Early repayment of its IMF loan has brought confidence back to Thailand’s consumers, who have driven up economic growth.When Thailand repaid the final loan outstanding from its 1997 IMF-led rescue package in July, the impact on its capital account was barely felt. That in itself was a reminder of just how far the country has climbed in the six years since the Asian financial crisis brought the IMF knocking on its door.

Armed with ample foreign reserves, lower public debt and a rising current account, Thai prime minister Thaksin Shinawatra, who took office in January 2001, decided to repay the IMF a year earlier than scheduled. It was as much a political gesture as an economic measure – a sign that Thailand was back on its own feet and back in business.

For investors who lost out in 1997, Thailand may still have a ring of uncertainty. But for those who rode the economic recovery of the past two years, the early repayment of the IMF loan underscores a return to confidence that has infected the nation’s consumers, whose spending helped to drive economic growth last year to 5.3%.

That confidence is starting to reverberate in Bangkok’s stock market, which had lagged behind as Thailand’s indebted corporations slowly cleaned up their act. Equities soared by 22% in 2002, and a recent influx of foreign funds in 2003 pushed market liquidity to a nine-year high in July. New issuances are also driving interest in Thailand’s domestic bond market, which barely existed before the crisis.

Exports forecast to grow

Domestic consumption is only half the story. Thailand’s exports of agriculture, electronics, cars and other manufactured products are forecast to post 8% growth in 2003, despite the gloom hanging over many Organisation for Economic Co-operation and Development countries. Rising trade with China and other Asian partners has offset Thailand’s exposure to the US and Europe.

Economists and government officials say that Thailand may get a sovereign ratings upgrade before the end of 2003, which would be an important step for reviving investment. The country is currently on a par with Croatia and South Africa. Ratings agencies say lower non-performing assets in the financial sector are also helping Thai banks to improve their standing, though debt work-outs still need attention.

“This is a positive investment climate. If you look around the world, then Thailand is really doing fine,” says Usara Wilaipich, chief economist at Standard Chartered Nakornthon Bank, which was bought out in 1999.

International eyes will be on Thailand in October when it hosts the annual Asia-Pacific Economic Co-operation summit, an event that is certain to generate discussion about the strengths and weaknesses of the global recovery (see page 69). No doubt foreign leaders will be impressed to see how Thailand has shrugged off its late 1990s slump, with even the much-maligned property sector in Bangkok finally picking up again.

Domestic critics

Thailand’s impressive growth may mask incipient weaknesses, though. Some domestic critics of Mr Shinawatra ask how much the country is borrowing to pay for the boom and question the sustainability of the recovery. In particular, the role of state banks in extending credit to small and large businesses and Mr Shinawatra’s promise of higher growth to come are making some analysts uneasy.

“He is a risk-taker and he has decided he can make the economy grow by 6% this year – even at the cost of good credit discipline. So the concern I have is that the means being used to achieve this growth may end up weakening Thailand, not strengthening it,” says Chalongphob Sussangkorn, president of the Thai Development Research Institute.

Some private bankers complain that state bank lending, which the government is anxious to stimulate, is shaving margins and creating liabilities further down the road. They point to Krung Thai Bank’s 24% growth in its loan book last year as a sign of state-directed lending. Some analysts think such off-balance sheet spending might also impede Thailand’s hopes of an imminent ratings upgrade.

However, others say that behind Mr Shinawatra’s populist promises, which include universal healthcare, subsidised housing and rural debt moratoria, is a fiscal prudence that is keeping the budget in check. Even before the IMF loan was repaid, Thailand’s foreign debt had fallen from a post-crisis high of $109bn to $65bn.

Improved tax receipts on the back of higher economic activity may bring a small budget surplus in the current financial year that ends in September, demonstrating that Thailand’s red-hot growth is not all down to government pump-priming. “It’s not a fiscal expansion. The government has been under-spending and is doing a great job in collecting taxes,” says Supavud Saicheua, managing director of Merrill Lynch Phatra Securities.

Comparisons between Thailand and South Korea, where last year’s credit boom has quickly soured, are also overdone, say bankers and analysts. Thai banks have begun issuing more credit cards and personal loans are easier to obtain, yet household debt is estimated at only 18% of GDP compared with 26% in 1996.

Neighbouring Malaysia, which has also relied on domestic spending to revive its economy, is much more highly geared in its consumer sector. Household debt, including mortgages and loans, reached 77% of disposable income in 2002 compared with only 33% in Thailand. The same ratio in South Korea was 69%, according to the World Bank.

Prudent regulators

Thailand’s regulators, which were caught short by the collapse of small lenders in 1997, have also been prudent in setting limits on consumer borrowing. Credit-card issuers were brought into check last year, with new measures to ensure borrowers do not slip too far into arrears. Thailand has about 3.6 million cards in circulation.

Analysts say domestic spending in Thailand is being driven less by debt and more by income and savings. With billions of dollars of liquidity in low-interest bank accounts – most lenders pay less than 1% on deposits – many big-ticket items are being snapped up with cash, not credit. One leasing company estimates that only 60% of car purchases are being financed, down from a pre-crisis level of 85%.

While consumers are eagerly spending, confident that the worst is behind them, the corporate sector is only slowly feeling its way forward. Many companies are cautious about major new investments until the excess left over from the last boom is tamed. Capacity utilisation has risen to 65%, from 55% at the beginning of 2002, although the rate varies greatly from industry to industry.

Among the more successful industries is car manufacturing. Car and truck sales rose 38% in the first five months of 2003, and the government predicts that sales will reach one million units in 2006. Japanese and US investors that have helped to make Thailand into the “Detroit of the East” are hoping to tap into wider demand across Southeast Asia if trade barriers fall in the future. Honda has even begun making cars in Thailand for export to Japan.

Foreign investment

Elsewhere, foreign investment in Thailand is less buoyant. Many sectors are still ripe for consolidation before new capacity can be profitably added. But the fact that carmakers are flocking to Thailand, rather than concentrating on the big prize of China, shows that not all investors are blinded by the Middle Kingdom’s strengths.

Thai financiers say the outbreak of severe acute respiratory syndrome (SARS) in Asia, which reverberated loudest in China, has underscored the need to diversify manufacturing facilities in Asia. “Investors realise that it’s better to diversify than put all their eggs in one basket. Southeast Asia is an alternative to China, not an either/or destination,” says Twatchai Yongkittikul, secretary general of the Thai Bankers Association.

Thai companies that have restructured successfully are increasingly issuing low-interest bonds to refinance bank loans and using reinvested profits as working capital. This, in turn, is forcing banks, whose loan growth recovered in the second half of 2002, to chase smaller companies, including emerging industrial suppliers, for new business.

“The challenge for banks today is to get their courage up to get into bed with these [emerging] companies,” says Vishnu Mohan, CEO of Standard Chartered Nakornthon. “Of course, you need a robust credit culture to analyse, study and eventually lend to these kinds of businesses. That’s where the growth in credit will come from.”

Bankers say they expect credit to expand by about 4% in 2003. That is a far cry from the 25% growth rates chalked up during the go-getting 1990s but few financiers expect to go down that road again. Instead, they are rolling up their sleeves and competing for Thai consumers, who are becoming more attuned to financial planning.

“We have a developing bank industry here, so even if everyone is throwing themselves into the market, it’s still relatively untapped. Our consumers have not yet got all the products that they could be offered,” says Jada Wattanasiritham, president of Siam Commercial Bank.

Thailand may be a nation of 62 million people but its wealth distribution is far from even. This shows up in the banking sector: 40% of deposits come from only 50,000 customers, according to Merrill Lynch.

Optimists would say this shows how the market is ripe for development, while sceptics question whether banks are ready to branch out into large-scale lending to lower and middle-income earners, rather than servicing their rich customers.

“Banks have moved on from crisis management and are focused again on the business of banking, rather than damage control from the crisis,” says Vincent Milton, managing director of Fitch Ratings in Thailand. “There is a huge growth potential. The question is: how do you manage the risk environment?”

As banks reposition their branches to tap this market, they are conscious that their consumer book is still only 12% of total assets. That means a revival in Thai corporate fortunes remains crucial to financial sector profits.

bNext wave

Not everyone is convinced, though, that Thailand’s corporate champions, whose fortunes waned so dramatically in 1997, are ready to lead the next wave of industrial development. Unlike South Korea, where indebted companies were forced to the wall, Thailand has preferred to rehabilitate, rather than liquidate its dud assets.

The spectacle presented by Thai Petrochemicals Industries (TPI), whose feisty former owner has battled creditors around every corner of its $2.8bn debt work-out, has done little to burnish the country’s reputation for creditors’ rights. Bankers worry that other tycoons may renege on restructuring terms, though in some respects TPI is a special case.

Perhaps a deeper problem for Thailand is how to finance companies without falling for the old trick of over-leveraged property plays. “We had a defunct loan model before and a new model has not emerged because the banking sector and the real sector are moving in different directions,” says a senior banker. “We need more reform in the real sector.”


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