THE WORLD BANK http://www.worldbank.or.th/monitor 66381 June 2000 Bangkok, World Bank Thailand Office June 2000 14th Floor Tower A Country Director: J. Shivakumar Diethelm Towers Comments to: 93/1 Wireless Road David A. Robalino, Ejaz Ghani, Bangkok 10330, Thailand Kirida Bhaopichitr (662) 256-7792 DRobalino@worldbank.org http://www.worldbank.or.th EGhani@worldbank.org KBhaopichitr@worldbank.org Table of Contents PREFACE...........................................................................................................................................................................................4 EXECUTIVE SUMMARY................................................................................................................................................................5 POVERTY ..........................................................................................................................................................................................8 KEY DEVELOPMENTS .......................................................................................................................................................................8 GOING FORWARD............................................................................................................................................................................10 ECONOMIC RECOVERY .............................................................................................................................................................11 KEY DEVELOPMENTS .....................................................................................................................................................................11 SECTORAL PERFORMANCE .............................................................................................................................................................16 LABOR MARKETS ...........................................................................................................................................................................17 MACROECONOMIC POLICY AND THE REAL ECONOMY................................................................................................19 KEY DEVELOPMENTS .....................................................................................................................................................................19 FISCAL POLICY ...............................................................................................................................................................................19 MONETARY POLICY........................................................................................................................................................................20 FINANCIAL SECTOR REFORM .................................................................................................................................................21 KEY DEVELOPMENTS .....................................................................................................................................................................21 A MARKET LED-DECENTRALIZED APPROACH TO FINANCIAL SECTOR REFORM .............................................................................22 RESTRUCTURING OF THE BANKING SECTOR ...................................................................................................................................24 DEVELOPMENTS IN THE STATE AGENCIES ......................................................................................................................................26 CAPITAL MARKET DEVELOPMENT..................................................................................................................................................27 SUPERVISORY REGIME ...................................................................................................................................................................28 CHALLENGES AHEAD .....................................................................................................................................................................29 CORPORATE RESTRUCTURING...............................................................................................................................................31 KEY DEVELOPMENTS .....................................................................................................................................................................31 CDRAC .........................................................................................................................................................................................33 COURT-SUPERVISED RESTRUCTURING AND LIQUIDATION ..............................................................................................................33 STRATEGIES TO ACCELERATE DEBT RESTRUCTURING....................................................................................................................35 CHALLENGES AHEAD .....................................................................................................................................................................35 MEDIUM-TERM COMPETITIVENESS .....................................................................................................................................36 PROBLEMS AND CHALLENGES ........................................................................................................................................................37 The Monitor was prepared by Abha Joshi Ghani, Alex Mutebi, Arvind Gupta, Behdad Nowroozi, Dana Weist, David Robalino, Ejaz Ghani (Task Team Leader), Ijaz Nabi, Kirida Bhaopichitr, Michael Markels, Mario Reyes Vidal, Melissa Fossberg, Renuka Vongviriyatham, Tanatat Puttasuwan, and Tip-arpar Karasudhi. The views expressed in the Thailand Economic Monitor are entirely those of the authors and should not be cited without prior permission. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent. The material contained herein has been obtained from sources believed reliable but is not necessarily complete and cannot be guaranteed. CORPORATE GOVERNANCE ............................................................................................................................................................37 INFORMATION TECHNOLOGY STRATEGY ........................................................................................................................................40 SMES .............................................................................................................................................................................................41 SKILLS DEVELOPMENT ...................................................................................................................................................................41 TECHNOLOGICAL CAPABILITY ........................................................................................................................................................42 COMPETITION POLICY ....................................................................................................................................................................43 TRADE POLICY ...............................................................................................................................................................................44 SOE REFORM .................................................................................................................................................................................46 PUBLIC SECTOR REFORM.........................................................................................................................................................47 BACKGROUND ................................................................................................................................................................................47 PUBLIC EXPENDITURE MANAGEMENT ............................................................................................................................................48 HUMAN RESOURCE MANAGEMENT ................................................................................................................................................48 REVENUE MANAGEMENT ...............................................................................................................................................................48 DECENTRALIZATION .......................................................................................................................................................................49 ACCOUNTABILITY AND TRANSPARENCY ........................................................................................................................................49 OTHER MINISTRIES.........................................................................................................................................................................51 Tables TABLE 1:ESTIMATES OF GOVERNMENT-FINANCED SAFETY NET EXPENDITURES FOR FY01 (BAHT MILLION).......................................10 TABLE 2: CONTRIBUTION TO GROWTH, 2000 (%)...............................................................................................................................12 TABLE 3: THAI EXPORTS (1999-2000) ................................................................................................................................................12 TABLE 4: INVESTMENTS AND SAVINGS IN EAST ASIAN COUNTRIES (PERCENT OF GDP) ......................................................................14 TABLE 5: VACANCY RATES REMAIN HIGH ( PERCENT).........................................................................................................................16 TABLE 6: UNEMPLOYMENT IN THAILAND ...........................................................................................................................................18 TABLE 7: CHANGES IN AVERAGE REAL WAGES AND TOTAL EMPLOYMENT BY SECTOR (FEBRUARY ROUND) .......................................18 TABLE 8: PUBLIC DEFICIT IN ASIAN COUNTRIES, 1999 (%GDP) ........................................................................................................19 TABLE 9: PUBLIC DEBT IN ASIAN COUNTRIES (%GDP) ......................................................................................................................19 TABLE 10: PUBLIC DEBT AS OF MARCH 2000.....................................................................................................................................20 TABLE 11: LONG RUN FISCAL SUSTAINABILITY ..................................................................................................................................20 TABLE 12: NONPERFORMING LOAN ESTIMATES*................................................................................................................................20 TABLE 13: LIST OF ASSET MANAGEMENT COMPANIES IN THAILAND ..................................................................................................23 TABLE 14: FLOW OF NPLS AS A PERCENTAGE OF LOANS....................................................................................................................23 TABLE 15: NPL RATIO FORECAST AT THE END 2000..........................................................................................................................24 TABLE 16: FINANCIAL SECTOR RESTRUCTURING AUTHORITY AUCTION RESULTS (CORE ASSETS).....................................................27 TABLE 17: SUMMARY OF NON-CORE ASSET SALES ............................................................................................................................28 TABLE 18: SUPERVISION RESPONSIBILITY ...........................................................................................................................................29 TABLE 19: EXISTING RESERVE + WRITE OFFS TO TOTAL REQUIRED BY YEAR 2000 RULE* (BILLION BAHT).....................................31 TABLE 20: STATUS OF CDRAC TARGET CASES .................................................................................................................................34 TABLE 21: PROGRESS OF CENTRAL BANKRUPTCY COURT ..................................................................................................................34 TABLE 22: TFP AND GDP GROWTH (1995-2000) ..............................................................................................................................37 TABLE 23: FORMAL ENTERPRISE-BASED TRAINING IN THAI MANUFACTURING 1997 (%) ..................................................................42 TABLE 24: CORRELATION OF STRUCTURE OF MANUFACTURE EXPORTS (1995) ...................................................................................45 TABLE 25: CHANGE IN THE STRUCTURE OF MANUFACTURE EXPORTS BY TECHNOLOGICAL LEVEL ......................................................45 TABLE 26: STRUCTURE OF APPLIED TARIFFS IN THAILAND .................................................................................................................46 Figures FIGURE 1: POVERTY INCIDENCE IN THAILAND ......................................................................................................................................9 FIGURE 2: SOCIAL SAFETY NET EXPENDITURES .....................................................................................................................................9 FIGURE 3: SHARE OF PUBLIC HEALTH EXPENDITURES AND SHARE OF POOR POPULATION BY REGION ...............................................10 FIGURE 4: DESTINATION OF THAI EXPORTS .........................................................................................................................................12 FIGURE 5: IMPORTS ARE ON THE RISE (US$) .......................................................................................................................................13 FIGURE 6: REAL PRIVATE CONSUMPTION TO GDP HAS BEEN RECOVERING .........................................................................................13 FIGURE 7: PRIVATE CONSUMPTION INDICATORS ..................................................................................................................................13 FIGURE 8: INVESTMENT RECOVERY IS GRADUAL.................................................................................................................................14 FIGURE 9: BOI APPROVALS ARE FLAT .................................................................................................................................................14 FIGURE 10: MORE DYNAMIC SECTORS HAVE ATTRACTED FDI ............................................................................................................14 FIGURE 11: CREDIT-TO-GDP RATIO IS STILL FALLING .........................................................................................................................16 FIGURE 12: NON-TRADABLE SECTOR IS WEAK.....................................................................................................................................16 FIGURE 13: MANUFACTURING PRODUCTION IS MODERATING ..............................................................................................................17 FIGURE 14: CAPACITY UTILIZATION IS RECOVERING SLOWLY ..............................................................................................................17 FIGURE 15: WORKERS RECEIVING OVERTIME PAYMENTS ....................................................................................................................17 FIGURE 16: LONG-RUN DECLINE IN THE LABOR PARTICIPATION RATE ................................................................................................18 FIGURE 17: TOTAL REAL WAGE BILL AND UNEMPLOYMENT RATES .....................................................................................................18 FIGURE 18: HEADLINE NPLS ARE FALLING .........................................................................................................................................24 FIGURE 19: SECTORAL NPLS ..............................................................................................................................................................25 FIGURE 20: CLASSIFIED DELINQUENT LOAN BREAKDOWN .................................................................................................................25 FIGURE 21: LOAN TO GDP AND CAPACITY UTILIZATION ....................................................................................................................26 FIGURE 22: INTEREST RATES 1997-2000 ............................................................................................................................................30 FIGURE 23 : REAL MLR......................................................................................................................................................................30 FIGURE 24: PROGRESS ON TOTAL DEBT RESTRUCTURING ..................................................................................................................32 FIGURE 25: SECTORAL CORPORATE RESTRUCTURING COMPLETION RATIO ........................................................................................32 FIGURE 26: STOCK MARKET PERFORMANCE.......................................................................................................................................32 FIGURE 27: CHANGES IN STOCK INDEX BY SECTORS, THAILAND .........................................................................................................33 FIGURE 28: DEBT TO EQUITY RATIO BY SECTOR, THAILAND ..............................................................................................................33 FIGURE 29: DYNAMICS OF TOTAL FACTOR PRODUCTIVITY .................................................................................................................37 FIGURE 30: PERSONAL COMPUTERS PER 1,000 PEOPLE .......................................................................................................................40 FIGURE 31: INTERNET HOSTS PER 10,000 PEOPLE ............................................................................................................................... 41 FIGURE 32: INTERNATIONAL COMPARISON OF R&D INVESTMENTS ....................................................................................................43 FIGURE 33: WORLD MARKET SHARES FOR EXPORTS OF ELECTRONICS.................................................................................................44 FIGURE 34: WORLD MARKET SHARE FOR EXPORTS OF TEXTILES .......................................................................................................45 Boxes BOX 1: NET FOREIGN DIRECT INVESTMENT IN THAILAND…………………………………………………………………………. 15 BOX 2: LANDMARK INSOLVENCY DECISION: TPI CASE………………………………………………………………………….… 35 BOX 3: IMPROVED ACCOUNTING STANDARDS ADOPTED BY THE INSTITUTE OF CERTIFIED ACCOUNTANTS AND AUDITORS OF THAILAND IN 1998 AND 1999…………………………………………………………………………………………....… 39 BOX 4: ESTABLISHMENT OF THE PUBLIC DEBT MANAGEMENT OFFICE……………………………………………………………. 49 BOX 5: THE GOVERNMENT’S EARLY RETIREMENT SCHEME………………………………………………………………………. 50 BOX 6: EMERGING POWER OF NEW ACCOUNTABILITY INSTITUTIONS……………………………………………………………… 50 PREFACE The Thailand Economic Monitor reviews major developments and challenges in the areas of poverty reduction, the real economy, financial and corporate sector reform, public sector reform, and medium-term competitiveness. The last three years have been very difficult for Thailand. However, this period has also been one of rapid institutional and policy change. The government has shown its ability to design and implement a complex strategy to stabilize the economy and to move the reform agenda forward to prepare Thailand for the challenges posed by globalization. This Economic Monitor depicts an economy in expansion that is likely to recover its pre-crisis levels of output and welfare within two or three years. As the economy recovers, the major challenge is to maintain the momentum of institutional and policy reform and to shift the focus from crisis management to medium-term economic and social development. The Monitor shows that while the policy and institutional framework is largely in place, implementation in some areas needs to be accelerated. Thailand needs to more rapidly reduce the volume of non-performing loans and to improve the pace and quality of corporate debt restructuring, while improving the effectiveness of its bankruptcy and debt recovery laws. A critical part of the reform program will be to provide momentum to development and usage of information technology -- an area where Thailand is currently lagging -- but which will be essential for the country to compete in the new knowledge economy. This Monitor responds to increasing demand for information on Thailand’s reform program. We hope that this publication will be useful to those monitoring Thailand’s short and medium-term outlook. Details on other World Bank publications on Thailand can be found at the website http://www.worldbank.or.th. J. Shivakumar Country Director World Bank Office- Bangkok May 30, 2000 EXECUTIVE SUMMARY • This Monitor takes a comprehensive look at the Thai reform program. The crisis had revealed weaknesses in several areas including the social, financial, and corporate sectors, competitiveness, and public sector institutions. These weaknesses had interrupted the development process. In response, Thailand has been implementing a comprehensive reform program, both as a response to the crisis and the new constitution adopted in 1997. This Monitor examines the progress made so far in eliminating both the short and the medium-term structural weaknesses. It also identifies some of the challenges ahead. • While Thailand deserves credit for putting in place a comprehensive reform program, stronger implementation holds the key to the success. Thailand has introduced a remarkable range of reforms in a short period of time. Fundamental changes in laws, practices, mind-sets, institutions and policies have been initiated. These reforms promote competitiveness, governance, and social justice, and auger well for securing better quality of life for all citizens. However, elements of the program need further fine tuning to remove remaining constraints. More energetic implementation, with support of the private sector and civil society, remains a high priority. • The adverse impact of the crisis is still being felt by the Thai people. Although economic growth in 1999 has helped to reduce the poverty incidence, around 7.5 million Thai people remain below the poverty line. Unemployment rate has fallen from 5.4 percent in 1999 to 4.8 percent in February 2000. Fiscal policy will need to carefully manage the tradeoffs between employment creation, social protection and sustainability of the public debt. • Communities have played an exemplary role in tackling the crisis. Communities have received support from various sources including the Community Development Department and the Social Investment Fund. These vibrant community organizations, besides influencing values and bolstering morale during the crisis, have been directly involved in employment generation, training and income transfer programs targeted at those worst affected. An adequate level of government support for such a continued role is justified until recovery is fully restored. • Economic recovery is on track. Export performance remains strong. Fiscal stimulus is being delivered. Private investment, although fragile, is on an upward trend. On balance, GDP is expected to grow by 4 to 5 percent in 2000. The downside risks to the growth outlook include both domestic and external developments. Internally, the pace and quality of bank and corporate restructuring, constrained by a weak legal framework, could slow down the momentum of recovery. External developments (in the US and Japan) could adversely impact exports, a key driver of Thailand’s recovery. • Macroeconomic policies continue to support recovery. Given low inflation and a substantial output gap, fiscal and monetary policies continue to support recovery. Public sector has played an important role in recovery. As a consequence, public debt has increased, but is sustainable, if the growth momentum is maintained. Public debt would need to be carefully managed over time. The Thai Government has established the Public Debt Management Office, which will be responsible for setting the overall public debt policy. The Ministry of Finance is in the process of drafting the Debt Management Law enabling flexibility in public debt management. • The market-led, decentralized approach to financial sector restructuring is an appropriate strategy, but understated losses on bank balance sheets could pose a risk. Additional capital to Thailand Economic Monitor 5 handle understated losses (beyond year-end 2000 provisions) may require some form of public policy support, linked to further rationalization of the sector. Significant progress has been made with the privatization of the three government run banks. The competitive dynamics of the IT driven, knowledge based economy will put more pressure on financial institutions to consolidate. Thailand is in the process of defining a medium-term vision for the financial sector. The supervisory and regulatory framework for the financial sector is being strengthened. The draft Financial Institutions Act, aimed at modernizing the regulatory framework (consolidating supervision of financial conglomerates, tightening rules on insider lending, linking capital adequacy to risk profile) has been approved by the Council of State and it now needs the parliamentary approval. The draft Deposit Insurance Act, which would replace the blanket guarantee with limited depositor protection, is under preparation. The Bank of Thailand is being restructured to strengthen its independence, accountability and transparency. Alongside the rebuilding of the banking sector, progress is being made towards developing the capital markets. Deepening the capital markets will improve corporate behavior and help buffer the economy against future shocks. • Corporate debt restructuring needs to accelerate. The first quarter of 2000 saw a slow down in both the number of cases and the value of debt restructured as compared to the fourth quarter of 1999. Restructuring is still concentrated in large corporate firms. Medium and small loans and their underlying assets are being restructured slowly, and markets for distressed assets are not clearing. The corporate restructuring completion ratio (debt restructured as a ratio of size of NPLs) is high for services and export sectors but relatively low for the construction, real estate and manufacturing sectors. Over time, the firms approaching Corporate Debt Restructuring Advisory Committee (CDRAC) for assistance are likely to be in less viable sectors or small and medium-sized firms. CDRAC will need to be stricter in enforcing adherence to the time schedules set out in the voluntary agreements among debtors and creditors. Bankruptcy and debt collection regimes need to be more supportive of reform. Finally, debt restructuring guidelines for remaining state banks should be finalized quickly, approved at the appropriate governmental level to reduce the cloud of legal liability for reasonable write-offs, and implemented. • Medium-term competitiveness reform will help to achieve high-quality growth. Since the crisis, both capital and labor have shown modest productivity gains. Going forward, there is tremendous potential for productivity gains. High-quality growth will require shifting away from an input-based to a knowledge-based economy. The latter will require modernizing institutions and policies aimed at improving corporate governance, skills and technology, introducing competition and protecting consumer welfare, and providing an enabling environment for small and medium scale enterprises. While substantial progress has been made in improving corporate governance, much of the reform agenda remains unfinished. The Public Company Act needs to be amended to improve minority shareholder protection, and to change provisions related to the duties of directors, and sanctions for fraudulent practices. In response to concerns related to skill shortages, Thailand is undertaking a comprehensive reform of the educational system with the objective of improving the quality of education, and improving access to secondary and higher education. A new Education Act provides the framework for reform and its implementation is underway. With regard to competition, Thailand has drafted a number of laws (e.g., Business Competition Act) which will improve competitiveness, productivity, and help facilitate technology upgrading. The momentum on capacity building to implement these regulations needs to be maintained. Trade policy reforms (e.g., elimination of import surcharges introduced during the crisis, amendment of customs Act) will help to strengthen Thailand’s ability to compete in the international markets. • Thailand is developing an effective information technology strategy. The range of constraints that Thailand faces in this critical area extends from lack of access and coverage of telecommunication infrastructure, through obstacles to E-Commerce and E-Government, to Thailand Economic Monitor 6 shortages of skilled manpower, not only at the sophisticated end but even for widespread use of new technology. Thailand is preparing a comprehensive program to address these issues in the context of the new economy. • Thailand is proceeding with its privatization agenda. Upcoming transactions include the strategic sale or public offering of a stake in Thai Airways International; the Airports Authority of Thailand (Regional Airports); the Petroleum Authority of Thailand; the Ratchaburi Power Plant; the Communications Authority of Thailand; and the Telephone Organization of Thailand. While Thailand remains fully committed to privatizing state-owned enterprises to improve their efficiency and improve the quality of services offered to the public, it has also rightly placed a high priority on modernizing and strengthening its regulatory framework and institutions. • Public sector reform momentum is critical. The new Constitution provides the underpinning of a modern democratic governance regime and supports greater citizen participation, decentralization, accountability, and transparency. With the policy and institutional frameworks in place in several key areas, implementation now holds the key to results on the ground. Progress is being made on strengthening performance-based resource management, improving service delivery, and strengthening accountability and transparency across the public sector as decentralization proceeds. The key challenge is sustaining the momentum of the program, improving coordination across agencies, motivating civil servants to play their new role, and using the potential offered by information technology to speed up reforms. Thailand Economic Monitor 7 Government has plans to establish a Community POVERTY Organization Development Institute, and a draft bill which would improve the enabling Key Developments environment and support for civil society organizations is awaiting Parliamentary approval. • As the recovery takes place, the share of the Such local capacity building is all the more population living below the poverty line is important because the 1997 Constitution expected to decline following the halt in emphasizes increased citizen participation, Thailand’s sustained progress in reducing poverty community-based development, and greater due to the crisis. However, the absolute number decentralization. of poor (at US$ 1.5 a day) is expected to remain between 7.3 to 7.7 million at the end of 2000. The • On educational opportunities, Thailand is share of population living below the poverty line undertaking a comprehensive reform of the is expected to decline to its pre-crisis levels by educational system with the objective of 2002. improving the quality of learning and expanding enrollment in secondary and higher education. • Thailand has successfully managed the social Secondary education enrollment expanded slowly impact of the crisis. Both formal and informal in Thailand and only reached 60 percent in 1998. safety nets have cushioned the impact of the The Constitution of 1997 now provides all crisis. Latest estimates suggest that the public citizens with the right to 12 years of publicly safety net programs have benefited over 4.5 financed education. million workers, 35,000 low-income households and 400,000 poor elderly. • The legal basis for the ongoing education reform • Going forward, fiscal policy will need to carefully is the Education Act (1999) which gives a three- manage the tradeoffs between economic stimulus, year timeframe for reducing the power of the social protection and sustainability of the public central ministry, decentralizing to new school debt. Although fiscal stimulus is being delivered, districts, establishing quality control mechanisms, there is a downside risk of a shortfall in the reforming teacher employment, moving to block overall deficit during the second half of this fiscal grant financing, and increasing school autonomy year, with some of the cuts falling on social safety and accountability. net programs, now that nearly 83 percent of the Miyazawa package has been disbursed. Public sector safety net programs have been • The crisis has unveiled both structural and largely successful. While data about the number and institutional weaknesses in the social policy socio-demographic characteristics of beneficiaries framework. There is considerable room for from the different social programs is still scarce, improving the efficiency and equity aspects of preliminary analysis suggests that original targets taxes, allocation of public expenditures, and the were usually achieved. For instance, in the case of mechanisms used to target social safety net the Miyazawa Plan’s programs for employment programs. Reforms in these areas will improve the generation, 65,223 educated workers (76 percent of benefit of growth and public interventions to the the target) and 3.5 million unskilled workers (80 poor. percent of the target) had been hired by the end of 1999 (the average employment length was 18 days). • Thailand has emphasized educational Also, 2,000 villages received training and financial opportunities and community capacity building as support through the Department of Community the two pillars for improving social equity on a Development. The same program provided loans to lasting basis. On local capacity building, the 30,000 farmers, while the Department of Agricultural Government has been supporting community Promotion provided training to 1,094 farmers out of organizations such as savings groups, vocational 1,270. For programs providing cash or in-kind groups, and community markets through the transfers (e.g., meals for children), estimates suggest Community Development Department. The Thailand Economic Monitor 8 that they have benefited over 1.2 million persons or Although economic growth in 1999 and 2000 will 35,000 households. The programs also included reduce poverty incidence, the number of poor is likely provision of financial support (Bt 10,000) to 990 to remain above 7.5 million (mostly concentrated in HIV/AIDS-affected persons, and monthly transfers of the North and Northeast regions, see Thailand: Bt 300 to 400,000 for the elderly poor. Economic Monitor February 2000). Given that poverty incidence and unemployment remain above Since the Social Investment Fund (a component of the pre-crisis level, work-fare programs and means- the Social Investment Project financed by the tested cash transfers and in-kind transfers will need to World Bank) was launched on September 9, 1998, be preserved in the future. This will be a challenge in a total of 2,279 sub-projects have been approved FY2001, as foreign financed expenditures (roughly 50 with a total budget of Bt 2,636 million percent of total safety net expenditures) gradually (approximately US$ 67.6 million). The sub-projects decline. cover 76 provinces with over 4.3 million beneficiaries. The demand for Social Investment Given the recovery, safety net expenditures should Fund resources continues to grow. The Social Fund be adjusted. The reduction in the unemployment rate has stimulated the emergence of community observed in February (see section on Labor Markets) organizations and community networks capable of could justify lower levels of expenditures on income efficient sub-project and local community generation programs. However, reductions should be management and administration. This growing carefully assessed given that the unemployment rate partnership with civil society has stimulated remains 4 percentage points above pre-crisis levels disbursements and improved the delivery of social (MOL projects that in year 2000, 1 million workers assistance to the poor. will remain unemployed) and the construction sector, which in the past acted as a safety net for agricultural Despite the recovery, the number of poor remains workers during the non-harvesting season, remains above pre-crisis levels. Thailand was very weak. successful in reducing the poverty incidence during the decade preceding the crisis (see Figure 1). Hence, Figure 2: Social safety net expenditures in less than ten years, the poverty incidence was more Expenditure per poor (US$/year) than halved, falling from 32 percent in 1988 to 8.0 250 7.9 Expenditure Number of poor (million) roughly 11 percent in 1996. This reduction was 7.8 per capita 200 mostly the result of economic growth. Flexible labor 7.7 markets and high levels of social capital (e.g., strong 150 7.6 family ties) diminished the crisis’ impact on 7.5 unemployment and poverty. Despite these natural Number of 100 7.4 stabilization mechanisms, poverty incidence increased poor 7.3 50 by 13 percent between 1996 and 1998 (from 11.4 7.2 percent of the total population to 12.9 percent). 7.1 0 Figure 1: Poverty Incidence in Thailand 98-99 99-00 00-01 35 Sources : Bureau of the Budget and Staff calculations % of the Population 30 There is scope for improving the effectiveness of 25 the safety net programs. Two years of experience in Projection the implementation of social programs have revealed 20 weaknesses in three areas: 1) targeting; 2) cost- effectiveness of programs and evaluation; and 3) 15 coordination between agencies and network units. 10 1988 1990 1992 1994 1996 1998 2000 2002 Source: NESDB and Staff calculations Thailand Economic Monitor 9 Table 1:Estimates of government-financed safety Figure 3: Share of Public Health Expenditures and net expenditures for FY01 (Baht million) Share of Poor Population by Region 1998/99 1999/00 2000/01p 0.08 0.07 Income Generation 18,300.8 20,587.2 11,771.7 0.06 In Kind transfers 4,947.0 12,538.1 14,942.6 0.05 School lunch programs 2,425.4 2,364.6 2,546.4 0.04 Housing 502.6 352.7 1,150.0 0.03 Health 8,417.7 9,820.8 11,246.2 0.02 Cash Transfers 1,820.8 1,687.7 2,338.7 0.01 0 TOTAL 33,988.9 34,813.0 29,053.0 0 0.02 0.04 0.06 0.08 % Change 2.42% -16.55% Share of Poor Population Source: Bureau of the Budget. In terms of targeting, social programs have not Improved coordination between line agencies will always been successful in identifying and helping have large benefits. The implementation of safety the poor. In part, this is a consequence of the net programs has induced the proliferation of social tradeoff between the speed of disbursement, which is funds which often target the same markets or critical during a downturn, and the effectiveness of population groups. Although the magnitude of the the targeting mechanism. However, the problem of coordination failure has not been evaluated it is likely appropriately targeting social expenditures goes to have reduced the effectiveness of the policy beyond safety net programs. Recent studies have interventions. suggested that in general social expenditures are not On the positive side, safety net programs may have focused on the poor, but rather the middle and high- increased transparency in the use of funds. Central income groups. In 1994, for example, only 6 percent and line agencies have suggested that because the of total public expenditures benefited the poorest development and implementation of safety net decile, while 25 percent concentrated on the richest programs usually involve different stakeholders, decile. Similarly, per capita public expenditures by transparency tends to increase. The media has regions tend to increase as the income per capita of focused on corruption and lack of transparency in the region increases, showing that public resources budget allocations. Preliminary audits by Government tend to concentrate in rich regions. Figure 3 also suggest that social safety net funds have been shows that there is no coherent relationship between managed relatively free of corruption. For instance, the share of total health expenditures received by a from more than 80,000 projects supported within the given province, and the share of poor population Miyazawa package, some 300 complaints have been living in that province. received. Central agencies have faced difficulties in identifying cost-effective employment and training Going forward programs. Indeed, some of the programs are often designed without the proper knowledge of the cultural Given that unemployment and poverty remain above and socioeconomic characteristics of the population pre-crisis levels, it is important to maintain they target. For instance, some programs, such as job appropriate levels of expenditures on safety nets and creation through infrastructure projects, targeted strengthen the institutional framework to implement workers who were not prepared to work on these and manage these programs. projects. Similarly, some of the training programs Future programs should reflect lessons of have not had any impact on the employment situation experience. This is particularly relevant for income of their trainees (e.g., training programs for rubber generation programs. There is evidence that projects tapping). that have been implemented by networks of communities have tended to be more effective. Thailand Economic Monitor 10 Future implementation could encourage this type of coordination. ECONOMIC RECOVERY Mechanisms to allocate public expenditures across regions and demographic groups should be Key Developments reviewed. Preliminary evaluation reports suggest that decentralized mechanisms tend to be more effective in • Economic recovery is on track. Export targeting the poor than centralized mechanisms. performance has been impressive. Fiscal stimulus However, this is only true if the initial allocation is being delivered. Private investment, although across local governments or communities is efficient. fragile, is on an upward trend. Recent data on To date the practice has been to distribute the same consumption show a mixed picture, although it is amount of resources to each local unit (the tambon). difficult to say whether this is a temporary Y2K- The justification is that no data is available to related phenomenon, or a fundamental slow measure poverty incidence or other social indicators down. On balance, GDP is expected to grow by 4 that could serve as criteria for targeting. However, a to 5 percent in 2000. The downside risks to the more efficient strategy would be to allocate resources growth outlook include both domestic and to groups of tambons, the size of the group being external developments. Internally, the pace and chosen to facilitate the calculation of the indicators quality of bank and corporate restructuring could involved in the allocation criteria. In terms of the slow down the momentum of recovery, while latter, the main indicator could be the share of the developments in the US and Japan could impact poor population living in the sub-regions under exports, a key driver of Thailand’s recovery. consideration. This criteria maximizes the number of • Thailand’s external position has strengthened poor who receive support even under the assumption with international reserves reaching US$32 that the allocation within sub-regions is random. billion, equivalent to 200 percent of debt maturing Other indicators could be introduced in the criteria in the next 12 months, and 6 months of imports. (e.g., the share of child population, female population, or AIDS-infected population). • Recent results from the Labor Force Survey Experience shows that a criteria using more than 3 suggest that employment is expanding. The indicators becomes cumbersome given the need to February unemployment rate fell from 5.4 percent choose weights for each of the indicators. in 1999 to 4.8 percent in 2000. However, the pace at which the unemployment rate has adjusted Continued progress should be made towards downwards is slower compared to the previous improving the quality and reliability of social data. crisis in the 1980s. While the current This is essential for an adequate monitoring of unemployment rate appears to be modest when poverty, unemployment, and the timely design of compared to European countries, Thailand has no alternative policy interventions unemployment insurance system and welfare There is also room to improve the redistributive impacts can be severe. However, a review of the role of fiscal policy. Authorities need to identify adjustments in the labor market shows that wage mechanisms to increase efficiency in the composition reductions among less educated workers were less and allocation of public expenditures and taxes. severe compared to the educated workers, Changes in the current structures of taxes and suggesting that labor markets protected the less expenditures could reduce inequality and the poverty well off. incidence. • Agriculture did not provide the expected safety net, as the employment levels in that sector have continued to fall. Key drivers of growth. After growing by 4.2 percent in 1999, real GDP is expected to expand by 4 to 5 percent in year 2000. The major contributors to Thailand Economic Monitor 11 growth continue to be exports (6.3 percentage points) commodity prices, but also possibly due to shortages and private consumption (3.4 percentage points). of working capital. Private investment is likely to contribute around 1.2 The relative importance of different markets for Thai percentage points, while the total contribution of exports has remained roughly constant over time public expenditures (current and capital) is around 1 (Figure 4), with NAFTA and Japan accounting for percentage point (Table 2). close to 36 percent. A slow down in the United States economy and lack of full recovery in Japan could Table 2: Contribution to Growth, 2000 (%) negatively affect Thai exports. Furthermore, low Growth Contributions profit margins among hardware producers in the to growth United States could slow down the demand for Real GDP growth (%) 4.5 4.5 electronic components which currently represent 7-10 Private consumption 6.4 3.4 percent of total exports. In the medium term, Public consumption 4.9 0.46 however, the performance of the export sector will GDFI 8.04 1.37 depend on Thailand’s ability to reduce transaction Public total investment 4.5 0.43 costs and improve production factors (see Private total investment 11.0 1.22 Exports 11.0 6.33 Competitiveness section). Imports 17.0 -7.54 Figure 4: Destination of Thai exports Source: Staff calculations 100% 90% Exports continue on a fast track. Exports grew by 9 80% Others percent in volume terms in 1999 and are expected to 70% EU grow by 11 percent in year 2000. During the first 60% China quarter 2000, exports in US$ have been growing at an 50% ASEAN average of 30 percent per month, helped by the 40% 30% NAFTA regional recovery, a competitive real exchange rate, Japan 20% real wages that are below pre-crisis levels, and 10% productivity gains. 0% 1993 1994 1995 1996 1997 1998 1999 2000 Table 3: Thai exports (1999-2000) (Share of Total Exports) 1997 1999 2000 Imports also signal recovery. Since mid 1999 Oct Nov Dec Jan imports have been growing rapidly. In January, Agriculture 10.3% 7.4% 8.2% 9.3% 8.8% February and March 2000, imports in US$ grew by 27 Fisheries 4.0% 4.0% 3.5% 3.5% 3.1% percent, 65.8 percent and 24.8 percent respectively. Forestry 0.1% 0.1% 0.1% 0.1% 0.1% While initially growth was driven by consumer goods, Mining 0.9% 0.5% 0.9% 1.2% 1.6% Manufacturing 82.5% 85.2% 83.0% 83.6% 83.5% imports of raw material and capital goods have Other 2.0% 2.6% 4.0% 2.1% 2.6% gradually recovered (Figure 5). Re-exports 0.3% 0.2% 0.3% 0.2% 0.3% Total exports Private Consumption. Given that households are not 56,626 5,335 5,120 5,245 5,401 (Million US$) as heavily indebted as the corporate sector, private consumption will continue to be an important driver Expansion of exports has been confined to the of the recovery (Figure 6). manufacture, mining, and re-export sectors, which have received the bulk of foreign investment. The In 1999, total private consumption grew by 3.5 US$ value of exports in agriculture-related sectors percent, recovering from the sharp contraction in have been contracting, in part as a result of falling 1998 (-12.3 percent). This recovery is broadly consistent with the return of consumer confidence, Thailand Economic Monitor 12 reflected in an increase in the propensity to consume indicators suggest that private consumption could be (Figure 6), as well as the recovery in aggregate slowing down. For instance, department store sales disposable income resulting from rising wages and and import of consumer goods have moderated in Q1 2000, while the rapid growth in sale of motor cycles higher levels of employment (see section on Labor and automobiles witnessed last year may be running Markets)1. out of steam (Figure 7). There is a possibility that this Figure 5: Imports are on the rise (US$) slow down in consumption in Q1 2000 may be explained by exaggerated preparations for Y2K- Raw Materials related emergencies. It may also reflect a negative 105 Capital Goods wealth effect arising from the recent fall in the stock Index (1997Jan=100) 95 markets (analysis shows that deviations from the trend 85 in consumption are highly correlated with movements 75 in the stock market). If the slowdown is not a mere 65 fluctuation but a more permanent change in trend, fiscal policy along with structural reforms may need 55 to be pursued more pro-actively. 45 Figure 7: Private consumption indicators Jan-97 May-97 Sep-97 Jan-98 May-98 Sep-98 Jan-99 May-99 Sep-99 Jan-00 800 Sales of Dept Stores (LHS) 120 VAT (LHS) Consumer good imports (LHS) 700 Passenger car sales (RHS) Motorcycle sales (RHS) 100 (Seasonally Adjusted) 600 80 Thousand Units Figure 6: Real private consumption to GDP has 500 Million US$ been recovering 400 60 59.0 300 40 57.9 58.0 200 57.0 20 56.1 100 Percent 56.0 0 0 Jan-97 Jan-98 Jan-99 Jan-00 Sep-97 Sep-98 Sep-99 May- May- May- 55.0 54.0 54.2 53.0 (Seasonally Adjusted) 52.0 Private investment. In 1999, total investments 96 Q1 96 Q3 97 Q1 97 Q3 98 Q1 98 Q3 99 Q1 99 Q3 reached 20.4 percent of GDP, an increase of 12 percent from 1998 (in 1996, 1997 and 1998 total Note: Computations are based on seasonally adjusted series of private consumption and GDP investment as a share of GDP was respectively 43 percent, 33.6 percent and 19 percent). Despite this During the first quarter 2000, however, data on recovery, the investment rate remains below the rate private consumption send mixed signals. Several observed in Korea (27 percent) and Malaysia (22 percent) (Table 4). 1 The contribution to disposable income from non-wage related earnings Since January 1999, indicators such as cement sales (e.g., corporate profits, property rent) has less impact on consumption (for each dollar of this type of income, only 60 cents tend to be consumed on and BOI approvals have remained mostly flat. average). However, given that historically this type of earning has However, historically, BOI only represents a small represented close to 60 percent of disposable income, the observed share of total investments (less than 3 percent of recovery in the rate of return to capital should also be contributing to consumption growth. GDP). Other indicators such as imports of capital Thailand Economic Monitor 13 goods, which constitute a better proxy for aggregate Figure 9: BOI approvals are flat investment, are trending up, suggesting that (Seasonally adjusted) investment is recovering (Figure 8). Hence, total 6.0 investments in the economy are expected to grow by close to 8 percent this year (this forecast is also 5.0 supported by an increase in SOE investments). Million $US 4.0 Table 4: Investments and savings in East Asian 3.0 countries (percent of GDP) 2.0 1996 1997 1998 1999e 1.0 Thailand Savings 33.2 31.9 31.1 30.1 Investment 43.7 33.6 19.0 20.4 0.0 97 97 97 97 98 98 98 98 99 99 99 99 00 Indonesia Savings 28.7 28.1 23.0 12.4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Investment 32.1 31.3 19.1 11.6 Korea Savings 33.7 33.1 32.8 33 Source: Bank of Thailand Investment 37.9 34.2 21.2 26.8 Malaysia Savings 38.2 38.5 43.1 41.5 Figure 10: More dynamic sectors have attracted Investment 41.5 42.9 26.7 22.3 FDI Source: JP Morgan and NESDB 1400 Figure 8: Investment recovery is gradual 1200 1997 1999 80 1000 Million $US % changes, year-on-year 60 800 40 600 20 400 0 200 -20 0 -40 -60 Machinery Financial Trade Services -80 & transport institutions Jul-97 Jul-98 Jul-99 Jan-97 Oct-97 Jan-98 Oct-98 Jan-99 Oct-99 Jan-00 Apr-97 Apr-98 Apr-99 equipment Source: Bank of Thailand Cement consumption Iron rod sales Galvanized iron sheet sales Capital goods imports So far, the lack of bank credit has not hindered recovery. As recovery broadens, however, it will be Source: Bank of Thailand accompanied by higher credit demand, especially Will weak bank credit growth constrain private from SMEs and new borrowers. The growth of bank investment? Even with domestic credit contracting, credit to the private sector is projected to remain flat output grew in 1999 and private investments in 2000. This could be a problem going forward, at represented roughly half of total investments or 11 least for firms with no access to equity and bond percent of GDP. To finance these new investments markets. corporations had three potential sources of funds: (1) bonds and equity (12 percent of GDP), (2) net foreign direct investment and portfolio investment (4.3 percent of GDP net), and (3) corporate savings (4 percent of GDP). Net credit from the rest of the world was negative (-4 percent of GDP). Thailand Economic Monitor 14 Box 1 : Net Foreign Direct Investment in Thailand In 1999, inflows of foreign direct investment (FDI) represented 4.6 percent of GDP, while outflows (foreign investments by Thai companies abroad) accounted for less than 0.3 percent of GDP. Hence, net foreign direct investments amounted to 4.3 percent of GDP, twice the average for the period 1990-1995. This level of foreign direct investment is considerably higher than the level observed in other East Asian countries with the exception of Singapore. Table 1: Net FDI as a share of GDP by Country 1999 2000 2001 Indonesia -0.34% 1.29% 1.63% Philippines 2.28% 1.77% 1.61% Singapore 5.78% 5.79% 5.38% Thailand 4.30% 3.49% 2.97% Malaysia 0.13% 0.57% 1.45% Korea 1.20% 1.21% 0.87% Source: ABN-AMRO and Staff Calculations for Thailand Lately, there is some evidence that the flow of FDI is slowing down in sectors such as real estate, financial intermediation, and construction. FDI in the industrial sector has also shown some weakness since Q4 1999. However, in the services and trade sectors, where perspectives about future productivity growth are encouraging, the trend in FDI has been stable and could be peaking up. Overall, the flow of foreign direct investments should be expected to slow down as foreign investors exhaust extraordinary investment opportunities which emerged during the crisis in sectors such as real estate. Higher interest rates in the United States may also contribute to this slow down. Nonetheless, it is likely that in the medium term, FDI flows will be above the pre-crisis level. The institutional and policy reforms that Thailand is currently implementing to improve competitiveness should contribute to attract investments from the rest of the world. Figure 1: Net Flows of Foreign Direct Investment (US$ million) Total Construction Industry 700.00 80.00 60.00 600.00 60.00 40.00 50.00 500.00 400.00 20.00 40.00 300.00 0.00 30.00 200.00 -20.00 20.00 100.00 6 months moving -40.00 average 10.00 0.00 -60.00 0.00 97 98 99 00 Jan-97 Jan-98 Jul.p Jan-99 Jan-00 Jul Jul Apr Apr Apr Oct.p Oct Oct ay ay ay ep p ep 97 98 99 00 p p ay ay ay Ja p p. n- n- n- n- Se Se p. M M M S S n- n- n- n- Se M M M Ja Ja Ja Ja Se Ja Ja Ja Real Estate Financial intermediation Trade 500.00 200.00 300.00 180.00 400.00 250.00 160.00 300.00 140.00 200.00 200.00 120.00 100.00 100.00 150.00 80.00 0.00 100.00 60.00 40.00 -100.00 50.00 20.00 -200.00 0.00 0.00 -300.00 -50.00 -20.00 Apr Apr Apr Oct Oct Jul Jul Jan-97 Jan-98 Jul.p Oct.p Jan-99 Jan-00 Jul Jul Jan-97 Jan-98 Jul.p Jan-99 Jan-00 Apr Apr Apr Oct.p Oct Oct 97 98 99 00 p p ay ay ay p Se Se p. n- n- n- n- M M M Se Ja Ja Ja Ja Services 300.00 250.00 200.00 150.00 100.00 50.00 0.00 p ay ay ay 97 98 99 00 p p p. Se Se M M M n- n- n- n- Se Ja Ja Ja Ja Thailand Economic Monitor 15 Table 5: Vacancy rates remain high ( percent) Figure 11: Credit-to-GDP ratio is still falling Jun-97 Jun-98 Jun-99 Jun-00f 120 Real GDP Bangkok 17.7 27.0 40.0 35.0 115 Real Credit Jakarta 13.1 16.0 22.2 22.0 Index (1997Q1=100) 110 105 Kuala 10.3 16.8 21.0 24.0 100 Lumpur 95 Seoul 12.0 15.0 15.0 12.0 90 85 In Q1 2000, growth in the Manufacture Production 80 75 Index slowed down from 17.5 percent in the previous 70 quarter to 8.8 percent. Indeed, between December 97 Q1 97 Q3 98 Q1 98 Q3 99 Q1 99 Q3 1999 and February 2000, the manufacturing production index was declining. In part the slow down is the result of the decline in beverage production Source: Bank of Thailand (beverage plants increased production significantly at Domestic saving remains strong. Unlike Indonesia, the end of 1999 to stock their products because savings in Thailand remain strong. Domestic savings production licenses were expiring) and the decline in is currently close to 30 percent of GDP (Table 4), production of petroleum products due to closure of below Korea (33 percent) and Malaysia (41 percent), some oil refineries for repair and maintenance (Figure but above Indonesia (18 percent). Preliminary 13). However, the slowdown could also reflect a analysis suggests that this level of savings should be contraction in consumers’ demand, hence the need for sufficient to support 4-5 percent GDP growth rates. carefully monitoring private consumption. Sectoral Performance Figure 12: Non-tradable sector is weak From the supply side, recovery has broadened, but Construction materials (Non-tradable) 60 Others (IC, jewelry, motors) (Tradable) manufacturing production, in the non-tradable Total index % change, year-on-year sector, may be slowing down. All sectors were 40 growing in the last quarter of 1999 with the exception 20 of the agricultural and financial sectors. The sector with highest growth was manufacturing which 0 rebounded since the beginning of 1999. The BOT -20 production indexes suggest that all sectors continued to expand in the first quarter of 2000, again excluding -40 agriculture. In particular, the “other� sector, which is -60 96 Q1 96 Q3 97 Q1 97 Q3 98 Q1 98 Q3 99 Q1 99 Q3 00 Q1 heavily export oriented (including the production of integrated circuits, jewelry and ornaments, electrical motors, television sets, and glass sheets), grew in March by 46.6 percent. In the meantime, the Source: Bank of Thailand construction sector (including the production of cement) remains fragile, registering a modest growth Capacity utilization has shown very modest signs of 1.1 percent (Figure 12). Vacancy rates in of recovery. In January 2000 aggregate capacity Bangkok are among the highest in the region. utilization declined, probably as a result of excessive preparation for Y2K-related emergencies. Since January it has been growing in all sectors. For instance, in the transportation sector it increased from 21.0 percent in Q1 1999 to 41.8 percent in Q1 2000. Thailand Economic Monitor 16 Figure 13: Manufacturing production is Labor Markets moderating The Labor Force Surveys (LFS) for August and 125 November 1999 showed that while the 120 unemployment rate had begun to fall, employment 115 was contracting and the share of the labor force 110 working less than 20 and 30 hours per week was 105 increasing. The falling unemployment rate was 100 simply due to the fact that since 1989 the participation 95 rate (the share of the labor force in the population 90 over 13 years of age) had been falling at an average 85 rate of –1.4 percent per year (Figure 16). This falling 80 participation rate can be explained by observed high Jul-97 Jul-98 Jul-99 returns to education in Thailand. The crisis did not Jan-97 Oct-97 Jan-98 Oct-98 Jan-99 Oct-99 Jan-00 Apr-97 Apr-98 Apr-99 have a statistically significant impact on the dynamics of the participation rate, and the latest round Seasonally adjusted index (February 2000) of the LFS confirms its long-run downward trend (Figure 16). Similarly, capacity utilization in the “others� category Figure 15: Workers receiving overtime payments (mostly goods produced for foreign markets) has 20 increased from close to 50 percent in March 1999 to 18 16 63 percent (the highest level across sectors) (Figure 14 14). Nonetheless, the average capacity utilization in 12 % 10 the economy reached 57.7 percent in Q1 2000, only 8 0.8 percentage points above the level observed in Q1 6 1999 and still significantly lower than the 71.8 4 2 percent average in 1995-1997. 0 1997 1998 1999 Figure 14: Capacity utilization is recovering slowly Source : Labor Force Surveys (LFS) 100 Construction Transportation Equipment 90 Others …..But recent data show that new jobs are being 80 Total created. The February 2000 LFS shows that 70 employment has expanded in all sectors except 60 agriculture. Indeed, between 1999 and 2000 Percent 50 approximately 500 thousand new workers were 40 employed thus reducing the February unemployment 30 rate from 5.4 percent in 1999 to 4.8 percent in 2000 20 (data on the average number of hours worked is not 10 yet available). While this is a positive development, 0 data also show that the unemployment rate is falling Sep Jan- MaySep Jan- MaySep Jan- Jan- May Sep Jan- May- 96 -96 -96 97 97 -97 98 -98 -98 99 -99 -99 00 at a very slow pace. This is a major difference between the 1997 crisis and Source: Bank of Thailand the 1989 crisis. In the latter, negative terms of trade shocks were absorbed rapidly and, in a period of one year, the unemployment rate came back to pre-crisis levels. This crisis is in part associated with structural Thailand Economic Monitor 17 weaknesses in the financial and corporate sector, and Table 7: Changes in average real wages and total therefore the recovery is expected to take longer. employment by sector (February round) % Changes EmploymentReal Wages at Table 6: Unemployment in Thailand 1994 prices (Based on August Round) Feb-99 Feb-00 Feb-99 Feb-00E Total 2.1 1.9 -2.1 -0.2 1995 1996 1997 1998 1999 Change Agriculture, forestry, 7.8 -3.9 -7.2 -4.1 97-98 hunting & fishing 1. Persons aged 13 years 45,196 45,869 46,798 47,265 47,974 2.51% and over Manufacturing -1.3 10.6 -1.6 4.2 2. Total labor force 33,002 32,750 33,56 33,353 33,210 -1.0% Construction, repair -23.6 11.6 -0.1 -1.6 (2+3+4) 2.1. Employed 32,575 32,232 33,162 32,138 32,087 -3.2% and demolition of which working less 581 721 938 954 32.3% Commerce 1.6 5.4 -11.9 1.9 than 20 hours Service 3.4 3.4 -1.2 -0.4 2.2. Unemployed 375 354 293 1,138 986 237% E = Estimate by Bank Staff 2.3. Waiting to farm 52 164 106 77 137 29.8% Note: Average real wage is the average real wage per person per month in 3. Participation rate (2/1) 0.730 0.714 0.717 0.706 0.692 -3.4% a particular sector. 4. Unemployment rate 1.2% 1.1% 0.9% 3.5% 3.1% 248% (2.2/2) Figure 17: Total real wage bill and unemployment 5. Real wages 100.0 98.5 104.3 102.3 99.6 -4.5% rates 6. Real consumption per 26,939 28,493 27,912 24,231 24,830 11.0% capita (Baht) Real Wage Bill (LHS) Source : Labor Force Surveys (LFS) Unemployment rate (RHS) 120 500 Figure 16: Long-run decline in the Labor Indecx (1995=100) Index (1995=100) 115 Participation Rate 400 110 74 300 73.0 105 73 200 100 72 95 100 71 69.8 90 0 Percent 70 95-3 96-1 96-3 97-1 97-3 98-1 98-3 99-1 99-3 00-1 69 69.2 68 Round 1 = Feb Round 3 = August Feb round 68.2 67 August round Source: Bank of Thailand 66 65 New jobs are being created in the manufacturing 1995 1996 1997 1998 1999 2000 and construction sectors. The fact that employment in the construction sector is expanding (as well as Source : Labor Force Surveys (LFS) output, see Section on Sectoral Performance) is encouraging. Indeed, in the past, the construction While the 4-5 percent unemployment rate could be sector constituted a safety net for agricultural workers considered modest by European standards, its welfare during the non-harvesting season. Despite the impact can be severe, given that Thailand does not observed recovery, however, claiming that the have unemployment insurance systems similar to construction sector is ready to resume this role would those available in European countries. Nonetheless, in be premature. Government safety net programs addition to the Government-supported employment remain important. creation and training programs, Thailand’s relatively flexible labor markets have helped mitigate the impact Total wage bill bottomed out in August 1999 and is of the crisis. Interestingly, wage adjustments were now on an upward trend. Total wages paid are a more severe among educated workers than better measure of workers’ welfare than the uneducated workers. unemployment rate. For instance, while the Thailand Economic Monitor 18 unemployment rate was falling between August 1998 Fiscal Policy and August 1999, total wages paid continued to decline. Since 1999, however, total wages paid started Fiscal policy continues to support the recovery. to grow again (Figure 17). Although data on wages The overall public sector deficit (including interest for the LFS February 2000 round are not yet cost of financial sector restructuring) for year FY00 is available, preliminary estimates suggest that total projected to be around 7 percent of GDP and is wages paid may have grown by 1.3 percent between expected to contribute around 1 percentage point to February 1999 and February 2000. This not only economic growth. The deficit for January-March 2000 reflects the expansion in employment, but also a has been in line with the target (in March the smaller contraction in average real wages as budgetary deficit amounted to Bt 4.9 billion). compared to February 1999 (Table 7). Despite the However, there is a downside risk of a shortfall in the recovery, however, real wages remain below pre- overall deficit during the second half of this fiscal crisis levels. year. To date, total revenue has been in line with expectations, with consumption-based taxes offsetting shortfalls in income tax receipts and non-tax revenue. MACROECONOMIC POLICY AND Fiscal consolidation is expected to start in the next fiscal year and will need to be carefully aligned with THE REAL ECONOMY the strength of the recovery in the real sector. If there are signs that the recovery is slowing down, fiscal Key Developments consolidation may need to be delayed. • Given low inflation and a substantial output gap, While the public debt has increased and will need macroeconomic policies continue to support to be carefully managed, it is sustainable. As of recovery. March 2000, Thailand’s public debt had increased to close to 55 percent of 1999 GDP according to the • Public expenditures have played a key role in the Royal Thai Government estimates (including Bt 500 recovery process. Once recovery has fully firmed billion issued to cover FIDF debt and additional 776 up, fiscal policy will need to be consolidated. billion of currently outstanding FIDF liabilities). • Thailand is modernizing its public debt While existing FIDF liabilities are included in March management capacity to reduce risks and costs 2000 public debt figure (Table 10), only current and associated with public debt. future net losses will impact the central government budget. MOF and BOT estimates place these losses • While the public debt has increased and will need in the range of Bt 800-1,200 billion. to be carefully managed, current levels are sustainable, if the growth momentum is Table 9: Public Debt in Asian Countries (%GDP) maintained, and the agenda on public sector 1996 1999 reform is accelerated. Indonesia 32.3 86.7 Table 8: Public Deficit in Asian Countries, 1999 Korea 14.0 41.0 (%GDP) Malaysia 35.6 41.5 Total Primary Source: JP Morgan Thailand -7.0 -3.4 Indonesia -4.8 1.6 Experience from other countries shows that the cost Korea -2.6 -1.1 of financial sector restructuring depend on a number Malaysia -4.5 -1.3 of factors including the strength of future economic Total fiscal balance includes interest cost of financial sector recovery, and recovery rate of assets. Even under a restructuring for Thailand. worst case scenario, preliminary analysis suggests that Thailand’s public debt dynamics are sustainable, Thailand Economic Monitor 19 provided the growth momentum is maintained and the Finance and the Bank of Thailand with support from reform program is on track. the World Bank are currently working together to increase efficiency in public debt management. This Table 10: Public debt as of March 2000 implies not only improving coordination and Baht information-sharing mechanisms, but also developing Billion and implementing an action plan to increase Central Government debt 983.2 institutional capacity in PDMO. Updated information Guaranteed SOE debt 698.4 systems and targeted training programs for staff are Non-Guaranteed SOE debt 139.2 critical elements of this action plan. FIDF outstanding liabilities (a) 776.8 Total public sector debt 2,597 Source: Ministry of Finance Monetary Policy (a) as of December 1999 The BOT has maintained an appropriate Table 11 shows the size of the primary fiscal balance monetary stance. Despite an accommodative that the Government will need to generate to stabilize monetary stance, however, bank credit has not picked the public-debt-to-GDP ratio, under different up. Indeed, given high levels of NPLs and a weak assumptions on the gap between the real GDP growth corporate sector, only limited investment rate (g) and the real interest (r) paid on debt. Even opportunities with reasonable risk-adjusted rates of under a worst case scenario, assuming that the fiscal return are seen by domestic banks. cost of financial sector restructuring turns out to be higher than currently projected, with public debt Table 12: Nonperforming Loan Estimates* peaking at 65 percent of GDP, debt dynamics is (% of total loans) sustainable. If real interest rates were to exceed real Peak1 Latest estimates1 Transferred2 GDP growth by 1 percentage point, Thailand will be Thailand 46.8 38.2 Feb. 00 0.0 able to stabilize its debt-to-GDP ratio at 60 percent by Indonesia 70.0 30.0 Apr. 00 47.0 running a surplus of 0.2% of GDP on the primary Korea 25.0 11.3 Dec. 99 13.2 fiscal balance, net of seignorage revenue. To lower Malaysia 24.5 11.3 Feb. 00 13.0 the debt-to-GDP ratio further to 40 percent, it will * Official data and J.P. Morgan estimates 1 NPLs in the banking system. need to generate a surplus on the primary balance of 2 NPLs transferred to public asset management and bank around 3.4 percent of GDP. Once recovery has restructuring agencies (excludes NPLs assumed by Thailand’s cemented, fiscal consolidation should receive a high Financial Restructuring Agency during the closure of 56 finance priority. companies in 1997 ) Source : JP Morgan Table 11: Long Run Fiscal Sustainability Target for the total public Primary Balance (as % of Inflation is not a risk. High oil prices, and a sector debt to GDP ratio by GDP) required to stabilize shrinking output gap, over time, could add year 2010 (%) debt. inflationary pressures. Nonetheless, given low g-r= g-r= g-r= g-r= -1% 0% 1% 2% commodity prices and low capacity utilization, 60 0.18 -0.82 -1.78 -2.7 forecasts suggest that inflation in year 2000 will not 50 1.8 0.84 -0.07 -0.96 be above 3 percent. Tentatively, the Government has 40 3.43 2.51 1.63 0.78 set an inflation ceiling of 3.5 percent for the medium “i� is real interest rate, and “g� is real GDP growth term. Assumes seignorage revenue of 1% of GDP equal to the average for the period 1980-1995. Seignorage revenue is defined as (Base money/GDP)*Nominal GDP growth Source: Staff calculations Government is working towards strengthening capacity to manage public debt. The Ministry of Thailand Economic Monitor 20 provisions are calculated net of collateral value, which comprises about 55 percent of current loss FINANCIAL SECTOR REFORM coverage. This collateral, about 90 percent of which is property, appears to have not been Key Developments marked to market, given the uneven quality of valuation in Thailand. Banks are currently using a • Non-Performing Loans (NPLs) are declining collateral coverage ratio of between 40-70 percent slowly across all sectors. Reported NPLs could of NPLs when calculating year-end 2000 reach 35 percent of total loans by the end of 2000 provisions. if net NPLs continue to decline at the rate of 1.5 percent of total loans per quarter. If NPLs • Bank portfolios may be valued more rigorously transferred to Asset Management Companies next year due to steps taken by leading banks to (AMCs) are excluded from the total, NPLs could obtain clean opinions from their external auditors. reach 22.5 percent of total loans by year-end. Most banks have qualified audit opinions today, given that they have not valued their portfolios • However, the pace of NPL reduction may slow according to audit standards. down next year as less complex cases have been already restructured or rescheduled (see section • An important step that the government could take “Corporate Restructuring�). As of December would be to reduce the time it takes to foreclose 1999, 88 percent of classified loans (more that 3 collateral from years to months. This would months delinquent, including write-offs) were promote more equitable burden sharing by more than one-year overdue (“doubtful loss� borrowers in troubled debt situations, facilitate classification). voluntary negotiations, and speed the clearing of NPLs off bank balance sheets. • Banks are capital constrained and are concerned that their borrowers are not recovering as hoped. • Banks have started to show positive operating In order to avoid write-offs, banks may continue profits (before provisions), given positive spreads to reschedule loans (term extension plus grace and the progress in loan restructuring. periods, without net present value reduction), instead of restructuring them such that the • Unfortunately, corporate interest coverage borrower’s underlying cash flows can cover the (EBITDA/interest expenses) has not improved for debt service. This could lead to multiple SET-listed companies over the past two quarters, restructuring events for the same accounts, which may be due in part to seasonality. This, incremental loss recognition and more rounds of coupled with real interest rates in the 7 percent bank recapitalization over time. Larger, range and exposure to rising US rates, means that syndicated loans with foreign creditors under NPL re-entry may increase in the future. CDRAC monitoring are being restructured in a higher quality fashion. • Loans outstanding continued to decline. The ratio of total loans to GDP has dropped from a peak of • Banks are expected to meet year-end 2000 139 percent at the end of 1997 to 113 percent at provisioning requirements. Private banks need the end of 1999. Excess capacity, excess leverage only Bt 21 billion additional tier-1 capital to meet in the real sector, and dis-intermediation could the BOT’s year-end 2000 provisioning suppress loan growth to below GDP growth over requirement. the next few years. However, weak financial institutions do not seem to have been a constraint • More pessimistic assumptions on NPL, recovery on growth so far; creditworthy borrowers have rates suggest that recapitalization needs may be access to credit from banks and the bond market. much higher. From the regulatory standpoint, Going forward, a broad-based recovery will Thailand Economic Monitor 21 require further strengthening of the financial Institutions Act,� aimed at modernizing the sector. regulatory framework, will likely be delayed until after the elections. A task force is developing an • The BOT announced that the sale of Bangkok enhanced supervisory regime for financial Metropolitan Bank (BMB) to Hong Kong and conglomerates, which are formalized under the Shanghai Bank Corporation (HSBC) is to be draft law. finalized soon, but the Government is revisiting its plan to sell Siam City Bank (SCB), as is, given • Independence of the Central Bank as the bank the lack of competition among bidders. supervisor and monetary authority is under debate in the draft “Central Bank Act.� The MOF and the • While foreign banks and so-called hybrid banks BOT have agreed on a transfer of about US$3.4 still have low market share in assets billion of foreign reserves from BOT’s accounts (approximately 10 percent including BMB, to cover a portion of FIDF’s losses from financial excluding SCIB), they have branch networks for sector restructuring. the first time and can compete directly with Thai banks. Several foreign and hybrid banks aim for A Market Led-Decentralized Approach to the retail and middle markets, as well as the large corporate customers. The requirement to support Financial Sector Reform two cost bases, the existing distribution system The objective of the government’s reform of the Thai plus a new virtual or e-bank delivery system, financial sector is to enhance the competitiveness of favors the foreign banks. A shakeout may be productive enterprises as they emerge from the crisis expected in five years from these competitive and compete in the global market. More efficient forces. In response, several banks have announced intermediation and the allocation of savings to the major cost-cutting initiatives. most productive investments are prerequisites to a competitive Thailand. • In a positive development, the Cabinet approved the establishment of an AMC, owned by the The Thailand financial sector program comprises a FIDF, to manage Krung Thai Bank (KTB)’s sizable reform agenda to restore financial sector NPLs. soundness. Given the close linkages, corporate debt restructuring and capital market development are vital • The Financial Sector Restructuring Authority complements to the comprehensive financial sector (FRA) continues to dispose of the remaining non- restructuring strategy. The major objectives of the core assets and will start to distribute proceeds in financial sector program in Thailand include: June 2000. The AMC, set up as the bidder of last resort for FRA assets, reports that it has restructured Bt 144 billion of its assets. • Resolving the finance company sector, restructuring and recapitalizing viable financial • Primary bond issues by firms increased in Q1 institutions and restoring confidence to facilitate 2000, before implementation of the SEC’s new new lending into the real sector; requirement that all debentures must be rated. The • Facilitating corporate debt restructuring and SET and the SEC are considering measures to upgrading the legal framework for bankruptcies promote utilization of the domestic stock market, and secured lending; given that many firms find listing requirements • Strengthening the supervisory capacity of the onerous in the context of lax governance and Bank of Thailand, the Securities and Exchange disclosure requirements for unlisted firms. Commission and the Department of Insurance; • Increasing market discipline and corporate • Supervisory capacity of the BOT continues to be governance of financial institutions; and strengthened. The passage of the new “Financial • Building capital markets. Thailand Economic Monitor 22 Table 13: List of Asset Management Companies in Thailand Face value of NPLs Transfer price Purpose Established (Bt mn) (a) Private AMC TFB 61,000 50% manage worst category of NPLs Completed PHATRA 40,000 Book value after manage NPLs of TFB’s subsidiary Completed Provision SCB 26,000-30,000 50% manage NPLs Planned BBL 500 Book value manage foreclosed properties Already set up / (registered capital) expect to operate in July 2000 TMB 50,000 n.a. manage NPLs Planned (b) Public AMC BBC 80,000 Book value government subsidized AMC Completed UOB 45,000 Book value government subsidized AMC Completed KTB 530,000 80%* government subsidized AMC Expect in Q3 2000 AMC 197,000 17% auction assets from the FRA Completed * Merrill Lynch Phatra’s estimate Table 14: Flow of NPLs as a Percentage of Loans Oct-99 Nov-99 Dec-99 Jan-00 Feb-00 Mar-00 Monthly 4Q 99 1Q 00 Average Increase in NPLs New NPLs 0.8% 0.9% 0.8% 0.7% 0.5% 0.6% 0.7% 2.5% 1.8% Reentry NPLs 0.2% 0.1% 0.3% 0.2% 0.2% 0.3% 0.2% 0.6% 0.7% 1.0% 1.1% 1.0% 0.9% 0.7% 0.9% 0.9% 3.1% 2.5% NPL Reduction Debt Restructuring 1.0% 1.0% 2.8% 0.6% 0.8% 1.3% 1.3% 4.7% 2.8% Others 1.5% 1.8% 3.0% 0.4% 0.4% 0.7% 1.3% 6.4% 1.5% 2.5% 2.8% 5.8% 1.0% 1.3% 2.0% 2.6% 11.1% 4.3% Net NPL Reduction 1.5% 1.7% 4.8% 0.1% 0.6% 1.1% 1.6% 8.0% 1.8% AMC 0.8% 1.0% 0.8% 0.0% 0.0% 0.0% 0.4% 2.5% 0.0% Net NPL Reduction (w/o 0.7% 0.7% 4.0% 0.1% 0.6% 1.1% 1.6% 5.5% 1.8% AMC) Source: The Bank of Thailand Thailand Economic Monitor 23 Thailand’s reform program should be Q1 2000, new NPLs continued to enter into system, differentiated from other programs in the region. but at a slower pace (1.8 percent of total loans) than The magnitude of Thailand’s peak NPLs as a in Q4 1999 (2.5 percent of total loans). The percentage of total loans is larger that in Korea or magnitude of re-entry NPLs in Q1 2000 was similar Malaysia, though less than Indonesia. In those (0.7 percent of total loans) to the Q4 1999 (0.6 countries, central governments vested new public percent) (Table 14 and Figure 18). institutions, to resolve corporate debts and restructure banks. Thailand did the same for the finance NPLs have declined across all sectors2. The import companies, which were the first hit by the crisis, but sector experienced the lowest reduction of NPLs, which represented a small part of the overall losses in perhaps because imports were severely affected by the the system. However, for banks, which went into Baht depreciation in 1997. Even so, NPLs in the crisis later, the Thai Government has followed a import sector dropped 15 percent from June 1999 to market-led, decentralized approach to reform, which March 2000. The sector with the best performance is appropriate to the country situation. has been personal loans; in March 2000, those NPLs dropped 34.5 percent from the June 1999 level Figure 18: Headline NPLs are falling (Figure 19). The bias resulting from the exclusion of NPLs transferred to AMCs from reported sectoral 100 50% NPLs is small given that only 3 percent of NPLs have been transferred to AMCs to date. However, the data 0 45% will be biased further once KTB transfers NPLs to its Billion Bt AMC. A closer look at new NPLs by sector during (100) 40% January to March 2000 showed that new NPLs in the mining and service sectors as a percentage of the (200) 35% sectors’ loans were among the highest, while the (300) 30% utilities, banking (interbank, lending to bank subsidiaries, etc.) and construction sectors have been Aug-99 Jun-99 Feb-00 Apr-99 Dec-99 Oct-99 among the lowest. Incremental NPLs (LHS) Table 15: NPL Ratio Forecast at the End 2000 Incremental Loans (LHS) NPL Ratio (RHS) March NPLs (incl. AMCs) 39.84% NPL Ratio w/ AMCs (RHS) Est. Net NPL reduction in the next 3 (4.50%) Source:The Bank of Thailand quarters* Est. NPLs at end-2000 (including AMCs) 35.34% Restructuring of the Banking Sector AMCs to be established** (10.20%) Existing AMCs (2.59%) NPLs are declining slowly. The BOT reported that Est. NPLs at end-2000 excluding AMCs 22.55% NPLs of financial institutions as of March 2000 * based on estimated net NPL reduction of 1.5 percent per quarter ** AMCs which are expected to establish before year end. amounted to Bt 1.99 trillion (37 percent of total loans), 10.5 percentage points lower than the peak in May 1999. If NPLs transferred to AMCs were included, reported NPLs would reach Bt 2.13 trillion 2 (39.8 percent of total loans), 8 percentage points The BOT has recently relaxed the criteria by which restructured lower than the peak. Net NPLs reduction in Q1 2000 loans are removed from NPL status. Today, any new restructuring (1.8 percent of total loans) was less than Q4 1999 (8 agreement qualifies for NPL exit without any track record for repayments or other quality control. This raises questions about percent of total loans), mainly due to slower how many restructured loans may become NPLs once again. completed restructuring (2.8 percent of total loans in Since the revised NPL definition is more lenient than before, Q1 2000 versus 4.7 percent of total loans in Q4 1999) caution needs to be exercised regarding NPL existing under the and accelerated activity for year-end accounting. In revised definition so as to pre-empt their returning as NPLs in future. Thailand Economic Monitor 24 Figure 19: Sectoral NPLs borrowers are not recovering as hoped, which means more rounds of recapitalization. Resolution of non- Trillion Baht restructurable NPLs relies heavily on efficient Mar-00 NPLs to Jun-99 NPLs 0.7 90% foreclosure and liquidation processes, both of which 0.6 85% 80% take years. The post-judgement administrative 0.5 Winner 75% process for foreclosure should be streamlined so that 0.4 70% the process does not take more than a few months. 0.3 Laggard 65% 0.2 60% 0.1 55% Figure 20: Classified Delinquent Loan Breakdown 0.0 50% Commer Utilities Export M ining Bank Import Real est NPLs Agri Const Serv Indus Pers 100% Jun-99 NPLs (LHS) 80% More than 12 mth overdue (incl.write-off) Mar-00 NPLs (LHS) Doubtful loans Mar-00 NPLs to Jun-99 NPLs (RHS) 60% Substandard loans Source: Bank of Thailand 40% If NPLs continue to decline at the rate of 1.5 20% percent of total loans per quarter, reported NPLs should drop to 35 percent of total loans by the end 0% All State All Private BBL UOBR BMB SCIB SCB BOA BAY NTB KTB TMB TFB DTDB BankThai of year 2000. If NPLs in existing and proposed AMCs are excluded, reported NPLs could go down to 22.6 percent by year-end. Our projected rate of NPL reduction (1.5 percent per quarter) is lower than the Source: Bank of Thailand rate of NPL reduction during last two quarters (1.8 percent of total loans in Q1 2000 versus 8 percent of Recapitalization continues. Four banks have total loans in Q4 1999) (Table 15). We assume that announced plans to raise capital amidst negative the easier restructuring cases have been addressed, sentiment from international investors. Thai Military and the more complex cases remain, thus slowing the Bank (TMB) needs to raise capital to meet the pace of restructuring in the next year. While banks provisioning schedule under the BOT’s forbearance have so far incurred only small net present value program. Of Bt 30 billion raised, Bt 20 billion came reductions (0-10 percent) from loan restructuring, from the government’s capital support program and Bt they are likely to face larger haircuts going forward, 10 billion from the private capital market. TMB is when more difficult cases are restructured. The targeting local investors to capture excess liquidity in breakdown of classified loans supports these the system. TMB’s capital raising is made possible assumptions: 88 percent of the remaining classified by enhancements to the government’s capital support loans below substandard as of December 1999 were program. Innovative capital instruments (SLIPS and more than 12 months past due. CAPS) are now permitted as matching private capital for the governments’ stake, which means that private The pace of NPL reduction will depend on investors will receive two warrants (instead of one) sustainable economic recovery and a supportive for each share purchased. Each warrant will entitle interest rate environment. Real interest rates are in the private investors to buy one of the Government’s the 7 percent range, a further rise in Thai interest rates new shares for Bt 11 at any time during the next three would be a blow to borrowers. In addition, the years. Other banks acknowledge that they will have to magnitude of non-restructurable cases (non-viable raise more capital beyond prudential requirement if borrowers) is unknown, but depends in part on the recovery continues at the current pace. sectoral economic recovery. Banks which have recapitalized have expressed concern that their Thailand Economic Monitor 25 More banks reported positive pre-provision major step forward towards restructuring the banking profits, but their sustainability depends on funding system. On the other hand, the privatization of Siam costs and economic conditions. Contributions to City Bank has been delayed, since the price offered by operating profits in Q1 2000 came from net interest bidders is considered too low. Bank Thai, which was income, primarily due to the fall in funding costs. For created through the merger of a failed bank and a private banks, funding costs have dropped from 5.1 dozen finance companies, plans to raise capital in H2 percent in Q1 1999 to 3.5 percent in Q1 2000, while 2000 after its proposed yield maintenance and loss interest yields have dropped from 5.6 percent to 5.1 sharing scheme has been approved by the BOT, MOF, percent over the same period. The recovery in Thai and the Cabinet. If successful, its planned capital banks’ earnings may carry on because (1) continued increase would reduce the FIDF’s stake to 49 percent, NPL restructuring might improve their spread (debt which would release the bank from rules governing restructuring is resulting in more income, albeit at state enterprises, and would give management a concessional rates); (2) costs, especially personnel chance to compete effectively. costs, are being cut; and (3) banks will slow their provisioning once they meet the BOT’s year-end 2000 Figure 21: Loan to GDP and Capacity Utilization requirement. However, the magnitude and 145% Capacity Utilization (RHS) 80% sustainability of their earnings recovery depends on Total Loan to GDP (LHS) the degree to which Thai funding costs are immunized 140% 75% from increases in interest rates, the economic outlook 135% 70% (net NPL flow) and on the BOT’s policy regarding 130% continued forbearance on loss recognition (e.g., 65% 125% allowing provisions to be calculated net of inflated 60% 120% collateral values). 115% 55% 110% 50% Loan volume declined further. Total loans (banks Jun-98 Jun-99 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Feb-00 and finance companies) as of end 1999 declined 20 percent from the 1997 peak. However, in 1999 loans decreased at a slower rate than the decrease in 1998 Source : Bank of Thailand (at 7 percent per year versus 13 percent). The loan-to- GDP ratio declined to 113 percent in 1999 from 139 The first step in Krung Thai Bank’s (KTB) percent in 1997 (Figure 21). This reduction reflects restructuring was endorsed by the Cabinet. The de-leveraging by Thai companies and write-offs of Cabinet has approved the FIDF’s proposal to set up its bad loans by banks (total Bt 185 billion loans were wholly owned asset management corporation (AMC) written off in 1999). Because of the undeveloped to buy Bt 537 billion NPLs from KTB (FBCB: Bt 232 secured lending regime in Thailand, property is the billion; KTB: Bt 305 billion). The purchase price was dominant source of collateral for loans, so loans to the set such that KTB will be adequately capitalized, but tradable sector are most often secured by assets from uncovered losses will be transferred to the AMC and the non-tradable sector, where demand is low and will be recognized over time. KTB will receive a Bt values are uncertain, further constraining loan growth. 328 billion five-year AMC note from the FIDF. The Continued de-leveraging by domestic companies and amount of AMC note is net of Bt 108 billion capital, financial dis-intermediation from the bond market which KTB will have to return the FIDF. The may restrain loan growth below GDP growth. transaction will reduce FIDF’s stake in KTB from 93.5 percent to 87.2 percent. After the transfer of Developments in the State Agencies NPLs to an AMC, KTB’s NPLs will go down to 16.5 percent (from 57 percent), and its tier-1 capital will be The BOT is expected to finalize the sale of 9.56 percent. The AMC will be established with Bt 25 Bangkok Metropolitan Bank (BMB) soon. The sale million initial capital. The establishment and transfer of BMB will minimize the public burden, and is a of NPLs to AMC will be finalized in Q3 2000. The Thailand Economic Monitor 26 FIDF plans to engage professional, third party asset Bt 52 billion assets consist mostly of commercial managers with proper incentives to maximize returns loans, which have proven to be more difficult to to the taxpayer on the AMC’s assets. resolve. AMC management plans to manage down its assets in five years. Core assets have been sold, and the FRA plans to complete sales of non-core assets by year-end. The Table 16: Financial Sector Restructuring remaining value of non-core assets of the failed Authority Auction Results (Core Assets) finance companies is not believed to be significant. Bid Date Core Assets Book Recovery Thus far, proceeds from non-core asset auctions total Value Bt 34 billion and proceeds from the sale of core assets (Bt (Bt % are Bt 152 billion (25 percent of outstanding principal Billion) Billion) balance). Details for all sales are summarized in Table 25-Jun-98 Auto hire 51.8 24.9 48.0% 16 and Table 17. Creditor claims have been purchase adjudicated for approximately 50 finance companies, contracts and they plan to complete that process by mid-year. 13-Aug-98 Residential 24.6 11.5 46.8% However, the FRA is facing some legal challenges mortgage loans regarding the distribution of proceeds. Some 15-Dec-98 Business loans 155.7 39.0 25.0% creditors have sought court judgements for full (1st Round) repayment, instead of their prorata share based on the 19-Mar-99 Business loans 221.5 40.3 18.2% (2nd Round) relative amount of each creditor’s claim. Therefore, 6-Jul-99 Construction 1.3 0.2 12.2% the FRA has filed bankruptcy petitions against those loans particular finance companies to pre-empt possible 11-Aug-99 Commercial & 129.0 31.0 24.0% judgements for other than prorata distribution of other loans (1st) proceeds. At the FRA’s request, the Council of State 11-Nov-99 Commercial & 16.3 5.4 32.9% is reviewing whether the FRA can distribute proceeds other loans (2nd) to creditors on a prorata basis before petitioning for Total 600.2 152.2 25.4% receivership of each finance company. Another Source: Financial Sector Restructuring Authority challenge is the distribution of collateral for syndicated loans which is co-owned by separate Capital Market Development purchasers of auctioned assets. So far, voluntary negotiation has worked. There are over 200 cases still The BOT is leading a task force within the to be negotiated. Domestic Bond Market Committee to reduce counterparty risk in the system to settle bond According to management, the Asset Management trades. Bahtnet 2, an automatic delivery vs. Corporation (AMC) has restructured or resolved a payments settlement system, is under development. total of Bt 144 billion assets, which is 73 percent of This will allow the anonymous market system to its total portfolio of Bt 196 billion (outstanding function by eliminating counterparty risk, which was principal balance). The AMC was established to be a the downfall of the market when the crisis broke. In bidder of last resort for auctions of assets from the addition, the Revenue Department is identifying tax failed finance companies by the FRA. Most resolved impediments to the derivatives and bond market, and cases were property loans. 30 percent of total plans to make recommendations to eliminate those restructuring year to date were settled by transfers of impediments this year. property by the debtors to the AMC (deed in lieu of foreclosure). The AMC will allow debtors to Debenture issuance by domestic corporations continue to manage the properties if the projects continues to be active in Q1 2000. Domestic appear feasible. Other restructuring methods include companies have raised Bt 67 billion worth of debt to equity swap (9 percent), maturity extension (9 debentures in Q1 2000 versus Bt 59 billion in Q4 percent), and legal action (10 percent). The remaining 1999. Q1 activity was prompted by a new SEC rule, Thailand Economic Monitor 27 Table 17: Summary of Non-Core Asset Sales foreign investors; (2) allowing for dual or multiple (as of March 30, 2000) listings; (3) allowing securities companies to invest Bid Price overseas; and (4) introducing new hedging Non-Core Assets (Million instruments. The new Derivatives Act is to go before Baht) the Parliament in July. In addition, the SET approved Repossessed automobiles and a yacht 1, 439 in principle the termination of the fixed par value Other requirement at Bt 10 per share for listed companies to - Golf club memberships 32 boost the number of tradable securities. This proposal - Mobile phones, pagers, books 6 is under review by the SEC. To promote new listings, - Art objects 59 the SEC proposed to reduce requirements for new - Furniture, office equipment and 420 listings on both the SET and the MAI (the Market for computers Alternative Investment). In addition, many unlisted - Mini computer 3 firms under report income in order to avoid taxes. In Real estate 2,430 order to attract them to the SET, the SEC has Capital Investments proposed a tax amnesty on past performance for newly listed companies. - Government securities 18,085 - Listed securities 2,127 - Non-listed securities 1,954 Supervisory Regime - Mutual fund unit trust 1,971 - Corporate debentures and convertible 6,292 The Draft “Financial Institution Law� was debentures approved by Cabinet and the Council of State in Total non-core assets sold 34, 818 Q1 2000. The Cabinet’s approved version does not Source: Financial Sector Restructuring Authority materially differ from the BOT’s version. The draft law will consolidate laws governing banks, finance which requires that after April 2000, all debentures, companies and credit fonciers. The emphasis of the including those offered through private placement, draft law includes financial liberalization, must be rated by a credit rating agency. Previously, strengthened supervision, prompt corrective action, the SEC required a rating for only public offerings. and improvement in disclosure and corporate The soaring activity in the primary market has been governance. The draft law is awaiting final cabinet driven by increased demand for fixed income endorsement, after which it will be submitted to the instruments at the long-end of the yield curve. lower House for the first reading. This draft law, the Competing yields from bank deposit rates are draft “Bank of Thailand Act� and the draft “Currency historically low (3-4 percent). On the supply side, Act� are moving through the legislative process firms are refinancing their current borrowings. together. The draft “Deposit Insurance Act,� which Although debenture issuance by private companies would replace the blanket guarantee with limited has soared, government issues still dominate the depositor protection, has been held until market domestic bond market. As of March 2000, confidence is fully restored. One problem, however, government bonds made up of 49.6 percent of a total is that the exit procedures outlined in the draft of Bt 1.4 trillion outstanding issues. Bt 500 billion in “Deposit Insurance Act� were not transferred in FIDF refinancing bonds accounts for the largest whole to the “Financial Institutions Law� for actions portion. in the interim. Another problem is that clauses which remove impediments to mergers and acquisitions of The SEC and SET are promoting the domestic financial institutions were removed in favor of a stock market. Their aim is to enhance the future general revision to the legal regime for mergers competitive edge of the Thai stock market in response and acquisitions for all firms. However, such to globalization. Their proposal promotes both the revisions to the legal framework outside of the draft demand and supply side by: (1) merging the foreign “Financial Institutions Law� will take some time, and board with the main board to increase flexibility for Thailand Economic Monitor 28 market-led consolidation of the banking industry is Table 18: Supervision Responsibility imminent. Roles Commercial Banks SFIs The BOT is reengineering its supervision function, Private State with the assistance of a management consultant banks banks and professional supervisors from the US. Risk- Mandate Shareholders MOF/CG MOF/CGO* focused supervision is replacing transaction testing. O* A commissioning process and training courses for Enforcement BOT MOF MOF to BOT examiners has been established. Offsite reporting and Prudential / BOT BOT MOF to BOT on-site supervision processes are being revamped Supervision Examination BOT BOT BOT according to best practice in the Thai context. * CGO = Comptroller General Office Information system supervision is being developed. SFI = State Financial Institutions A complete listing of technical support to the financial and corporate sectors by all partners to the The Financial Services Task Force is now focusing Thai authorities is available on the web at on the medium-term strategy for the finance www.worldbank.or.th/ta/. company sector and the capital market. During the crisis, the finance companies were hardest hit, and The Ministry of Finance has formed a Task Force have undergone substantial consolidation, from 91 to on the Supervision of Financial Conglomerates. 20 companies. This consolidation is likely to For the first time, the MOF has brought together continue as a result of their competitive disadvantages representatives from all supervisory agencies, vis-a-vis banks, given that leasing, now the exclusive including the Bank of Thailand, the Securities and territory of finance companies, will soon be opened to Exchange Commission, the Department of Insurance, banks as well. Even though the existing market share the Auditor General, the Comptroller General’s of finance companies in the loan market has declined Department (MOF) and the Fiscal Policy Office from 25 percent pre-crisis to below 5 percent today, (MOF), to establish arrangements for supervision of the remaining firms pose a potential challenge to the financial conglomerates. The draft “Financial regulator. In response, the BOT is proactively Institutions Law� allows financial firms to own other evaluating its strategic options going forward. The financial firms as subsidiaries, and also allows a SEC is preparing a medium-term strategic plan for the holding company structure. Currently, links among capital market, which will be incorporated into the financial institutions occur through cross ownership recommendations of the Task Force to the Ministry of and control by family shareholders, but banks can Finance. hold only up to 10 percent of another financial firm, with exceptions granted on a one-off basis. Under the Challenges Ahead draft law, equity investment by banks in non-financial firms would be limited. To aid coordination, the Given the improvement in external balance, authorities are considering whether to move the monetary policy should continue to accommodate insurance regulator from under the purview of the financial and corporate sector restructuring. Ministry of Commerce to the purview of the Ministry Although real interest rates have come down from the of Finance along with the BOT and the SEC. In its peak in mid 1999 to slightly below the pre-crisis level early deliberations, the Task Force is favoring (Figure 22), the current level of real interest rates decentralized examination and supervision by appear relatively high. While the current level of real separate, specialized supervisory agencies, which will lending rates is below the pre-crisis level (7.16 share risk analysis on the different businesses within percent versus 7.76 percent), given the current each financial conglomerate. economic conditions, real lending rates are not low enough to stimulate demand. Unfortunately, domestic interest rates appear to be at their bottom, given rising US interest rates. An increase in interest rates at this Thailand Economic Monitor 29 point in a fragile recovery could trigger an increase in court’s capacity to support a larger volume of cases new NPLs and the re-entry of previously restructured would also contribute to enhanced credit culture. NPLs, as well as complicating debt restructuring negotiations. In addition, any increase in bank Figure 23 : Real MLR funding costs would compress already weak margins, given that most borrowers cannot afford higher 25 Deflated by CPI lending rates. Deflated by WPI 20 Loss sharing among all stakeholders should be 15 Percent more fairly distributed. The burden of financial 10 sector restructuring has been most heavily borne by 5 taxpayers and both existing and new shareholders of 0 financial institutions (creditors). Depositors are -5 protected by the government’s guarantee, but they Aug-98 Aug-99 Jun-98 Feb-99 Jun-99 Feb-00 Dec-98 Apr-99 Dec-99 Oct-98 Oct-99 bear the cost of reduced return on their deposits. The weak legal and administrative regimes for bankruptcy and debt collection allows defaulted debtors to avoid Source: BOT and Staff Calculations sharing losses. Good debtors are being penalized by paying high real lending rates on their debt, charged The domestic capital market should enable banks by banks to cover the NPLs in their portfolio. Due to to finance their near-term capital requirements, weak penalties, debtors are incentivized to default on but recapitalization beyond that level may require their loans. This uneven burden sharing harms credit a supportive policy. As of December 1999, banks culture and overall economic performance. Instead, have already set aside 69 percent of the provisions losses should be re-distributed more evenly so that required for the end of year 2000, and their tier-1 defaulted debtors, not performing debtors, are capital was 8.5 percent. Private banks’ provisions penalized by rapid and transparent enforcement of the were 82 percent of the year-end 2000 standard; state loan contract. In addition to a strengthened CDRAC, banks’ provisions were 60 percent of that level (See an effective tool to speed debt resolution would be to Table 19). To reach the full provisioningrequirement, state banks need Bt 232 billion while private banks Figure 22: Interest Rates 1997-2000 need only Bt 21 billion of additional tier-1 capital. Since the amount of additional capital required for 18.0 private banks to meet 2000 provision rule is not 16.0 Minim um lending substantial, the domestic capital market should be 14.0 rate able to finance their near-term need. However, more 12.0 Bank of Thailand pessimistic assumptions on NPL recovery rate will 10.0 increase the amount of private banks’ capital need by rate 8.0 ten fold. The domestic capital market may be able to 6.0 finance private banks’ recapitalization need beyond 4.0 Deposit rate the regulatory requirement, but only if such financing 2.0 occurs over several years. An extension of the 0.0 government’s capital support program as a last resort 97 ay p. . g. . g. . may be needed past the end of the year. r. r. ec ec ec Ap Ap Se Au Au M n- D D D Ja Source : Bank of Thailand streamline the legal regime for debt collection, such that the post-judgement administrative processes take months instead of years. In addition, expansion of the Thailand Economic Monitor 30 Table 19: Existing Reserve + Write offs to Total Required by Year 2000 Rule* (Billion Baht) Dec 99 Write off (1) + (2) = (4) 2000 (3) / (4) Recap Loan (2) (3) Required Need for Reserve Reserve* 2000 (1) Rule* Private banks 294 152 446 546 81.75% 21 Bangkok Bank 167 3 170 208 81.98% 7 Thai Farmers Bank 24 79 102 109 94.27% 0 Bank of Ayudhya 27 4 31 42 73.56% 0 Siam Commercial Bank 19 64 83 96 86.62% 0 Thai Military Bank** 21 1 22 41 53.45% 12 DBS Thai Danu Bank 19 2 20 25 80.37% 2 Bank of Asia 18 0 18 26 68.50% 1 State banks*** 435 26 461 770 59.89% 233 Total Domestic Commercial Banks 729 178 907 1,316 68.96% 254 Source: Annual Reports * Assume 100 percent required reserve for substandard and doubtful loans ** TMB already raised Bt 30 billion in Q2 2000 *** Include privatized banks, whose losses in next 5 years are to be shared by the state under the sharing agreement. *** Before KTB’s AMC A financing plan for the losses of the Financial Institution Development Fund (FIDF) is under CORPORATE RESTRUCTURING development. The FIDF estimates that the future value of its net losses in the next 5 years ranges Key Developments between Bt 800-1,200 billion (US$ 21-31 billion), in • Restructuring is still concentrated in large addition to the Bt 500 billion (US$ 13 billion) of corporate firms. Medium and small loans and FIDF refinancing bonds already issued by the their underlying assets are being restructured Government. The range of estimated losses is driven slowly, and markets for distressed assets are not by different assumptions on asset recovery rates (35 clearing. The corporate restructuring completion percent versus 45 percent) and the inclusion or ratio (debt restructured as a ratio of size of NPLs) exclusion of Bt 20 billion annual fees paid to FIDF by is high for services and export sectors and financial institutions. The BOT has agreed with the relatively low for the construction, real estate and MOF to finance Bt 132 billion losses by using manufacturing sectors. “excess� foreign reserves held by the BOT, after the passage of the Central Bank Act and the Currency • The first quarter of 2000 saw a slow down in both Act. However, the MOF has not yet clarified the the number of cases and the value of debt financing plan for the remaining losses of the FIDF. restructured as compared to the fourth quarter of More than 60 percent of the FIDF’s liabilities are 1999. mostly funded inexpensively in the short-term market, • Additional medium-size cases were added to the but with high interest rate risk. Bank of Thailand’s CDRAC target program. At the end of April 2000, 32 percent of total debt by volume had been restructured under CDRAC. Thailand Economic Monitor 31 • Court-supervised business reorganization and Figure 25: Sectoral Corporate Restructuring liquidation petitions filed with the Central Completion Ratio Bankruptcy Court have increased in volume (Debt restructured as a ratio of size of NPLs) during the first quarter of 2000. Manufacturing 120 RE & Construction Exports • There is scope for improving both the pace and 100 Services quality of corporate restructuring. Financial leverage of firms still remains high and they are 80 Percent vulnerable to any future increases in interest rates. 60 40 Overall pace of the debt restructuring completion rate has slowed down in the first quarter of year 20 2000. During the first quarter 2000, Bt 213 billion of 0 Jun-99 Aug-99 Feb-99 Apr-99 Jan-00 Dec-98 Oct-99 debt was restructured as compared to Bt 309 billion during the fourth quarter of 1999. The decrease in the completion rate was expected as financial institutions usually accelerate restructuring at the end of the Source: Bank of Thailand accounting periods in June and December to report favorable NPLs. Completed restructuring varied across sectors. Restructuring completion rate is high in services and To date, 47 percent of total peak NPLs have been export sectors but relatively low in real estate restructured. At the end of March 2000, financial (including construction) and manufacturing sectors institutions increased the total completed debt (Figure 25). Improving economic conditions, lower restructuring by 52,579 cases from December 1999 to market interest rates, and increasing success of a total of 213,791 cases. The credit amount bilateral restructuring were the contributing factors to restructured over the same period increased by Bt 207 raise the completion rate, while limited domestic billion to a total of Bt 1.29 trillion. This represents demand and investment, and lack of FDI have been 47% of peak NPLs of Bt 2.7 trillion at the end of May the cause of slow restructuring in the affected sectors. 1999 (Figure 24). The reported progress also includes completed restructuring under CDRAC, which targets Figure 26: Stock Market Performance proactive restructuring of non-NPL cases. (Change between end-December 1999 – March 2000) Figure 24: Progress on Total Debt Restructuring Indonesia 1,400 60% Singapore 1,200 50% 1,000 Korea 40% Bt Billion 800 30% Malaysia 600 20% 400 Thailand 200 10% 0 0% -40 -30 -20 -10 0 10 20 Jul-99 Nov-99 Jan-99 May-99 Sep-99 Jan-00 Mar-99 Mar-00 % changes in stock market index Source: Stock Exchange of Thailand In Process Restructuring NPLs % of Loans Source: Bank of Thailand Thailand Economic Monitor 32 Figure 27: Changes in stock index by sectors, corporate cases (credit outstanding of Bt 2,272,198 Thailand million), and 6,460 small and medium sized cases (22 June 99 to 12 May 00) (credit outstanding of Bt 289,975 million). 80% Completed restructuring totaled 3,328 cases (Bt 811,817 million, or 32 percent of total credit 60% outstanding), of which 374 are large target cases (Bt 40% 768,781 million, or 33.8 percent of total 20% outstanding credit), and 2,954 are small to 0% medium cases (Bt 43,036 million, or 14.8 percent of -20% total outstanding credit). 1,732 cases (Bt 859,980 -40% million or 33.6 percent of total outstanding credit) -60% have failed the CDRAC process and have proceeded -80% to legal actions. Commu Agri Rehab Electro Bank Fin Prop SET Cases under CDRAC consist of NPLs, defaulted investments, and proactive restructuring of loans yet to be classified as NPLs. Therefore, the total Source: Stock Exchange of Thailand exposure under CDRAC is higher than the reported NPLs of the system. Since the crisis, most sectors have experienced a reduction in the debt-to-equity ratio. For example, the CDRAC is concerned with the slow progress of the debt-to-equity ratio for the construction sector fell small and medium-sized cases. At the end of April from 7 in 1997 to around 3 in 1999. Similar trends 2000, only 2,954 cases (Bt 43,036 million, or 15 can be observed in manufacturing and commerce. But percent of total outstanding credit) have been the level of debt-to-equity remains high, particularly restructured, while 452 cases (Bt 35,579 million) have in the construction sector (Figure 28). proceeded to legal action. (See Table 20). Figure 28: Debt to Equity Ratio by Sector, Thailand Court-Supervised Restructuring and constuction Liquidation 7 commercial 6 manufacturing Court-supervised debt restructuring has increased 5 in volume. Between January through March 2000, 14 business reorganization petitions (value over Bt 169 4 billion) were filed with the Central Bankruptcy Court, 3 a substantial increase from the total of 37 cases (value 2 Bt 363 billion) filed in 1999. In April, the number of filings increased to 15 petitions (value over Bt 140 1 billion). Liquidation petitions have also increased 1992 1993 1994 1995 1996 1997 1998 1999 during the first quarter of 2000. In 1999, 441 Source: Stock Exchange of Thailand petitions were filed (value under Bt 11 billion), while in the first quarter 2000, 240 petitions (value over Bt 10.7 billion) were filed. Court officials felt that CDRAC debtors and creditors have a better understanding of the bankruptcy law and are more confident in the More target cases have been added to CDRAC legal protection under the court system. More debtors Program. At the end of April 2000, target debtors are filing petitions to protect their businesses as out- under CDRAC totaled 9,142 cases (credit outstanding of-court direct negotiations with creditors proved of Bt 2,562,173 million), which comprised of 2,682 futile. (Table 21). Thailand Economic Monitor 33 Table 20: Status of CDRAC Target Cases As of April 30, 2000 Corporate (Groups 1,2,3) SMEs Total Stages #Cases Amt. #Cases Amt. #Cases Amt. % of Total Completed cases (signed restructuring contract, agreed on plan & in process of signing) 266 468,697 2,954 43,036 3,220 511,733 Agreed on plan, in process of signing restructure contract 93 169,682 - - 93 169,682 Plan accepted, will file in court 15 130,402 - - 15 134,402 Total Completed Cases: 374 768,781 2,954 43,036 3,328 811,817 31.7% In Restructuring Process (draft/ propose/amend plan, to be voted) 420 258,803 684 51,722 1,104 310,525 12.1% Plan Rejected (after 2nd vote) – Will Proceed to Court Action 125 172,222 452 35,579 577 207,801 8.1% Debtors not signatory under DCA/ICA/SA, proceed to court 779 746,913 831 57,578 1,610 804,491 Unsuccessful restructuring 39 53,031 83 2,458 122 55,489 In Process of Legal Action 818 799,944 914 60,036 1,732 859,980 33.6% In Process of Signing Debtor Accession 885 112,786 1,456 99,602 2,341 212,388 Returned to performing loans 60 159,662 - - 60 159,662 Total Approved Target Debtors 2,682 2,272,198 6,460 289,975 9,142 2,562,173 100.0% Source: The Bank of Thailand Table 21: Progress of Central Bankruptcy Court Business Reorganization and Liquidation As of April 30, 2000 Type of Jan-Apr 00 Filing Volume 1999 Jan-00 Feb-00 Mar-00 Apr-00 Total Reorganization Cases 37 3 3 8 15 29 Million 362,841 118,169 13,395 38,374 139,333 309,271 Liquidation Cases 441 88 71 8 56 223 Million 10,500 7,411 1,128 2,168 1,775 12,482 Source: Central Bankruptcy Court Thailand Economic Monitor 34 Box 2 Landmark Insolvency Decision: The TPI Case The Central Bankruptcy Court ruled in favor of the creditors in the TPI insolvency case. Effective Planner Co., Ltd., was later appointed as the Planner to restructure over Bt 120 billion bad debt. The ruling was based on the existing legal definition of insolvency, namely “liabilities exceed assets�. Therefore, the so called “balance sheet test� prevailed in the decision. Creditors’ valuation assumptions and appraisal methods were found to be more reliable than the methods presented by the debtor. While the decision is viewed as a positive step, it should not be regarded as a legal precedent for defining insolvency under the more appropriate criteria of “ability to pay when debt falls due�. The insolvency test remains the discretion of the court, and as a result, further reform of the insolvency regime is still needed. Strategies to Accelerate Debt Restructuring working on the amendment of the Bankruptcy Act. The Committee announced that it is considering Increasing restructuring completion rate and several crucial issues: (1) reviewing the “excessive eliminating unnecessary delays. CDRAC and BOT debt� criteria which defines “insolvency�, and play an implicit, strategic role in directing the quality possibly broadening the definition to include the of debt restructuring through establishing the “liquidity problem� of the debtors; (2) allowing acceptable restructuring principles and qualitative honest and yet-to-be declared insolvent small, targets. However, with perceived slowness in debt medium, and individual debtors to petition for restructuring, CDRAC and the BOT have recently protection as an opportunity to revive the business; taken a more proactive role to accelerate the process. (3) separating of individual from corporate New measures include (1) The Executive Decision bankruptcies; and (4) assessing the cost of appointing Panel (EDP) has been established to render binding independent business reorganization planners. decisions on deadlocked issues between debtors and However, the committee has not announced the creditors upon request. The EDP process may occur timeline to put forth the amendments, which is in anytime prior to legal action which automatically itself a lengthy legislative process. proceeds 60 days after the failed second vote, and it can be requested either by the debtor or the creditor. The draft Secured Transaction Act approved by To date, 29 cases have been referred to EDP, with the Cabinet. The Cabinet approved the draft Act in binding decisions rendered on 9 cases; (2) CDRAC is early May 2000. The Act provides for legal inclusion considering mediation services to help the negotiation of a wider range of personal and business assets, such process; (3) the requirement for financial institutions as receivables and property rights, which can be to forward cases to CDRAC if they were unable to pledged as collateral. It gives both the debtors and successfully negotiate restructuring by May 2000; creditors more options to negotiate and agree on loan and (4) a restructuring target of 16,000 cases per restructuring and new credit facilities. The act is month for financial institutions in 2000. now being reviewed by the Council of State prior to submission to the Parliament for approval. CDRAC is strengthening restructuring capacity. Several independent debt restructuring advisors will Challenges Ahead be contracted to assist CDRAC in facilitating and accelerating the restructuring of small and medium- Increasing the recovery rate of distressed assets. sized cases as well as corporate loans. In a restructuring environment characterized by low capitalization and weak legal implementation, sectors Reforming the legal framework to enhance which do not promise a high recovery rate on restructuring. The Ministry of Justice Committee is restructuring will pose an overwhelming challenge. Thailand Economic Monitor 35 Addressing excess capacity in core sectors. a sector basis and staffed with management qualified Creditor-driven removal of capacity is by and large to deal to restructure debt and manage assets in those not occurring. Even where firms have negative equity sectors. and whose petitions are likely to be accepted by the Court-supervised restructuring is expected to bankruptcy court, creditors have in general not filed increase. To prevent delays due to higher volume, petitions and as a result assets are not clearing. the court will have to improve its administrative procedures and capability to maintain or improve the Debt collection outside bankruptcy law needs current average of 4 months case completion. The strengthening. Enforcement of security interests is court has expressed concern, but assured the public difficult both in terms of time as well as in terms of that it has sufficient resources to handle more cases. procedures. This unduly increases the burden on bankruptcy proceedings. The Civil Procedures Code on Default has been passed into law. The procedures could result in greater reliance in asset sales and MEDIUM-TERM COMPETITIVENESS would facilitate rationalization of capacity in the real sectors. Key Developments • Total factor productivity growth (TFP), quality Few, if any, mergers between distressed firms have adjusted labor growth, changes in the structure of occurred. The merger process in Thailand is time manufacturing exports, and the steps taken to consuming and onerous, requiring six month notice modernize regulatory institutions and business period during which creditors may object to the environment, all suggest that Thailand is making merger or demand immediate payment. The Civil and progress towards strengthening its medium-term Commercial Code and the Public Limited Companies competitiveness. Act require that the two merged entities lose legal status before creating a new legal entity out of the two • Sustained and high quality growth will require independent units. In addition, although the tax code further deepening reforms: improving corporate for mergers has been improved to waive taxable of governance, openness, skills, competition, and non-cash transactions, it is still biased against the providing an enabling environment for SMEs. ability to carry net losses forward to the new entity. The authorities need to consider removal of these • As part of the strategy to increase domestic value- impediments to streamline market-led mergers and added and strengthen backward linkages, acquisitions. Thailand has embarked on a program to improve the competitiveness of the SME sector. Strengthening CDRAC’s ability to deal with less viable cases. Over time, the firms approaching • Thailand has a strong foundation of basic CDRAC for assistance are likely to be in less viable education, but important challenges remain in sectors or small and medium-sized firms. CDRAC’s terms of post-basic education and development of successful restructuring will require more resources workers’ skills. devoted to analysis, business restructuring, and mediation. • Thailand is developing a comprehensive information technology strategy. The first Addressing NPLs of state-owned banks. The priority has been to develop the legal framework growth rate of loss-classified loans among state- for e-commerce transactions, including the owned banks indicates that the institutions are not Electronics Transactions Act and the Digital equipped to deal with debt restructuring. The Bank of Signature Act. Further legislation, including the Thailand is in the process of adopting the Principles Universal Access Law; Data Protection Law; and Guidelines for Valuation of Debt Restructuring, Computer Crime Law; and the Electronic Funds to be used by state banks. In addition, asset Transfer Law are in the process of being drafted. management companies are being set up, organized on At the same time, National Electronics and Thailand Economic Monitor 36 computer Technology Center (NECTEC) has also growth rate is estimated to be 1-1.4 percent per year. been conducting intensive education and training Higher growth rates, which approximate those programs in the e-commerce area. observed in the late 1980s, will require completing the agenda of institutional reforms (discussed in the next • Thailand is proceeding with its privatization sections), aimed at moving from an input to a agenda. The Corporatization Act, which was knowledge-based economy. passed by Parliament last year, facilitates corporatization and private participation in state Figure 29: Dynamics of Total Factor Productivity enterprises. Detailed restructuring plans for the 10.0% telecommunications and energy sectors are ready. 3 years moving Upcoming transactions include the strategic sale 5.0% average or public offering of a stake in Thai Airways T F P g ro w th 0.0% International; the Airports Authority of Thailand (Regional Airports); the Petroleum Authority of TFP -5.0% Thailand; the Ratchaburi Power Plant; the Communications Authority of Thailand; and the -10.0% Telephone Organization of Thailand. While -15.0% Thailand remains fully committed to privatizing 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 state-owned enterprises to improve their efficiency and improve the quality of services offered to the public, it has also placed a high Table 22: TFP and GDP Growth (1995-2000) priority on modernizing and strengthening its Capital Quality TFP GDP regulatory framework and institutions. adjusted labor • The Customs Act was amended in March 2000. 1995 6.16% 1.03% 1.69% 8.9% This will allow Thailand to introduce the WTO 5.36% 1.83% -1.80% 5.4% 1996 Agreement on Customs Valuations which will 1997 3.40% 2.75% -7.85% -1.7% help to increase transparency, and reduce 1998 1.77% 1.32% -13.09% -10.0% uncertainty and corruption in the process of 1999 1.77% 1.41% 0.82% 4.0% import valuation, and allow the implementation of 2000 1.94% 1.61% 0.95% 4.5% an electronic system for the submission of claims, Medium 1.99% 1.61% 1.41% 5.0% and an ex-post auditing system based on Term importers’ and exporters’ customs records. Source: Staff Calculations Problems and Challenges Corporate Governance Growth in Thailand has been input rather than knowledge driven. The financial crisis unveiled Good corporate governance promotes structural weakness hidden behind Thailand’s relationships of accountability among the primary exceptional growth rates during the 1990s. Indeed, corporate participants with the objective of growth in Thailand, as well as in other East Asian enhancing corporate performance. It holds countries, was driven by accumulation of physical management accountable to boards and boards capital, with little improvement in total factor accountable to shareholders. The recent financial productivity (i.e., technological progress). Since crisis has highlighted the need for more clear rules 1989, the growth rate of total factor productivity had and legal standards to govern the relationships among been declining, from 5 percent during the early 90s to shareholders, directors, and management. These -1.8 percent in 1996 (Figure 29 and Table 22). Since include rules and standards addressing the fiduciary 1999 TFP has started to grow again, mostly as a result duty of directors and responsibility of management, of a “bounce-back�. In the medium term the TFP Thailand Economic Monitor 37 the protection of shareholder rights and most, are being finalized and is expected to be submitted to importantly, enforcement of those rights. the Parliament by December 2000. While substantial progress has been made in In addition, SET has revised the guidelines on the improving corporate governance, much of the code of best practice for listed company directors reform agenda remains unfinished. The consistent with international best practice, and has Government has approved a framework as well as made disclosure of non-compliance with such draft legislation to: (a) streamline the institutional guidelines mandatory under the listing rules. All framework for setting standards and regulating the listed companies are now required to have an audit profession; (b) establish the Thailand Financial committee of the board of directors. Moreover, Accounting Standard Board (TFASB) as an existing requirements for internal controls for listed independent entity with authority for setting companies and for the audit committees of boards of accounting standards; and (c) make the Institute of directors, including their roles and responsibilities, Certified Accountants and Auditors of Thailand have been improved. (ICAAT) an independent self-regulatory professional body consistent with international best practice. In In order to increase the effectiveness of the regulatory order to improve quality of audits, the content of audit framework, the roles and responsibilities of SET, reports has been improved. The Accounting Act has SEC, and MOC, in monitoring compliance with and been passed by the Parliament and a plan has been enforcing the PCA and SEA, have been clarified. adopted to implement and remove the burdensome Under the new arrangement, SET is the front-line statutory audit requirement for about 200,000 limited regulator in monitoring and administratively partnerships. BOT has prepared new specific rules on enforcing listed companies’ compliance with the SEC accounting for banks and finance companies. The and the SET regulations. The SET is responsible for Committee on Good Corporate Governance from a preliminary investigation of any violation and will wide spectrum of professionals, including defer cases to the SEC for further investigation as businessmen, lawyers, bankers, and accountants has necessary. The SEC is responsible for monitoring the been established. Improved guidelines on the code of performance of auditors of listed companies and best practice for listed company directors have been securities companies. While SEC focuses on listed issued. companies, MOC has responsibility for monitoring all public companies. Accounting standards consistent with international best practice are being adopted. The Government In order to improve corporate governance practices, has required that financial statements of listed Thailand will need to intensify its effort to provide companies, as well as non-listed public companies, clear and enforceable securities and public companies banks, and other financial institutions with assets in laws to protect shareholder rights and to ensure an excess of Bt 1 billion, be prepared and audited in effective regulatory framework capable of enforcing accordance with improved standards starting financial such laws. year 1999 (Box 3). Financial information and disclosures are an efficient means of protecting shareholders and are at the heart The Public Companies Act (PCA) is being of good corporate governance. Significant efforts amended. A working group has prepared changes to have been expended in the last year to upgrade Thai the PCA that will improve shareholder protection, accounting standards to international levels and much such as access to performance-related information and additional work is underway. While more effort is procedures for calling a shareholder meeting. These warranted to improve standards, the challenge now is changes also include provisions related to duties of to ensure the application, compliance, and directors, director and management self-dealing, and enforcement of those standards by practitioners, sanctions for fraudulent practices. Draft amendments professional institutions, and regulators. Much to the PCA and the Security and Exchange Act (SEA) Thailand Economic Monitor 38 Box 3 : Improved Accounting Standards Adopted by The Institute of Certified Accountants and Auditors of Thailand in 1998 and 1999 Thai Accounting Standards Based on Effective Date Framework of the Preparation and Presentation IASC Framework of Financial Statements TAS 32: Property, Plant and Equipment IAS 16 (1998) Approved & Effective: Jan ‘99 TAS 33: Borrowing Costs IAS 23 (1993) Approved & Effective: Jan ‘99 TAS 34: Troubled Debt Restructuring SFAS 15 Approved: Jan ’99; SFAS 114 Effective: Jan ‘99 TAS 35: Presentation of Financial Statements IAS 1 (1997) Approved & Effective: Jan ‘99 TAS 36: Impairment of Assets IAS 36 (1998) Approved: Feb. 99 Effective: Jan 99 TAS 37: Revenue Recognition IAS 18 (1993) Approved: Feb ‘99 Effective: Jan ‘99 TAS 38: Earnings Per Share IAS 33 (1997) Approved: Feb ‘99 Effective: Jan ‘99 TAS 39: Net Profit or Loss for the Period, IAS 8 (1993) Approved: Feb ‘99 Fundamental Errors, and Accounting Changes Effective: Jan ‘99 TAS 40: Accounting for Investments in Debt SFAS 115 Approved: Feb ‘99 and Equity Securities IAS 39 Effective: Jan ‘99 TAS 41: Interim Financial Statements IAS 34 (1998) Approved: Mar ‘99 Effective: Jan 2000 TAS 42: Accounting for Investments AICPA Industrial Approved: June ‘99 Companies Audit Guide Effective: Jan 2000 TAS 43: Business Combinations IAS 22 (1998) Approved: May ‘99 Effective: Jan 2000 TAS 44: Consolidated Financial Statements IAS 27 (1998) Approved: May ‘99 and Accounting for Investments in Subsidiaries Effective: Jan 2000 TAS 45: Accounting for Investments in IAS 28 (1998) Approved: May ‘99 Associates Effective: Jan 2000 TAS 46: Financial Reporting of Interests in IAS 31 (1998) Approved: June ‘99 Joint Ventures Effective: Jan 2000 TAS 47: Related Party Disclosures IAS 24 (1994) Approved: June ‘99 Effective: Jan 2000 TAS 48: Financial Instruments: Disclosure and IAS 32 (1998) Approved: June ‘99 Presentation Effective: Jan 2000 Source: The Institute of Certified Accountants and Auditors of Thailand Thailand Economic Monitor 39 the legal and regulatory framework. SEC’s role in further efforts will be required to strengthen necessary enforcement of securities regulations needs to be institutions responsible for ensuring compliance, further strengthened by streamlining criminal including the professional institutes, and to improve procedures for violations of SEA. In order to further and enforce necessary mechanisms such as the code raise the level of confidence in the Thai capital of ethics and code of conduct for accountants, and the market, enforcement of sanctions on insiders for false code of best practices for directors. Enactment of or misleading disclosure, self-dealing transactions, or amendments to the Accountants’ Professional Act will conflict-of-interest cases, need to be carried out more allow establishment of the Thailand Financial effectively and expeditiously. Accounting Standard Board to set accounting standards and enhance the role of the Institute of Certified Accountants and Auditors of Thailand as a Information Technology Strategy self-regulatory professional body. Current trends point to the pre-eminence of information and communication technology - the Thai corporate governance has largely been self- knowledge economy – as a source of future regulatory. Going forward, it is important to productivity gains. How is Thailand positioned to ensure that a proper balance is maintained make the most of these trends? between self-enforcement and effective Thailand is in the process of developing a enforcement of regulation by regulators. While comprehensive information technology strategy. self-regulation is desired and ideal, enforcement by The National Information Technology Committee outside shareholders, and effective enforcement of located in the Prime Minister’s Office is coordinating regulations and legislation by regulators should help this task. The National Electronics and Computer change corporate culture and business practices and Technology Center (NECTEC) in the Ministry of can pave the way for effective self-regulation in the Science, Technology and Environment is the long run. Minority shareholder rights need to be secretariat for the committee. Thailand’s strategy aims significantly strengthened, and accountability and to create a legal framework and an information liability of directors in the case of breach of duty infrastructure that enables businesses to expand the further clarified. Amendments to the PCA and SEA range and value of their goods and services. An should improve shareholder rights and the ease with important element of this strategy is to tap the which they exercise those rights, better protect outside potential for e-commerce especially in the business- shareholders against conflict-of-interest transactions to-business arena. benefiting insiders, increase accountability of directors to the shareholders, and improve Figure 30: Personal computers per 1,000 people administrative enforcement by regulators. In order to promote voluntary compliance, the Thailand Institute P e r s o n a l C o m p u te r s p e r 1 ,0 0 0 P e o p l e of Directors has been established to train company directors and 100 company directors are expected to 250 2 1 6 .8 be trained on the roles and responsibilities of directors 200 by December 31, 2000. 1 3 1 .7 150 100 The challenge is to focus on more effective 4 2 .8 enforcement of laws and regulations by the 50 1 6 .7 9 .3 3 .3 regulatory agencies. Thai judiciary system is 0 Philppines Thailand Malaysia Singapore Vietnam Korea perceived by the market as having lax and ineffective enforcement. It is recognized that until significant improvements are made in the system, a strong Source: NECTEC regulator can compensate for a weak judiciary. Efforts need to be intensified on improving effectiveness of Thailand Economic Monitor 40 NECTEC has also been conducting an intensive has been passed into law. This law provides the basis education, training and awareness building for coordinating, financing and implementing SME program in the area of e-commerce. Sector specific support activities by various RTG agencies. Under awareness and partnership programs have been this law a new agency called the Office of Small and conducted all over Thailand. NECTEC has also been Medium-Sized Enterprise Promotion will be developing the RTG Intra-Net with a view to linking established. A Master Plan for development of SMEs RTG agencies and facilitating interface with the in the manufacturing sector has also been submitted to private sector. the Cabinet. An Institute for SMEs Development (ISMED) has also been established as the core Figure 31: Internet hosts per 10,000 people institution to provide business management and technology services and training to SMEs. In te r n e t H o s ts p e r 1 0 ,0 0 0 P e o p le 1 9 6 .3 The Office of Small and Medium-Sized Enterprise 200 180 would have the important task of disseminating 160 information to SMEs on management, skills 140 120 development and technology upgradation support 100 services. The SME Act also calls for the creation of 80 an SME Fund. This Fund will address the adverse 60 40 1 9 .3 2 8 .7 7 impact of the banking crisis on the SME sector and 2 .1 1 20 0 .5 9 0 will aim at making SMEs more creditworthy and 0 bankable. By the end of the year, the policies and Philppines Thailand Malaysia Singapore Vietnam Korea operating procedures for the SME Fund will also be Source: NECTEC announced. During the second half of this year the Government will also develop a Master Plan for By October 2000 the Digital Signature Act will be supporting SMEs in the trade and services sector. finalized. By the end of the year the remaining four pieces of legislation would be drafted. Before finalizing the laws, NECTEC will also embark on an Skills Development intensive program of discussing these laws and infrastructure requirements with the business and Thailand has a strong foundation of basic legal community. This is with a view to ensuring that education, but important challenges remain in the laws are responsive to business needs and terms of post-basic education and development of consistent with market structures and practices. workers’ skills. While modern-sector wage employees have on average 9 years of formal Thailand must build a new economic base. It is at education, much lower levels of education persist the heart of the dynamic new economy, as it supports among older workers and workers in the informal the sharing of knowledge, flexible and strategic sector. This restricts labor mobility to modern-sector partnering, more efficient processes, domestic and wage employment and imposes constraints to the global networking, market expansion, and more. adoption and diffusion of new technologies. The distribution of employer-provided formal SMEs training is very uneven, with the incidence of training being particularly low among small and As part of the strategy to increase domestic value- medium-size companies. Almost 40 percent of added and strengthen backward linkages Thailand manufacturing establishments provide formal skills has embarked on a program to strengthen the training to some members of their workforce, either competitiveness of the SME sector. The through in-house training programs, or through Government has finished a review of the legal and courses given by external training providers. The institutional framework for the development of incidence of in-service formal training in Thai SME’s. Based on this review the SME Promotion Act Thailand Economic Monitor 41 manufacturing appears to be as high as that in training policies tend to be very diffused and difficult Malaysia and higher than those in other developing to target. International experience indicates that countries with lower average per capita incomes training tax incentives tend to be used mainly by large where broadly comparable training data are available. companies and multinationals, most of whom already However, as Table 23 shows, the distribution of train, so that there is little “additionality�; they do employer-provided formal training is very uneven, little to induce training among SMEs, the population with the incidence of training being particularly low of firms least likely to train. Since 1995, the MOL among small and medium-size companies. What has qualified less than 450 firms to receive training accounts for this uneven distribution of training in tax exemptions. This low take-up is reflected in the Thailand is not known, but some studies reveal that 1997 TICS survey data (Table 23), where less than 2 while many firms do not train because the derived percent of firms reported using the training tax demand for skills from using old technology is low, exemption. The major beneficiaries of this incentive many firms and SMEs, in particular, are also were larger firms and not SMEs, even though a high constrained by high labor turnover (and loss of proportion of both groups of firms reported providing training investments), poor knowledge about how to formal training to employees. train or the benefits of training, and access to finance for training. Table 23: Formal Enterprise-Based Training in Thai Manufacturing 1997 (%) Thailand has instituted a number of demand-side policies over the past five years to promote skills SMALL MEDIUM LARGE TOTAL training among workers, the labor market at Any Formal 28.3 62.2 82.1 40.1 Training large, as well as in companies. On the worker side, In-house the Skills Development Fund (SDF) was created in 14.2 44.1 71.8 35.5 Formal Training 1997 to provide new labor market entrants, the External 22.8 54.0 79.1 34.0 unemployed, and currently employed workers with Formal Training low-interest short-term loans for approved training Use Training Tax courses that would provide skills certification. In 0.8% 4.0% 3.6% 1.9% Exemption principle, the SDF is a useful instrument for enabling Source: 1997 Thailand Industrial and Competitiveness Survey (TICS) workers whose employers are not training them to Notes: Survey of 1277 firms in five sectors, with approximate inverse sampling weights self- finance the acquisition of certified skills that Size definitions: Small <50, Medium 50-300, Large <300 employees. would improve their job prospects both within and, perhaps more importantly, outside the firm. Policies Thailand is reviewing its strategy on skills more pertinent to promoting employer training development, particularly in small and medium- include the (1) 1994 Vocational Training Promotion sized enterprises, in order to amplify its impact. Act to set up company-based vocational training The objectives include: i) reforming the current centers for new hires with 50 percent tax exemption Vocational Education Act; ii) strengthening the on qualified training expenses; (2) the 1995 Training organizational structure, financing mechanisms, and a Tax Exemption Decree to provide tax incentives for medium-term strategy for specialized institutes; and employers to train employees with more than 6 iii) amending the Skills Development and Promotion months of seniority, either within the firm or in Act and developing regulations with particular focus government vocational institutions or approved on financing and operation mechanisms for the Skills schools. Development Fund and the certification of training The tax exemption incentives of 1994 and 1995 are programs. relatively benign but generally ineffective policies as evident in the very low rate of use by Technological Capability companies. Interviews with employers and both regional and international experience provide some The two major manifestations of the technological perspectives on these latter policies. First, tax-based gap in Thailand include the rapid reduction in the Thailand Economic Monitor 42 growth rate of total factor productivity observed reviewing financing programs for R&D. since the late 1980s, and strikingly low levels of Investment promotion embodied in the Investment R&D in the private sector, one of the lowest in the Promotion Act and administered by the Board of region as a proportion of GDP. While Thailand has Investment (BOI) has been Thailand’s main managed to update its technological base through vehicle for attracting foreign direct investment. foreign direct investment (during the 1990s foreign The BOI can authorize and approve a wide range of direct investment represented close to 26 percent of tax, tariff and non-tax incentives to new investors. In total private gross investment), its technological the past these measures were successful in inducing capability is limited. Though Thailand gives large FDI flows to Thailand. However, in the last generous tax incentives for R&D, few firms use the couple of years the Government has been re- incentives. Institutional support for technological examining the efficacy of these incentives. At the activity is also not well coordinated. The Science and request of the Government, FIAS undertook a detailed Technology (S&T) infrastructure is at present largely review of the efficiency of these incentives. This geared to a “supply push� strategy of technology review concluded that these incentives were often development, with weak linkages with industry and a unnecessarily complex. Moreover, the incentives did mutual lack of interaction and trust. The incentive not result in spillovers to the local economy in the structure and culture in the research institutions seems form of increased productivity or skills development. to be unsuited for a supportive role for technological activity in Thai industry. Figure 32: International Comparison of R&D Investments The Government has undertaken several measures to facilitate technological upgrading and stimulate 3.5 GERD as Percent of GDP R&D investment in Thai industry. It has 3.0 reorganized the Thai Industrial Standards Institute 2.5 (TISI) to hive off its testing functions and letting it 2.0 specialize in the core “public goods� functions of 1.5 writing standards and accrediting testing laboratories. 1.0 This has opened up the field for private provision of 0.5 testing and calibration services. It has set up a 0.0 Thailand Singapore Malaysia National Metrology Institute to coordinate the Taiwan Japan Korea U.S.A. different institutions previously providing calibration and improving the traceability of national measures. The laboratories under NSTDA are considering reorienting themselves to providing more services to Competition Policy industry. New/revamped mechanisms for providing technology finance are being considered. SMEs are Thailand has enacted or drafted a number of laws being targeted in a program of financial and that will improve competitiveness, productivity, technological support. The new industry centers and help facilitate technology upgrading. The new under MOI, with private sector representation, are pieces of legislation or amendments to existing laws charged with providing technology upgrading and include the Foreign Business Act, the Patent Act, training services to industry. Law on Property Leases for Commerce and Industries, and amendment to the 1991 Trademark In addition, studies are being conducted to address the Act. To enhance product quality and increase the following issues: i) reforming incentives for R&D; ii ) acceptability of Thai products in international reorienting the mission of public research markets, since 1997, Thai industrial standards are laboratories; iii) better integrating technology services now systematically based on international standards. provided by the MOI industry centers with client needs; iv) assessing skills needs for R&D, and v) Thailand Economic Monitor 43 To keep pace with rapid changes in market disseminating information to the public and for structures in the financial and real sectors, the encouraging a voluntary compliance strategy. Government has revamped the Price Fixing and Anti-Monopoly Act of 1979. In 1999, the Parliament Figure 33: World market shares for exports of enacted the Business Competition Act, 1999 and the electronics Price of Goods and Services Act, 1999 to replace the 12.00% 1979 Act. These two acts aim to ensure fair Vietnam Korea competition, provide consumer protection and combat 10.00% Thailand China monopoly practices. 8.00% Philippines Malays ia 6.00% The Business Competition Act of 1999 embodies 4.00% modern concepts of anti-competitive behavior. It provides a sound legal basis for the three substantive 2.00% areas of competition policy: prohibited practices; 0.00% abuse of dominant position, price fixing and 65 68 71 74 77 80 83 86 89 92 95 19 19 19 19 19 19 19 19 19 19 19 collusion; and mergers and acquisitions, joint ventures and strategic alliances. The Act provides for the creation of an independent, free of conflict Trade Policy competition policy authority to oversee implementation of the Act. As required by law, the Even before the crisis, concerns were raised about twelve members to the Committee have been Thailand’s ability to compete in international markets. appointed. The reason for this was the stagnant share of Thai exports in world trade. Indeed, a review of the The 12-member Committee on Business international trade flows by sector, before the crisis, Competition was established in November 1999. shows Thailand’s market share as stagnant, while the This Committee is located in the Department of market shares of countries such as China were Internal Trade, Ministry of Commerce. Under the growing rapidly. proposed loan, RTG also took up the task of building Thailand will face global competition. A the Committee’s capacity to oversee and implement mechanism to evaluate the level of competition faced the Business Competition Act. Starting in the second by countries is to compare the correlation between the half of 1999, the Government started implementing a structure of their exports. Table 24 presents the program to provide the Committee with technical correlation at the three-digit SITC level across East skills and resources for implementing the new Act. Asian Countries. The results indicate high correlation Under this draft, implementing regulations have been across most of the countries. Thailand faces developed along with the corresponding guidelines competition from all East Asian countries (Indonesia and interpretation documents, containing standards, to a lesser extent), and in particular China which has methodologies, and administrative procedures for the only weak correlation with the majority of other enforcement of the remedies and actions provided by countries. the law. Training programs and seminars were also conducted for Committee staff on key competition China’s potential adherence to the World Trade policy issues. Organization provides both an opportunity and a new challenge to Thailand. China’s proposal is to The momentum on capacity building needs to be reduce its average industrial import tariffs from 25 maintained, implementing regulations need to be percent in 1997 to 9.4 percent by 2005. The share of finalized, and a manual of operating procedures and its imports covered by administrative barriers would staff training needs to be prepared. The Competition also fall to 11 percent from 33 percent. China’s offer Commission would also develop a strategy for on services includes opening up the distribution and retail system, telecommunications and financial Thailand Economic Monitor 44 services. Foreign investors will be able to invest in (out-of-quota duty on raw silk) with a simple average joint ventures in these areas for the first time. Clearly of 18.4 percent (compared to 23 percent in 1995). these concessions offer Thailand potential gains in With the onset of the financial crisis, a 10 percent terms of access to Chinese markets. However, there surcharge was applied to all imports bearing duties of could be potential losses in international commodities 5 percent or more. These surcharges have now been and capital markets as China is granted MFN benefits. eliminated. Figure 34: World Market Share for Exports of Table 25: Change in the structure of manufacture Textiles exports by technological level (85-95; percentage points) 9.00% Vietnam Resource Low Medium High 8.00% Korea Based Tech Tech Tech 7.00% Thailand East Asia -11 -9 2 17 6.00% China China -28 8 8 12 5.00% Philippines Hong Kong 3 -11 -4 12 4.00% Malaysia Indonesia -31 14 10 7 3.00% Korea 2 -21 2 17 2.00% Malaysia -36 3 9 24 1.00% Philippines -30 -4 3 32 0.00% Taiwan -5 -23 2 11 Thailand -19 -10 -1 30 67 70 73 76 79 82 85 88 91 94 19 19 19 19 19 19 19 19 19 19 Latin America -27 1 16 9 South Asia -7 3 3 1 LDC -16 -3 6 13 Thailand has succeeded in climbing up the DC -2 -1 -2 4 technology ladder. The structure of exports has Source: Lall et al (1999) changed over time. As shown in Table 25, the share of technology intensive exports has increased while Thailand intends to continue the process of resource-based exports have contracted. liberalization by further compressing the tariff Import tariff surcharges introduced during the bands, and reviewing the system of special duties crisis have been eliminated. Thailand has largely and exemptions. The government is currently maintained an open and export-oriented trade regime preparing for the introduction of tariff changes within and reduced its dependence on customs receipts as a the context of AFTA agreement. According to this revenue source. Currently, customs revenue accounts agreement, Thailand will have to have 85 percent of tariff line items within the 0 to 5 percent band. A Table 24: Correlation of structure of manufacture certain core set of items is common to all AFTA exports (1995) members but broadly the individual countries are free CH HK IN KO MA PH SI TH TA to choose the list. Currently about 73 percent of lines CH 1 0.59 1 are at the 0-5 percent level. The other 12 percent HK IN 0.35 0.17 1 remain to be identified. The list will eventually be KI 0.21 0.40 0.1 1 expanded to cover 100 percent of tariff line items. MA 0.17 0.43 0.18 0.73 1 Thailand cannot retain significant duties on capital PH 0.31 0.51 0.21 0.66 0.82 1 goods and raw materials and still be competitive with SI 0.2 0.36 0.07 0.66 0.74 0.62 1 regional imports of finished goods at 0 to 5 percent. TH 0.57 0.54 0.21 0.52 0.59 0.58 0.70 1 TA 0.35 0.44 0.09 0.64 0.67 0.56 0.81 0.76 1 RTG has established a Tariff Committee within the Source: Lall et al (1999) Ministry of Finance to carry out a comprehensive review of the tariff schedule. It is likely that the rates for about 8 percent of tax revenue. Applied tariffs, in for raw materials and capital goods would be reduced September 1999, ranged from zero to 242 percent to zero and the other rates set in a range up to a Thailand Economic Monitor 45 maximum of 15 percent. Zero rates at the raw and SOE Reform capital end would alleviate some difficulties with rebates (drawbacks) and would reduce the need for Thailand’s commitment to reforming state-owned certain BOI tariff exemptions. enterprises (SOE) and implementing a divestiture program is articulated under the 1998 Table 26: Structure of Applied Tariffs in Thailand Privatization Master Plan. The objective is to SEP- improve the economic efficiency of key industries INDICATORS 1995 99 including energy, telecommunications, water and 1. Bound tariff lines as a share of total lines 72.4 73.5 2. Duty-free tariff lines 2.6 3.6 transport. The Government’s privatization efforts are 3. Non-ad valorem tariffs/all tariffs 31.1 21.3 designed to enable competitive markets to emerge in 4. Tariff quotas/all tariffs 0.9 0.9 these sectors in a framework that stimulates private 5. Tariffs with no ad valorem equivalent 2.5 0.3 investment, protects consumers and provides a basis 6. Simple average bound tariff rate 37.6 33.1 Agricultural products (HS 01-24) 40.0 37.8 for Thailand’s long term competitiveness in the global Industrial products (HS 25-97) 37.3 32.0 economy. The Bank’s ongoing Economic 7. Simple average applied tariff rate 23.1 18.4 Management Assistance Project (EMAP) supports the 8. Simple average applied MFN tariff rate 23.1 17.1 RTG’s strategy of preparing the ground for Agricultural products (HS 01-24) 43.1 32.1 privatization by putting into place a strong regulatory Industrial products (HS 25-97) 20.7 14.6 9. Domestic tariff peaks 0.1 7.6 framework, building institutional capacity and 10. International tariff peaks 59.3 47.7 beginning a well contemplated, time bound program 11. Overall standard deviation (SD) 16.9 17.9 of corporatization and divestiture of selected state- 12. Coefficient of variation (CV) 0.73 0.97 owned enterprises. Source: WTO Progress on privatization and SOE reform has The Customs Act was amended in March 2000. been slower than anticipated at the time when the This will allow introducing the WTO Agreement on Privatization Master Plan was passed by the Customs Valuations which will help to increase Cabinet in September 1998. This is mainly due to a transparency, reduce uncertainty and corruption in the heavy reform agenda; a weak legal framework; lack of process of import valuation, and allow the institutional capacity to implement the agenda; the implementation of an electronic system for the absence of a vision and articulation of a strong submission of claims and an ex-post auditing system strategy and public campaign to build consensus based on importers and exporters customs records. among stakeholders, especially SOE employees and To be able to compete in an open economy Thailand consumers, as to the benefits of privatization; and the needs to reduce logistic costs. To this end, absence of a systematic public information campaign, consolidating Customs reform is a critical factor. which led to anti-foreign ownership sentiments and Substantial progress has been made in this area. One resistance from employee unions. It must be of the main implications of the electronic system is acknowledged that in spite of these drawbacks, there that medium and large importers would be able to has been a steady movement in the implementation of clear their merchandise without inspection, thus the agenda. However, some areas such as the water reducing clearing time considerably. Guidelines and sector have lagged behind; employee issues have yet regulations for the implementation of the Act have to be addressed systematically; remaining legal been drafted and are expected to be approved by reforms are likely to move at a slow pace; and October 2000. The Customs department would then institutional capacity, especially in regulation, need to focus on implementation and the completion remains a key issue. of its internal plan for administrative reform including human resources management. Progress has been made in the legal framework to facilitate SOE reform and divestiture. RTG’s emphasis has been on putting in place a strong regulatory framework and creating independent Thailand Economic Monitor 46 regulatory bodies, free from political intervention, to SOEs in the sector. The partial privatization of Thai ensure a stable investment environment and to help Airways is expected in September 2000, the protect consumer interest. The State Enterprise privatization of AAT is being accelerated. The state Corporatization Act was passed in December 2000 expects to sell AATs major airports this year and and will enable RTG to corporatize individual shares in AAT early next year. In the energy sector, enterprises without further parliamentary NEPO is preparing detailed plan for transition to a involvement. The enactment in 1999, of the Alien power pool which is expected to be completed by July Business Act and the Act on Leasing of Property for 2000. The partial privatization of Ratchburi power Commerce and Industry, is significant in promoting generating plant is expected in September 2000. direct investment and greater liberalization. The State Employees Labor Relations Act (SELRA), which Water and Wastewater: Reforms in the water and repeals restrictions on the rights of state enterprise wastewater sector have lagged behind, mainly workers to unionize and strike, was also passed by the because Government’s focus has been on other Parliament. sectors. The Government now plans to accelerate reforms in this sector. Telecommunications: The Act on Organization of Radio Frequency Wave Allocation and Supervision of Employee interests need to be addressed in a Radio Broadcasting and Radio Television systematic manner. A key issue for Government is Broadcasting Business; and Telecommunication to address employee resistance to SOE reform and Business B.E. Frequency (The Frequency corporatization, and to protect their interests. In the Management Act) became effective in March 2000 absence of safety nets and training programs, and will allow for the establishment of the National employee resistance is likely to increase. Government Communications Commission (NCC). The NCC will has entered into a dialogue with labor on key issues in facilitate the establishment of an independent the program. As a part of the effort to address regulator in the telecommunications sector by October employment impacts, MOF has been preparing a 2000. The Telecom Bill which provides guidelines for series of proposals on severance pay, early retirement, the regulator was endorsed by the Cabinet in March training and shares’ distribution to employees. 2000 and is expected to be presented to the Parliament by July 2000. The conversion of existing Build-to-Operate (BTO) concession contracts PUBLIC SECTOR REFORM essential for full liberalization of the telecomm sector remains one of the most challenging issues in the Background sector. The Cabinet recently issued a resolution specifying guidelines for conversion concessions and The economic crisis highlighted the need for broad- a committee has been formed to oversee the based public sector reforms in Thailand. That need conversion process which is expected to be completed for reform received renewed impetus with the passage within the next nine months. of the new Constitution in 1997 which provides for greater citizen participation, decentralization, Transport and Energy: The cabinet has approved accountability, and transparency – tools that enhance the regulatory framework and market structure for the voice and improve public sector governance. The energy and transport sectors and independent Constitution’s main themes are to: promote and regulators in these sectors are expected by the end of protect citizen’s rights and human integrity, promote year 2001. A comprehensive Transport Sector participatory democracy, improve political structures, Framework Reform Study was undertaken and decentralize authority to local bodies, redesign the completed in April 1999. The report provides a work process of government agencies to be responsive framework for improved policy and planning in the to citizens’ needs, and abolish cumbersome transport sector, development of modal regulatory regulations that are a burden to efficient markets. framework and the direction of reform for the 14 Thailand Economic Monitor 47 In May 1999, the Cabinet issued its Public Sector Œ Significant progress has been achieved in Management Reform Plan, which provides the implementing performance-based budgeting in the Government’s vision for modernizing the public Ministries of Public Health (MoPH) and sector. The Government’s Public Sector Reform Commerce (MoC) as well as in the Office of the Committee is responsible for overseeing the public Civil Service Commission (OCSC). sector reforms. The Government’s Program Œ The Ministry of Finance has established a Public constitutes a three-year action agenda to reform Debt Management Office (PDMO) to manage its Thailand’s public sector in the areas of (i) expenditure debt and liabilities (see Box 4). management, (ii) human resources management, (iii) revenue management, (iv) decentralization, and (v) Human Resource Management accountability and transparency. The major objectives of the program are (i) enhancing Œ The Government introduced an early retirement performance of resource management; (ii) improving scheme, which targeted 30,000 officials. During service delivery; and (iii) strengthening accountability the initial round from July to September 1999, and transparency to help boost public and investor 23,216 early retirements were approved; OCSC confidence in Thailand. estimates that cumulative savings of almost Bt 8.4 billion will occur over ten years (see Box 5). The reform program explicitly recognizes that institutional reforms require time to implement and Œ Functional reviews are underway in six economic are inherently uneven in pace. Hence it has been ministries and the Ministry of Public Health. designed around concrete objectives with flexible benchmarks that can be adjusted as necessary to Œ A proposal for establishing a performance-based accommodate the pace of implementation. Reform position classification system has been introduced progress across program areas has been generally to the Cabinet. The blueprint for the positive although somewhat uneven (as expected). performance-based human resource management system includes detailed proposals concerning Public Expenditure Management position classification, recruitment, selection and promotion, performance appraisal, and performance pay proposals for the civil service. Œ Budget reform pilots have been launched in 7 Position classification reforms are being given government agencies in various ministries. priority, and Cabinet approval will shortly be sought to a new, more flexible and simple system, Œ “Gaps� in seven hurdle areas (budget planning, based on competency-based job descriptions, activity costing, procurement management, which will be piloted in two agencies before budget control, financial and performance implementation in other ministries in 2002. reporting, asset management, internal audit) have been identified and clear work-programs have Œ Another proposal before the Cabinet seeks to been defined to fill these gaps in three pilots. develop a well-motivated, politically neutral, cross-governmental senior cadre (or Senior Œ The Bureau of the Budget (BoB) and the Executive Service) to lead the civil service Comptroller General’s Department (CGD), have renewal program. Full implementation of an SES agreed on a common set of objectives, each will require a new salary system. formed a separate steering group, established working groups, identified pilot departments and Revenue Management hired international consultants who have produced numerous reports. Œ The Large Taxpayer Organization (LTO) has Œ The BoB has begun discussions on the need for achieved significant progress: 2,318 large modernizing its legal framework for budgeting. companies (accounting for one-half of total Thailand Economic Monitor 48 Box 4 : Establishment of the Public Debt Management Office A Public Debt Management Office (PDMO) was created in the Ministry of Finance on 20 September 1999. Its mandate is to be the single office in the Thai Government with full responsibility for monitoring and managing Thailand’s public debt. It will also monitor and analyze the fiscal risks associated with the Government’s contingent liabilities (e.g., sovereign guarantees on state enterprise borrowings). The PDMO, in close collaboration with the Bank of Thailand, will assist policy makers in developing a comprehensive, medium-term financial and debt management strategy. It will also assist in the creation of short-, medium- and long-term borrowing plans that are consistent with the NESDB’s Development Plan and the Government’s fiscal and monetary stance. To achieve these objectives, the PDMO will undertake several functions including: debt service forecasting; active debt management; cash management; risk management (to hedge against currency, interest rate, funding and refinancing, credit and operational risk, among others); monitoring project finance related transactions; and tracking and preparing to deal with contingent liabilities of Government. To this end, the PDMO is in the process of developing an appropriate information system and skills base to support integrated public debt management. This will require establishing a number of debt, cash, risk management and other systems, each linked together—both mechanically and through appropriate operational procedures and guidelines within government. These new systems will be supplemented by continuous training and guidance from local and international experts at strategic intervals during this ongoing endeavor. revenues collected) are currently being handled Decentralization by the LTO. Œ Five programs to speed up collection of tax Œ Members of the National Decentralization arrears have been established and debt collection Committee have been appointed. strategies are being implemented. VAT registrations have increased by over 11 percent Œ The Bureau of the Budget is working to devolve between FY98 and FY99. Rules regarding VAT 20 percent of government revenues to local refunds have been tightened, and taxpayer governments by 2001 and to 35 percent by 2006. liability for other taxes is checked before refunds are issued. Revenue collected from audit activities Accountability and Transparency have also increased, in part due to better targeting. Œ The Revenue Department is discussing with the Œ The organic law on Counter Corruption was Thai Banking Association procedures for enacted in November 1999; a new Office of the obtaining information about taxpayers’ bank National Counter Corruption Commission accounts and for seizing funds.. (ONCCC) and the National Counter Corruption Commission (NCCC) were officially established, Œ 19,875 assessments totaling Bt 4,514 million with complete with adequate budgets to implement the debt more than 10 years old have been written off. required programs this year. New laws are being Writing off uncollectible debts will become a drafted for blind trusts, conflict of interest, and regular procedure to clear the system of bad collusion. debts, and enable staff to concentrate on collectible cases. Œ The NCCC has taken a more active role in asset Œ The Revenue Department produced a new, draft declaration (Box 6). Besides the requirement for strategic plan that assigns responsibility for politicians and high-ranking officials, the implementing the strategies between the Commission has recently passed by-laws ordering headquarters divisions and regional, area and all local government representatives of Tambon provincial office. Administrative Organizations (with total annual revenue equal or above Bt 50 million), Provincial Thailand Economic Monitor 49 Box 5 : The Government’s Early Retirement Scheme The Government has introduced an early retirement scheme, which targeted 30,000 officials (civil servants, teachers, university staff, military and police) based on the principles of voluntary retirement, no impact on service delivery (requiring agreement from each retiree’s supervisor) and only 20 percent of retirees being permitted to be replaced – on top of a general hiring freeze for the civil service. Under the first round of the scheme from July to September 1999, 23,216 early retirements were approved, including nearly 5,000 civil servants and over 12,700 teachers. Despite the relatively generous payments under the scheme – no loss in retirement benefits and payment of 7 months salary as a retirement incentive – OCSC calculates net savings by the third year and cumulative savings of almost Baht 8.4 billion over ten years. A committee representing OCSC, BoB, MoF and the central personnel agencies of the teaching service, police and military has managed the early retirement program. While this first round appears to have been relatively successful given its limited duration, more must be done to achieve the envisaged reduction of 10 percent (about 120,000) in the total number of government officials by 2002. To meet this objective, the Office of the Civil Service Commission will recommend another similar offering of the early retirement scheme this year. Benefits to retirees will be similar, but there will be greater flexibility to ministries to re-allocate surplus staff from one area to enable retirements in another. This flexibility may also assist in better matching early retirements to areas where staff are less needed. Box 6 : Emerging Power of New Accountability Institutions In March 2000, the Minister of Interior was forced to resign by the National Counter Corruption Commission (NCCC) after he was accused of falsifying documents relating to a loan of Baht 45 million (US$1.2 million), and barred from holding political office for five years. It was only the second time in almost 70 years that a sitting politician was tried and convicted for corruption. Earlier in March, the Election Commission nullified the poll victories of 78 senatorial candidates on grounds of fraud, and ordered new elections in 35 provinces. A further 12 winners of the April 29 polls in nine provinces were disqualified, prompting a third round of voting. Both these independent agencies were created by the new Constitution with a mandate to oversee politicians and bureaucrats. Along with the NCCC and Electoral Commission, the 1997 Constitution introduced Ombudsmen, a system of administrative courts and an Official Information Act allowing citizens access to all but the most sensitive public information. All these independent agencies and accompanying laws have become powerful forces and may be proof not only that the country’s recovery is fostering greater economic and political transparency, but also that the checks and balances enshrined in the new Constitution will be actively applied. Administrative Organizations (with total revenue Œ More than 60 percent of government agencies equal or above Bt 100 million) and Municipality have established regulations and procedures to (with total annual revenue equal to or above Bt enhance responsiveness to public demands for 200 million) to declare their assets. information. Œ The organic law establishing the Office of the Œ The organic law establishing the Office of the Ombudsman was passed, although the selection of Ombudsmen was passed the three Ombudsmen is proceeding slowly. Œ The Senate selected 17 Supreme Administrative Œ Several new Cabinet resolutions have been issued Court judges in February. A temporary office for regarding information disclosure, including: the Administrative Court has been established. Petition and Complaint divisions of the Council Œ Cabinet resolution (1 February 2000) for all of State were transferred to the Administrative new government staff (levels C7 and above) Court office. to be knowledgeable of the Official Thailand Economic Monitor 50 Information Act, and lawyers for each agency central ministry, consolidation of departments, must pass an exam on the content of the OIA. establishment of Local Education Areas (LEAs), and teacher retraining and redeployment. Œ Cabinet resolution (30 November 1999) for Œ Mapping of LEAs is well advanced, and 289 have government inspectors of each department to been identified. This number may change monitor and evaluate the performance of their following community consultations to be carried concerned agencies regarding access to public out over the coming months. Final mapping will information. This must be done twice a year be submitted to the ERC, along with and reported directly to the Cabinet. recommendations on the 12 LEAs to serve as Œ Announced in the Royal Gazette in December pilots for the reform, for approval and submission 1999 that government procurement documents are to Cabinet. considered to be part of the OOIC categories to be released to the public. Ministry of Public Health (MoPH) Œ The OCSC has established the Ethics Promotion Œ A steering committee, chaired by the Permanent Center (EPC) to: (i) coordinate and assist other Secretary, has been instituted to guide the MoPH government and non-government agencies, (ii) internal reform. A full master plan is expected, conduct research and development, (iii) train civil that will include the MoPH mission and servants, and (iv) disseminate information. clarification of its role in service provision, Currently, the EPC is working with various financing, regulation and quality assurance. government agencies to assist them in developing Œ The MoPH has designed new financial and cost ethical standards for their staff. The EPC has accounting systems for hospitals; developed the developed training courses especially for high chart of accounts, and written a manual for ranking officials. Limited staff and budget have implementation. An implementation plan is ready however impeded the progress of the EPC’s with six “pilot� hospitals designated to implement activities. the full financial and cost accounting system, and Œ The Community Organization Development other hospitals to report manually on an accrual Institute bill was recently approved by the basis by September 2000. Cabinet, and a draft bill for the Ministry of Labor Œ The MoPH is currently preparing a proposal to and Social Welfare to enhance the role and develop a second pilot for budgetary reform support for the non-government organizations has wherein provinces rather than hospitals would be passed the scrutiny of the Council of State and is block-granted. awaiting Cabinet approval. Ministry of Commerce (MoC) Other Ministries Œ Following a functional review, the MoC has Ministry of Education (MoE) identified core activities such as trade policy development and business support and realigned Œ The Education Reform Committee (ERC) its department's functional responsibilities with required by law has been established and staffing these activities; the new organizational structure is underway. The ERC is responsible for securing fits the core tasks without cross-departmental cabinet approval for all measures needed to overlap. reform the MoE. Œ The MoE has completed 20 Action Plans required by the Education Act for reform implementation, and has submitted these to the ERC. These include inter alia role definition for a smaller Thailand Economic Monitor 51 Thailand Economic Monitor 52