind of banks that will make an impact will be foreign," he says. This is because no local player can challenge the Thai banks' nationwide branch networks.

Difficult as reforming the capital markets may be, the challenges are easier to resolve than the macroeconomic ones. Like most exporting nations - Thailand's export-to-GDP figure is 70% - Thailand has been hit hard in the crisis because of its very openness, with exports dropping 20% and growth set to contract between 3% to 4% in 2009. Mr Korn would like to steer the economy in a different direction so that it will be less vulnerable to future crises.

"We in ASEAN are making sure our export markets are more diversified. For Thailand, 10 years ago 20% of our exports were going to the US market, that's now down to about 10%. We have been able to open up new markets in the Middle East and Africa and trade within south-east Asia as a whole has grown significantly.

"The other thing is enhancing the domestic market and there are two ways of defining that - you can look at south-east Asia as a single market that becomes a domestic market to all of us in due course, through greater ASEAN integration, and the development of the ASEAN Economic Community - second, you can increase the size of the domestic market by increasing the level of income of the population.

"A large percentage of Thailand's population remains relatively poor, with a high propensity to consume but relatively low levels of income. We need to have economic policies that ensure a certain level of spending power.

"Partly that will consist of a social safety net, but also through investment in key areas that will enhance income generating capability. For this reason, we are investing 7% to 8% of GDP on top of normal budgetary spending over the next three years in key areas such as irrigation, which will lead to higher farm incomes. We are also devising a scheme to guarantee levels of income for farmers that will cost state money in the short term but will provide a level of economic security and thus consumption for a significant portion of the population."

Political ramifications

Could it help to ease Thailand's political tensions, which are often characterised as a battle between the country's rural poor and the urban middle classes? Mr Korn thinks that the rural-urban divide has been overemphasised as a root cause of tension and that a lot of the differences are genuine ideological disagreements. There is also a geographical factor, with the supporters of former prime minister Thaksin Shinawatra concentrated in the north-east, whereas the current government - a coalition led by the Democrat Party - secures more support from southern Thailand.

However, Mr Korn says that funds for irrigation will be focused on the north-east, which is arid and poor rather than the south, where rainfall is plentiful and that this will have unintentional political benefits.

Like most countries hit by the crisis, Thailand has engaged in a fiscal stimulus that will worsen debt-to-GDP numbers (likely to hit 57% by 2013) and budget deficit figures (3.5%) for the next few years. The aim is to bring the budget back into balance by 2015. The size of the budget deficit is mandated by law and special legislation has been introduced to carry out the extra measures. There is flexibility, says Mr Korn, for pulling back on the spending if it appears there is any danger of crowding out the private sector.

He also explains how even the funding of the fiscal stimulus is being done in a way that boosts consumption by selling government bonds to pensioners.

"In the new legislation that allows us to borrow an additional Bt800bn we wrote it in law that the entire amount will be borrowed domestically. We have issued savings bonds directly to the public as a way to lift their interest income because bank interest rates are so low [1% and less]. We especially gave the first rights to buy to pensioners and the bonds [yielding 4%] were way oversubscribed." Definitely the crisis has got the creative juices flowing in Thailand.

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United front: ASEAN politicians link arms at a recent summit. Integration within the ASEAN community is an important factor in Thailand's economic future

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