-"" e~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~... ...... >l : ,,% ..'._...... 77~0 .''' .'Y: : NI - " Bangkok, World Bank Thailand Ofrice July 2001 %I b 14b F]oor Tower A Countrv Director: J. Shivakumar Diethelm Towers Sector Director: H. Kharas 93/1 Wircless Road Coomments to: Bangkok 10330. Thailand Ejaz GIaili, (662) 256-7792 Kaspar Richter hrttr;:i;^2ww .woi lldbap kl.orl.th Euhani4it'.worldsbarnk.or Kitchn.r(- worldbank org Table of Contents Thailand Economic Monitor Summary i I Introduction .......1........................ I II. Growth Outlook Uncertain. 3 III Fiscal Stimulus, Public Expenditure, and Public Sector Reform .10 IV Financial Sector Development . 15 V. Corporate Restructuring .22 VI. The Legal Framework .24 VII. Corporate Goverance .26 VIII. Privatization & SOE Reform .28 VIIII Information, Science and Technology .33 Figures Figure 1: Room for productivity growth. 2 Figure 2: Return to capital has bottomed out. 2 Figure 3: Thailand's recovery slowing.. 3 Figure 4: . . .mirroring similar trends across the region. 3 Figure 5: Thai output is still below pre-crisis levels. 4 Figure 6: Poverty reduction stalled. 4 Figure 7: .. . but is expected to pick up with recovery next year. 4 Figure 8:: Real wages differ across sectors. 4 Figure 9: Unemployment remains high .5 Figure 10: Export growth strong in the past. 6 Figure 11: . . .led by IT exports .......................... _ 6 Figure 12: . . .but IT exports have slowed down recently. 6 Figure 13: Declining surplus on external balance. 6 Figure 14: ... as terms of trade deteriorate. 7 Figure 15: Consumption remains weak. 7 Figure 16: ... and consumption levels still below pre-crisis level. 7 Figure 17: Investment falling across the regio. 7 Figure 18: Mixed signals from private investment indicators. 8 Figure 19: Investmenit applications to BOI dropping. 8 Figure 20: Thailand still attracting large FDI. 8 Figure 21: FDI diversified across sectors ............................................. 9 Figure 22: GDP follows decline in manufactLring ................................. 9 Figure 23: Capacity utilization remains low ......................................... 9 Figure 24: Domestic credit yet to recover ............................................ 9 Figure 25: Difference in lending and deposit rates stays high ..................... 1 l 0 Figure 26: Undershooting of deficit targets .......................................... lO Figure 27: Thai public debt in line with EA5 ........................................ 12 Figure 28: Distressed Loans Remain High ........................................... 15 Figure 29: Contributors to NPL Reduction .......................................... 15 Figure 30: Quarterly Changes in Reported NPLs .................................. 16 Figure 31: Rising NPL Re-entry Rates ...................... ........................ 16 Figure 32: Non-performing Loans by Types of Financial Institutions ............ 18 Figure 33: Domestic Funding Sources for Private Sectors ........................ 20 Tables Table 1: Growth dependent on strong domestic demand ......................... 5 Table 2: Fiscal impulse switching from current to next year ...................... 11 Table 3: Capital expenditures in social sectors decreasing ........................ 12 Table 4: Grant disbursement ratio low for investment budget .................... 14 Table 5: Status of CDRAC Target Cases ............................................ 23 Table 6: Progress of Central Bankruptcy Court ............. ....................... 24 Table 7: Estimated Market Value of State Enterprises and Listing Schedule ... 29 Table 8: Key Initiatives in Infrastructure Regulatory Refonrn ..................... 3 1 Boxes Box 1: Measures to Stimulate the Capital Market ................................. 21 Box 2 Why corporate restructuring continues to be slow? ........................ 25 Box 3: Premium for Good Corporate Governance ................................. 27 Box 4: Corporate Governance Reform in Thailand-Challenges ahead ........ 28 Box 5: Lessons of Experience on National Holding Company .................... 3) This Monitor was prepared by a team consisting of Angkance Luangpenthong (team support and preparation of the report), Behdad Nowroozi (corporatc governance), Dana Weist (decentralization), Ejaz Ghani (task team leader). Kaspar Richter (growth and fiscal policy), Magdi Amin (information, science and technology), Michael Markels (financial sector), Renuka Vongviriyatham (financial sector), Tanatat Puttasuwan (corporate restructuring and legal rceform), and Trevor Bull (privatization and SOE relormn). Inputs wcre recceived from Arvind Gupta, Peter Bitnble, and Peter Raymond. The learn would like to thank Homi Kharas, ljaz Nabi, Jayasankar Shivakumar, Lais Sondergaard, Lorenzo Giorgianni, Mario Reyes Vidal, Reza Moghadamn, Stefan G. Koeberle, Steve Schwartz, and a number of researchers and agencies in Thailand tbr their comments. Thailand Economic Monitor Summary Thailand's current economic situation should be seen in the context of the deterioration in the global economy, which has been sharp and sudden in 2001, but is expected to recover in 2002. The US economy has slowed down considerably this year, with a steep fall in the manufacturing sector, led by a contraction in business investments in IT. Meanwhile, Japan is sliding into recession and Europe faces increased risk to its growth outlook. Policy makers around the world have responded to this downturn by lowering interest rates and increasinig fiscal stimulus. There are early signis that this downturn may be bottoming out, as oil prices soften, inflation outlook improves, and the non-manufacturing sectors show signs of recovery. This Monitor reviews recent economic developments in Thailand against this global-economy backdrop and assesses Thailand's ability to withstand the global shocks. Our assessment is that Thailand will weather the global downturn. Foreign exchange reserves have been restored to comfortable levels, increasing as a ratio to short-term debt from 57 percent in 1997 to 137 percent at end-March 2001. Total external debt has fallen from 70 percent of GDP in 1997 to 65 percent in 2001. The external trade surplus fell in the first quarter of 2001, partly as a result of the deterioration in the terms of trade, resulting from the rise in oil prices (oil accounts for 8 percent of import), depressed prices for electronic exports (electronics account for 35 percent of total exports) and non-oil commodity prices like rice. However, the terms of trade are likely to improve by 2002, as oil prices soften further, and electronic goods prices begin to improve. Despite the deterioration in the trade balance, the external current account, helped by the tourism sector, is expected to remain in surplus in 2001. Thailand has implemented several structural measures that address the underlying causes of the crisis in 1997. Financial sector reform has resulted in better capitalized banks, improved regulatory and supervisory regimes, and a more balanced financial system. Capital markets have been deepened which has helped to reduce firms' relianice on extemal debt and the vulnerability associated with this. Non-financial corporates have improved their earnings in the last few years, helped by the export boom. Domestic economy is more diversified now. Manufacturing is no longer the largest sector in Thailand. Services replaced manufacturing as the largest contributor to growth in the second half of 2000, and attracted a large proportion of foreign direct investments in 2000. However, there are risks that need to be managed well. The Thai recovery, as with the other East Asian countries, was led by exports. And IIow with the global downtum, export growth has lost its momentum significanitly. External demand has softened at a time of weakening domestic demand. Domestic private investment and consumption growth fell in the first quarter of 2001. Recovery in business investment has been held back by the high level of distressed assets in the banking system, slow progress in corporate restructuring, and potential concern regardinig the consistency of short-term policies with the medium-term goals. We now forecast GDP growth to come down to 2 percent in 2001 compared to 4.3 percent growth in 2000. The prospects for employment growth and poverty reduction are affected adversely by the slowdown. Until the onset of the crisis in 1997, high growth had created many employment i opportunities, wages had increased rapidly and poverty had fallen (from 32.6 percent of the population in 1988 to 11.4 percent in 1996) lifting nearly a million people out of poverty every year. This came to a halt in 1997. As a result of the crisis, more than one million Thais are still without a job and poverty incidence increased sharply to 16 percent of the population in 1999 (i.e. 9.8 million people live at less than $1.5 a day). Economic slowdown would delay the attainment of poverty levels of 1996 beyond 2002 and thus would prolong hardships for the poor. The challenge is to address the short-term downturn in a manner that positions Thailand for a healthy recovery when global economic environment improves next year. The new Government, with a strong electoral mandate, has introduced a number of pro-poor and pro-rural programs as part of the fiscal stimulus to support recovery. These include the village fund, health fuind, debt suspension for farmers, as well as a fiscal stimulus reserve fund to be implemented next fiscal year if the expected pick up in extemal demand does not materialize. Debt restructuring could be accelerated through the formation of a national asset management company (TAMC). The stalled privatization of state owned enterprises is being revived. These are steps broadly in the right direction. The challenge is to ensure that these policy actions are consistent with the mediumn term objectives of (i) maintaining sound macroeconomic policies, (ii) developing a well balanced financial sector with a strong credit culture, (iii) enabling both public and private firms to become more competitive, and (iv) developing modern public sector institutions to improve efficiency, transparency, and competition. In addition, pressure for rapid reform must be balanced against the need for transparency and broader participation in government policy formnulation. Fiscal stimulus will need to be smart. The government has increased the size of the budget deficit to 5.9 percent of GDP for this fiscal year from 4.6 percent last year. The fiscal imupulse for the current fiscal year is likely to be positive and will reach about one percentage point of GDP. The pro-poor fiscal initiatives have not created excessive public debt burden, but the size and the contenit of the stimulus has to be viewed in the context of a medium-term macroeconomic framework. Public debt has increased three-fold compared to the pre-crisis levels, mostly due to costs arisiiig from financial sector restructuring. Including the liabilities of non-financial public enterprises, public debt rose to 60 percent of GDP at September 2000. This level of public debt is comparable to the other countries in the region but is sustainable only if GDP growth remains at 4-5 percent per annum, interest rates remain low and the surplus on the primary fiscal balance can gradually be increased. The recent slowdown in growth places a limit on the size of the fiscal stimulus, as would increase in interest rates. The quality of the fiscal spending package is not just a question of its size, but also of its targeting and timeliness. Pro-poor expenditures with high local contenit have large multiplier effects, and the impact of this additional spending on economic activity could be considerable - if delivered effectively and in a timely, manner. The government could, for example, ensure that village funds are targeted at the poorest villages first, and their capacity to implement the program is strengthened. The government has protected public expenditures in the social sectors. But there has been a substantial shift from capital to current expenditures. The fiscal program has to be accompanied by a strong commitment to complete the on- going structural reform of the economy. As shown by the Japanese experience, fiscal stimulus by itself will not be sufficient to sustain a healtlhy recovery. Structural reforms that encourage efficient utilization of capital and support broader productivity growth also need to be pursued vigorously. There are signs that the return oni capital and productivity growth have started to ii improve and financial sector reform must be comnpleted so that capital allocation and project investments can continue to strengthen to bring about a robust recovery. If well-structured, the recently established Thai Asset Management Corporation could help boost financial restructuring. The design of the TAMC addresses well some of the incentive issues: NPLs will be acquired from both state and (to a lesser degree) the private banks; loans to be transferred from private banks will be limited to multi-creditor, non-performing accounts larger than $100,000 per account; private banks would share gains and losses with the government on their transferred NPLs if recovery rates turn ouit to be different from initial transfer prices. The design and the special legal powers granted in the TAMC Act will speed up restructuring but implementation will be a challenge. The outcome of the TAMC will depend on the quality of its management, credibility in deal making, transparency and simplicity in restructuring guidelines for borrowers and guarantors, and the incentives for TAMC managers to maximize recoveries and minimize the cost to taxpayers. Legal and judicial reforms are needed to help accelerate corporate restructuring. There is a huge backlog of cases in the civil courts, with over 55, 000 debt restructuring cases pending judgement. At current judgement rates, it will take 6-7 years to clear the backlog, plus another two years to auction the collateral. Given the serious backlog of cases and the limited role of TAMC in restructutring the NPLs of private banks (TAMC will purchase only 25% of their NPLs), the Government will need to accelerate legal reforns (e.g., bankrtptcy and foreclosure laws) to support corporate reforms. The policy towards state banks should be consistent with the medium-term objective of developing a sound financial system. Pro-active measures to manage the economic downturn by setting lending targets for the state banks, and changes in the loan classification and provisioning standards to make it easier for the banks to lend, should not conflict with the medium-term objectives of improving credit culture, strengthening prudential regulation, and promoting competition. Because banks are still copinig with the NPL problem, they will continue to be cautious in extending new loans, given the poor credit quality and lack of credit information on most borrowers. But loans are starting to grow (incremental bank loans increased in Ql 2001) after substantial declines in 1999. Setting lending targets that require state banks to lend more than prudence and caution demands would conflict witli the objective of developing a sound financial system and must be eschewed. Several measures have been announced to revive the privatization program, which is a welcome development. These include (i) government announcement that 18 state owned enterprises would be privatized by 2003; (ii) creation of a National Holding Company under which commercial state enterprises will be gathered; (iii) announcement of a schedule of Initial Public Offerings (IPOs) of state enterprises on the Thai stock market; and (iv) inclusion of Employee Share Ownership Programs (ESOP) in the IPO transactions. These announced measures, if properly implemented, would speed up privatization of large-scale enterprises, and could significantly deepen and strengthen the capital markets. A key implementation challenge is the organization structuLre, transparency in operations, and the management of the proposed national holding company. If handled with skill, the IPO approach can drive forward regulatory and structural reforms, and instill confidence in the general public, among the employees (via the proposed ESOPs) and in the investment community and thus provide greater momentum to the privatization program. Transition to commercially based governance will be important for improving efficiency and protecting the rights of minority shareholders. 111 I. Introduction Thailand's growth outlook has deteriorated returned to profitability, and raised since the publication of the last Economic substantial amounts in new capital. State Monitor in December 2000 as a result of the bank restructuring has been less speedy, but sharp and sudden downturn of the global the creation of the Thai Asset Management economy and weak domestic demand. We Corporation (TAMC) provides a potentially now forecast GDP growtli of 2 percent in powerful tool to accelerate debt 2001, compared to a 4.3 percent growth rate restructuring. Firms, especially in the in 2000. This slowdown in economic tradable goods sector, have shown strong activity presents Thailand with the earnings figures over recent years, and are in immediate task to put the economy back on a sound position to cope with the short-term track for recovery. However, this year's economic slowdown. growtlh reduction is unlikely to turn into a recession, let alone magnify into the crisis In spite of the achieved progress, further proportions experienced in 1997/98. The structLral reforms are essential to imnprove challenge for the government is to the medium tenn growth outlook. A "growth implement policies that are consistent with accounting" exercise for Thailand since the mediunm-term growth and poverty 1993 shows that until 1996, growth was reduction objectives, so that Thailand will based on sluggish total factor productivity be well placed to benefit from the return of a (TFP) growth, modest expansion of the more favorable external enviromnent labor torce, and vast capital accum-ulation. predicted for 2002. High rates of investment led to increases in the capital-output ratio, and to declines in Thailand will be able to weather the currenit the marginal product of capital. This period downturn and return to a higher growth of 'extensive" growth, based on increases in trajectory. Thailand's external vulnerability factor inputs, came to a sudden hold during has been substantially reduced over the last the crisis. Capital accumuLlation fell by years. Total external debt has fallen from 70 almost two thirds, and TFP growth dropped percent of (3DP at end-1997 to 65 percent of by close to 10 percent, leading to a large GDP at end-Marclh 2001. Short-temi private contraction in GDP. As tlle economic debt continued to fall over the last year, as recovery has gone under way in the last two low domestic interest rates encouraged years, the growth in capital and labor has enterprises to pre-pay their external debt, remained slow, while TFP growth has and they reached at the end of the first improved somewhat. The fall in the quarter 2001 no more than half of the end- investmenit rate reflects a number of factors, 1997 level. Gross foreign exchange reserves including excess capacity, a downward have been restored to comfortable levels, adjustmenit in the medium-term growth increasing as a ratio to short-term debt from prospects, and misallocation of capital, as 57 percent in 1997 to 137 percent at end- evident from the high share of non- March 2001. Capital outflows have slowed performing loans on banks' balance sheets. down as Thai banks have already reduced The marginal product of capital is low, but it their foreign obligations by three quarters may have bottomed out. Over the medium- since the end of 1997. run, output growth of 4-6 percent will only be possible with higher TFP growth, The improvements in the external balance stronger growth in human capital, and a have been supported by progress in financial recovery in private investment, all of which and corporate restructuring. Several private require stronger implementation of structural banks have reduced their distressed assets, reforms. I Figure 1: There is room for investment and productivity growth Growth Accounting: GDP, TFP, and Input Growth Rates (%) 1 5 1 0 1 0 o1 993194 5 - w * 1 995196 r-5 1 997196 - 199912000 -10 GDP TFP Capital Labor Labor Ouality Source: Staff Estimates. Figure 2: Return to capital has bottomed out Figure 2: Marginal Product of Capital (1992=100) 100.= ......... . .. 90 85 - 80- 75 1992 1993 1994 1995 1996 1997 1998 1999 2000 Source: Staff Estimates, IMF. The establishment of a National Holding well as weakening the ability of the NHC to Company (NHC) and the corporatisation separate commercial objectives from and listing of 18 state enterprises on the political objectives. Stock Exchange of Thailand will strengthen the capital market. To fully realize the This Economic Monitor analyses Thailand's potential, the NHC will need to ensure that challenges in sustaining a healthy recovery issues relating to governance, process against the backdrop of weakening organizational, transparency and global demand. Th-e first section sets the management and board competence are dealt context by describing the impact of the with effectively. Should such issues not be global slowdown on the Thai economy. taken into account, then significant risks will Subsequent sections explore recent be posed to the commercial operations of the developments in six key dimensions of the NHC and its subsidiary operating entities. medium-term policy and structural reform Further, this has the potential to result in the agenda: accumulation and amalgamation of the inefficiencies inherent in the state enterprise operating and decision making stnrcture as 2 * Fiscal stimulus, public * Corporate Governance expenditure, and public sector reform * Privatization and SOE reform * Financial restructuring * IT and science and technology * Corporate restnLctLuring and * legal reform Progress in these areas will allow Thailand nmedium-term, and ensure further reduction to take f'ull advantage of the next upswing in in poverty and improvements in living global growth, raise GDP growth in the standards. II. Growth outlook uncertain Four years after the onset of the crisis, Figure 3: Thailand's recovery slowing... Thailand is continuing its fragile recovery process. Over the last years, a supportive Quarterily Real GOP (1988 Prices) macroeconomic policy framework and 10- - - _8---------- -50 strong external demand have fostered the 800 economy's recovery. With large current / Growth (Y-o-Y, account surpluses offsetting capital 0 - l 750 %LHS) outflows, reserves have been stable and -5 -, 700 . . .Level (Billion adequate to cover the stock of short-tenn , Baht, RHS) debt. Against this backdrop, the short-term -10 650 outlook has deteriorated as Thailand feels -15 1 i f X 1 X 1 1 1 1 1 t 600 the impact of a global economic downturn, 97Q1 9703 9801 9803 99Q1 99Q3 OoQI 0003 01 which is being exacerbated by the weakness Source: BOT, NESDB. in domestic private demand. Figure 4: ...mirroring similar trends Sluggish grow%th across the region EAS Quarterly Real GDP Growth in 2000 (Y-o-Y, %) Thailand, just as the other export-oriented 15 - couLntries in the East Asia region, is affected by the global downturn and weak domestic 12 - ., demand. Real GDP growtlh fell to below 3 * ., __ Indonesa percent during the second half of 2000, the . . . . Korea, Rep lowest level of any of the East Asian crisis 6 - .... Malaya countries (EA5), and reached just over 4 - _ Pfntipprnes percent over the entire year, about the same 3 -Th-_la growth rate as in 1999. The slowdown continued in the first quarter of 2001, with o- Q 0 0 annual GDP growing by only 1.8 percent (and, seasonally adjusted, by just below Source: World Bank East Asia Brief. zero), the lowest level since the second quarter of 1999. Thailand was at the end of last year together with Indonesia the only EA5 country still below the pre-crisis GDP level. It felt the impact of the crisis stronger than other EA5 countries, and rebounded from the steep output decline in 1998 more slowly, especially in comparison to Korea and 3 Malaysia. The sluggish recovery points to a Figure 7: ... ut is expected to pick up large unfinished economic reform agenda, with recovery next year ranging from corporate and financial EAS Conrwumption Poverty Headcount ACtual and Projetiaons restructuring to legal reform. (¶, Us2 per day, 1993 PPPS) 70. Figure 5: Thai output is still below pre- crisis levels 50 .,, . . . .., . .. .- ---- --- -- EA5 Annual Real GDP Levels (1996=100) 40 ..-... 20 115 .In.. donesia 10 I .. . . . ....... * . _ . . ~~~~~~~~Kxora, Rep.O - - - - 'Malaysia 1996 1997 1998 1999 2000 2001 2002 100 - \' >oM' =Thailand Source : World Bank East Asia Brief. 85 Other dimensions of well-being also point to 1996 1997 1998 1999 2000 2001 2002 little improvement in living standards over Source: World Bank East Asia Brie{, the last year. According to the latest Labor Force Survey, real wages remained flat from Po-verty reduction stalled November 1999 to November 2000. However, there was a large variation across Lower growth has led to less poverty sectors. Since early 1999, real wage reduction. The decade of the 1990s was a increases were highest in the commerce period of strong growth and poverty industry, whereas agricultural wages reduiction in Thailand and in the East Asia declined. In addition, the situation on the region as a whole. The trajectory of growth labor market is improving only slowly. In with- poverty reduction over the 1990s was November 2000, 92 percent of the labor interrupted by the Asian crisis. Amongst the force were in full-time employment, EA5 countries, Tlhalaind, together witlh compared to 91.6 percent in November 1999 hIdonesia and Sotuth Korea, witnessed sharp and 89.2 percent in November 1998. The increases in poverty by the end of 1997. number of unemployed increased over the With the resumption of growth, per capita 12 months until November 2000 from just consumiptioni levels have started to rise over one million (3.3 percent) to 1,200,000 again, but it will take Thailand up to 2002 or (3.6 percent) individuals. beyond until poverty has returned to the 1996 levels. Figure 8: Real wages differ across sectors Figure 6: Poverty reduction stalled... 120 R-g - 9by ea ( -1i999.100l Poverty Head Count (National Poverty Line) and Real Per Capita Consumption - _a 1 5 -0~ - 14 5 0 1 0 25 , ! - , 140 / * - ~~~~~~I31 ...Headcoinot lnorra (% -. \ \ 1~~~~~~~~30 ~ m( O- ~ - 120 ileadontol Cnsnunlp0o2 100 11 Mean Consumption *0~~~~ 120 l1'~~~RH0i ~LHS) 105 _ 1990 1992 1990 1998 1509 2000 2001 2002 90 FebOO b-Domn AoI-9R -b,99 Fn b bO y- 00 A'Q-00 -a.320 Source: World Bank East Asia Brief Source: NSO, Labor F orce Surey. 4 Figure 9: Unemployment remains high Recovery was export-driven... 6 ---------Labor Force Trends Thailanld's recovery was export-driven. The s - .-> ., economy has seen large increases in trade of ; ,UAdepIoyment goods and services witlh other countries, 3 f*... Un empoyed with exports and imports rising in dollar 2 --k Se_on_____. _ terms by 20 to 30 percent. Net exports have j - \ _/ \ _ / , Labowr Force for the third year nmning made a positive o- contribution to GDP growth. Exports and koSR -IIIA PitL NW 6 Figure 14: ... as terms of trade Figure 16: ...and consumption levels still deteriorated below pre-crisis level EA5 Quarteily Real Ptivate Consumption Levels Monthly Terns of Trade and Exchange Rate 120 - (04 1996=100! 105 - - - ----- -- --- .50 100- g ......................... * -48 110- 1/\\ __- t 59, *~ ~ ~ ~ ~~4 -o --Terrnqsof 11 _A- --s -- Indr0res70 95 - , ,= / - 42 Tadrs IJan | 100 o < - v/, - _ - . Malyoi, . x-.-- ,- _Bahtpsr - - Ph,lIpp7nn o 90 - i ~+ & - 38 Dollar ./ . K94., Rep. 85 - iZ-x - 34 90 - 7w,liano 85 '0'~ 30 Jan-99Apr-99 Jul-99 Oct-99Jan-00 Apr-00 Jul-00 Oct-OOJanOl Apr-01 Apr 02 03 'A Ql Q O 04 Cl 02 03 Gl G' G 97 97 9 7 74 94 99 92 99 742 99 40 70. 0o3 rr9 Source: BOT. Source: World Bank East Asia Briel. Private consumption weak Investments held back The deterioration in the external Thailand has seen no persistent investment environment was compounded by weaker increase since the second half of 1999 as private consumption growth since thle strong private investment growth was offset second half of 2000. This slowdown has by reductions in public investment. In continued in the first quarter of 2001. The contrast, investmenit in Malaysia, Philippinies composite private consumption index, and Korea have already recovered from the constructed out of nine key private trough. Private investment growth in consumption indicators, is almost flat to Thailand slowed down from 14 percent in slightly positive, compared to anl increase of the second and third quarters of 2000 to 6 4.4 percent a year ago. Only passenger car percent in the last quarter of 2000. It sales showed an increase over the last continues to remain low in the first quarter quarter in 2000. Overall, private of 2001, with the quarterly growth rates of consumlption has yet to recover from the the key indicators all below the growNth rates crisis. Thailand is the only EAS country attained one year ago. While gross fixed where private consuniption is still below capital investment is still below pre-crisis pre-crisis level. levels in all EA5 coumtries, the contraction in Thailand was by far the largest. Figure 15: Consumption remains weak... Quarterly Growth of Private Consumption Indicators (Y-o-Y. %) Figure 17: Investment falling across the region C0,npooOor roair. EA5 Quarterly Real Gross Fixed C a pital Investment in X -77 7E rons9m0Srr00 b770797 2000 (Y.o.Y %) 03 SS _ .7407701 C.- --r--n ofr -3 - ..- ' 40 339044 (MOUro SUS, 30 -SP- _ . s;< 25 ,umt .Sa- % 25 - indonesla - 70 Mr~or~Ie 9a19920 -- . 70,o nSr,trl.ycl . OHS.) 15 - > RS -Korea, Rep. Q100 20 Q300 0400 Q007 10 -a 5 - -\ i _-PhilipPpies Source: BOT. 0 - . -5- -10 -l l ll 01 00 Q2 00 Q3 00 04 00 Source: World Bank East Asia Brief 7 Figure 18: Mixed signals from private Foreign direct investment holds up investment indicators Quarterly Growth of Private Investment Indicators -o-Y, '/.I On the surface, the worseiiing of the 45 - . . .----.---investmeient climate also affected net foreign - _ * \ .Domes8lc cement direct investmenit (FDI). Net FDI has 30- . i dropped for the second year in a row, _ - - Domestic amounting only to 2.5 percent of GDP in 15 - ommerci. - . sales (Units) 2000, or about one third of the 1998 level. In - s ; the competition for foreign investors, 0 -- 7 * --- Ird (oFsttaZ Thailanid lost ground to Korea, which has Prices. Million" Baht) advanced further in economic recovery. It 01 Q100 20 00 200 0101 received US$50 per person, less than Korea Source BUL (US$61) and Malaysia (US$129), whereas Source: 1301. in 1999 all three counttries still obtained The decline inteabout US$100 per person. However, the Thestment dc ine legesontin in theB p fors large FDI flows in 1998 and 1999 were investment privileges continued in the first mostly for recapitalization of the Thai quarter of 2001. Private investment is set to corporate sector ratlher than greenfield be weak during 2001, as enterprises continue to hold off investments. Thie slowdown in-,nvestments. Accotmtmg for this one-off tonholdmoff invtheresultm ofnotheu e slw own factor, Thailand continues to attract inlvestment iS the result of not I ust the short- susata FD.A h am ie h ter donwr ad'smn of grotl substantial FDI. At the sam-e time, the term downward adj ustment of growth etrlcmpsto fne D lw prospects. It is indicative of a reversal of the changed substtially. Servies eletc "over-investmient" during the 1990s in the apchanes tally. Servces, electrical face of excess capacity and declining applmances, machmiery and transport mnarginal p-roduct of capital. For example, hequtipment and chemicals allt gained, while private investmnenit in the construiction sector tetaesco eevdls hnI ecn is likely to remain depressed for some time of the 1999 flows. in view of the oversupply of real estate. But Figure 20: Thailand still attracting large the key to reviving private investmsent is FDIl financial and corporate reform to increase retLur to investment. EAS Net Foreign Direct Investment('. of GDP) 10 - - - - - --- Figure 19: Investment applications to BOI dropping 5 --Indonesia NetAppications forPromotional Privileges from Board Korea, Rep. of I nvestment a t toMalaysia BOI dropping~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~hiipe __0000 0 ........ IDpIna 250 - 90 -a iland 150 - . e --- Y-oY Real Growth _ _ _ - __ _' _\ _ - 50 (LHS) -5 - 50- N , \ - .3 0rlIrhonBaS1994 1997 1998 1999 2000 0- -~~~~~~~~~~~30 0 - - , s- - 20 Source: World Bank East Asia Brief. .100 ~~~~~~~~~~~0 -100 - Il -- 0 01 00 Q200 Q300 0400 Q10 1 Source: BOT. 8 S/~iCtd Lc//82:! 7G t rU. Figure 21: FDI diversified across sectors Figure 23: Capacity utilization remains low Net Foregin Direct Investment by Sector (% of Total Net FDI) 35 ..Quartrly Manufacturing and Industdial Capacity Uftfzatton _5__,_!_!_S6- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -------------------- 68 20 8 ce,gpeo, 1 0 E21999 '' 206 , A 00tI6 0 a 2000 *04 Pou-: BOT.00 0 W'eak credit growth in spite of low Manufacturing no longer the largest interest rates contributor to growth In view of the low capacity utilization and Turning to the sectoral composition of GI)P, the absence of inflationary pressure, the the reduction in manufacturing was a key Bank of Thailand has mnaintain1ed an factor in the trend decline in real GDP accommodation monetary policy. However, growth since the second half of 1999. In the the large liquidity available on the markets second half of 2000, manufacturing was has not transformed itself into higher credit replaced by the service sector as the largest volume due to weak investment demand and contributor to growth. The strong rise in the banks' high risk aversion in view of still manufacturing index during 1999 failed to sizable shares of non-performning loans on continue in 2000, leavin1g production up by their balance sheets. This factor also 1.4 percent in th1e first quarter of 2001 year- accounts for the still large spreads of banks' on-year, owning to higher output of vehicles lending and deposit rates. Th1e recent and parts and jewelry and ornaments. The increase of the Bank of Thailan1d of thle 14- slowdown in manufacturing contributed to a day repurchase rate by 100 basis pOin1tS to drop in industrial capacity utilization to no 2.5 percent has so far had little impact on more than 56 percent. lending and deposit rates. Fqigure 24: Domestic credit yet to recover Figure 22: Gl)P follows decline in Mooeo, Net DomesticAssets. C,uDdO. ae,6Dep:osits Blons m anufa cturin g 5500-.......................... Quarterly Sectoral Contributions to Real Growth 5250 . 10 - - - O Y.' MO of GDPJ )........ 5 0 - is2 10-~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~0 _ '5000 -CX_3menid 10 -0 99 99 w gj -0GOP iuOk DrosO 5 - ApocoOsrue - ,. __Co~nmrrcia \ . ~~~~~~~~ ~~~~~4750 -e ank Crercdmt 0 - ------e4~ur 4500 _ ~~~~~ _. _ _ 0 a 10 0 3 99 0100 0300D 0101t .0" Source: BOT. -5- 010 GG02GG 030 GO 4Q4 0G101 Source: BOT, NESDB. 9 Figure 25: Difference in lending and Figure 26: Undershooting of deficit deposit rates stays high targets IM.,arf Rat. Olft...nia) over CPI ('b) g .-. ....... Di..-..1 Budget Deficit: Actual versus Projection (% of GOP) 8- . .~ - -~ - - -' - M~rn,p~e~ 0 1997/98 1998/99 1999/2000 7 -- .- R- ueP*g ~ ouc: 3IO M: tafEsiats 6 ~~~~~~~~~~~~~~~~~~~~~2 5 4 :N fa-rnets expenditure, and public spending irUvolv measures both outhome 8~~~~~~-. 1 and 10 - It has ~~p.~OO ~co o~t-oo j~c.oi Source: MvOF, IMF, Staff Estimate>5 Source: BOT. New fiscal initiativies III. Fiscal stimulus, public The government's plans to boost domestic expenditure, and public spending involve mieasures both on the revenuie and expenditure side. It has sector reform postponed the reversal of the VAT rate from 7 to 10 percent by two more years. The The govemnent has maintained an administration has taken steps to implement accommodative fiscal stance to support the fiscal spending programs which featured recovery process. However, over the past prominently in its election campaign. They three years, the actual comprehensive public include sector balance was less expansionary than * a three year debt suspension moratorium planned. The undershooting of deficit targets for farmers, with eligibility restricted to is likely to continue also for the current loans not exceeding Bt 100,000, for a fiscal year. For the first two quarter (October total costs of around Bt 10-15 billion 2000 to March 2001), the accumulated (less than 0.3 percent of 2001 GDP); disbursement ratio was equal to 40.5 * a revolving village fund of Btl million, percent, compared to a target of 40.9 distributed to the about 70,000 villages percent. In addition, the balanice of the non- over a three-year horizon for a total cost financial public enterprises was in surplus of up to Bt 77 billion (around 1.5 by almost 0.5 percent of GDP, relative to a percent of 2001 GDP): and deficit target of close to 1 percent of GDP * a universal coverage health scheme for the whole fiscal year. The authorities reducing out of pocket health have stated their intention to accelerate expenditures to Bt 30 per visit, which enterprise capital spending to meet the was launched in six provinces on April deficit objective, but this has proven to be I, and is scheduled to be extended to challenging in the past. This pattern another 15 provinces on June 1, fuided highlights the govermnent's difficulties to by an Bt 8 billion allocation (0.15 successfully implement expansionary fiscal percent of GDP) in 2001/02 as foreseen policies during times of sluggish domestic in the preliminary next year's budget demand. plan. While the details of these programs are still being worked oLtt, their fiscal impact renmains limited. The fiscal impulse for the current fiscal year is likely to be positive, and to reach about one percentage point of 10 GDP in 2000/2001. By contrast, the fiscal "reserve ftnd" that would only be spent if impulse for 2001/2002 is likely to be the expected acceleration in growth is negative, even after including the Bt 50 threatenled. billion (1 percent of GDP) fiscal stimulus Table 2: Fiscal impulse switching from current to next year Fiscal impulse, current and next fiscal year 2000101 2001102 Projected budget balance* -5.9 -5.4 of which: Cyclically-neutral budget balance -5.1 -5.2 Fiscal stance 0.8 0.2 Fiscal impulse 0.9 -0.5 *For comprehensive government sector, including central and local govemment, extrabudgetary funds, FIDF interest payments, the non-financial public sector enterprses, and quasi-fiscal activities like village fund and debt suspension for farmers. Sowrce: IMF, Staff Estimates. Quality of public expenditure percent in 1999/2000 as a result of social safety net programs introduced to contain The quality of the fiscal spending package is the social costs of the economic crisis. The not just a question of its size, but also of its government will have to assess whether this targeting and timeliness. Pro-poor shift is to be temporary or preserved in the expenditures with high local content have future. Second, while social sector spending large multiplier effects, and their impact of of the central govermnnent as a percentage of this additional spending on economic GDP has remained fairly constant, there has activity could be considerable - if delivered been a substantial shift from capital to effectively and timely. In addition, new current expenditures. Capital expenditures fiscal initiative have to be viewed in the accounted for about one third of spending in context of sectoral strategies and their 1996/97, and only for 17 percent in impact on the overall com-position of public 1999/2000. This trend applies across the spending. Looking at the trend in social board, including education, health, and spending of the central government over the housing. This pattern raises concerns with last four year, two features stand out. First, regard to the maintenance and upgrading of the share of social security in overall social infrastructure in the social sectors. spending rose from 10 in 1998/99 to 16 11 Table 3: Capital expenditures in social sectors decreasing Social expenditures of the central government 1996/97 1997198 1998199 1999/00 Total expenditure 7.6 7.5 7.9 7.6 Education 4.1 4.2 4.4 4.1 Health 1.6 1.7 1.6 1.4 Social securiy and weHrare 0.7 0.7 0.s 1.2 Housing and commLtnity amenities 1.1 0.9 1.0 0.9 Current expenditure 5.1 5.4 6.1 6.3 Education 3.1 3.3 3.7 3.6 Health 1.1 1.2 1.4 1.3 Social security and welfare 0.7 0.7 0.8 1.1 Housing and community amenities 0.1 0.1 0.2 0.3 Capital expenditIre 2.5 2.1 1.8 1.3 Education 1.0 0.9 0.6 0.5 Health 0.5 0.5 0.3 0.2 Social security and welfare 0.0 0.0 0.0 0.0 Housing and community amenites 1.0 0.7 0.8 0.6 Source IMF. Staff Estimates. Public debt outlook Performance-Based Salary Increases for Any expansionary fiscal policy will have to Thai Civil Servants balanced against market concerns with regard to public debt. It increased threefold A new compensation scheme for civil compared to pre-crisis levels, mostly due to servantts was introduced this year. Civil costs arising from financial sector servants' compensation has not been restructuring, and amounted, including the adjasted significanitly since 1994. The new liabilities of nonfinancial public enterprises, scheme is designed to introduce to close to 60 percent of GDP at September performance-based compensation and to 2000. Apart from medium-term fiscal move away from guaranteed annual pay consolidation, returning to GDP growth raises that are unrelated to performance. The rates above 5 percent and maintaining low Civil Service Commission has allocated interest rates are key ingredients for a steady Baht 14 billion for pay raises in fiscal year decline in the debt-to-GDP ratio. 2001, with Baht 5 billion realized from savings from the Government's early Figure 27: Thai public debt in line with retirement program. Salaries for the civil EA5 service cost about Baht 280 billion a year. Performance and compensation evaluations will be conducted semi-annually (on I April 12C0 ICNForalgh [ and 2 October), with increases covering the six-month period prior to these dates. Pay raises are limited annually to 6 percent of the total salary bill in aniy department or 40.0 2g E :t 00 00 _ ! agency in the previous September. The new F01 _ X rE ischeme also iiltroduced a one-month pay bonus, to be paid to the "most efficient and hard workineg civil servants. Departmental- level panels will review proposed salary Source: World Bank East Asia Brief, increases to reduce the risk of supervisors abusing their authority. Civil servants who felt that they were mistreated could seek 12 redress from the newly-inaugurated governments, and this target will most likely Administrative Courts. be met. However, whether the actual revenues will be 20 percent is much more uncertain, due to delays in disbursing Decentralization to Local Administrations subsidies for specific projects. The 1997 Constitution and the Nationial The composition of sub-national revenues is Decentralization Act mandate the likely to change as the Government moves decentralization of service delivery and toward the targeted 35 percent in FY06. financing to local government Local own revenLes are planned to increase administrations. The Act specified that by by 0.5 percent of total government revenues FYO1, 20 percent of the total revenues per year. Part of this increase could arise collected would be allocated to local from the new property tax, which is being administrations, and that target will rise to proposed. Shared taxes are also likely to be 35 percent in FY06. Because local a source of increased revenues. Local governments collect limited revenues from governments currently receive 8.5 percent of their own sources, the 20 percent target must the revenues from VAT, but the law allows be met by increased reliance on shared taxes this percentage to increase to 30 percent. or subsidies from the central government. In With the difficulties in disbursing the FY01, the 20 percent target was met by specific grants, the Government may choose increasing central government subsidies for to shift ftnds from specific to general specific ftnctions and for general purposes. subsidies, which do not require local governments to comply with regulations to Currently a plan for decetntralization of the same extent. ftunctions has not been translated into local expendituLre targets for different functions. Local govermnents rely heavily on shared Ideally, decentralization would be driven by taxes and subsidies from the Central consideration of which level of government Government. In FYOI, it is estimated that could most efficiently and effectively deliver 43 percent of local reveniues and grants were and finance public services. from shared taxes, and 44 percent from Decentralization experience in other grants leaving only 13 percent being locally countries has shown that it is more effective collected revenue. Heavy reliance on shared to decentralize expenditure responsibility taxes and subsidies reduces local before decentralizing resources. The focus accountability and reduces the predictability in Thailand remains on the revenue side is in of reveniue flows. Countries that use part because of the target set by the formula-based intergovermnental transfers Constitution on local revenues. There is generally have more predictable flows to currently no budget or plan for sub-national sub-national governments. There are expenditures. Action plans have been currently three types of subsidies, and a developed within specific functions, but an fourth is planned to replace the third in aggregate expenditure plan should be 2003. developed to direct the decentralization. process and ensure it corresponds with the revenues devolved to local governments. . General grants: Grants distributed to Local revenues (including shared taxes and local governments based on indicators. subsidies) in FY01 were budgeted to Indicators such as number of students. increase by Baht 56 trillion to 20 percent of elderly, villages, and population, and local total government revenue as outlined by the revenue, are used as proxies for local 8th Plan. The target is iinterpreted as the expenditure needs and revenue capacities. revenies made available to local The grants are administered by the 13 Department of Local Administration pace of local capacity building. From FY03, (DOLA) in the Ministry of Interior. these grants will be replaced by sectoral * Specific grants: Grants to be spent block grants. For FY01 the budgeted on specific purposes. The grants are also general and specific grants arnotnt to Baht administered by DOLA. 41.4 trillion, while grants with transfer of * Grants with transfer of responsibility amount to Baht 32.3 trillion. responsibility: Grants given only to Tan2bon The Bureau of Budget (BOB) prepares the Administrative Organizations (TAOs). An budget, and a summary of FY01 budgeted instrument used for FY01 and FY02 to help grants is provided below. The disbursement the transition from central to local service are monitored by the Comptroller Generals delivery. An amount is set aside for each Department in the Ministry of Finance. local government for specific purposes. Before the funds are disbursed, local Some of the specific subsidies are being governments must submit a plan and be able disbursed very slowly. The disbursement of to procure the project. The grants are the subsidies with transfer of responsibility achninistered by various agencies. is contingent on tambons' capacity to plan * Sectoral block grants: A granit given and procure specific projects, and funds are to local governments that specifies which disbursed after BOB's approval of the sector to spend the money on, but granting tambons' proposals. With the substantial local governments much more autonomy increase in local govemment responsibilities than the two grants mentioned immediately from FY00 to FY01, this is proving to be a above. This instrument is not yet stumbling block. As evident from the table, implemented, but planned to be used from only 34.5 percent had been disbursed 8 FY03 and beyond. months into the fiscal year. The problem appears to be with the investment expendituLres, which require more The subsidy system is changing during the procurement by the local governments. process of decentralizationi. Before FY01, While overall disbursements are likely to the Central Government relied on the pick up towards the end of the fiscal year, general and specific transfers. During a disbursements are likely to fall short of the transition period, "CGrants with Transfer of budgeted amount. Responsibility" were initroduced to allow the Governnent to decentralize according to the Table 4: Grant disbursement ratio low for investment budget Disbursements of Grants with Transfer of Responsibility as of May 31, 2001 Budget Expenditure Disbursement ratio General budget 12,350.28 9,671.17 78.3% Investment budget 19,996.92 1,487.58 7.4% Total 32,347.2 11,158.75 34.5% Source: Comptroller Generals Department, Ministry of Finance. 14 Accountabilitv and Transparency Nonetheless NPL restructuring has slowed dtown significantly from an average of Bt5 I Thailand has taken significant steps towards billion per month in 2000 to an average of improving accountability and transparency. Bt22 billion per month in Q1 2001 and to The Office of the Ombudsman has been Btl8 billion in April 2001 because banks are established, the Ombudsman appointed, the now restructuring more difficult cases. As a National Counter Corruption Commnission result, distressed loans barely decreased in was officially established, and seveniteen IQ 2001 and increased slightly in April Supreme Administrative Judges have beeni 2001. More worrisome is the fact that officially appointed. A code of ethics for restructured loans, whichl have reverted to civil servants has been revised and an Ethics NPL status, have been rising, which reflects Promotion Center established. Despite these poor quality of completed restructuring. achievements, independent organizations Due to high NPL re-entry rates, headline need additional resources to improve their NPLs of financial system have risen about staffing. The challlenges ahead are to furthler Btl6 billion during April-May 2001 from develop government policies and procedures bottom of 17.40% of total loans in March for budgeting, human resource management, 2001 to 17.42% of total loans in April and to and reporting functions of independent an estimate of 17.79% of total loans in May organizations: enhancing the integration of 2001. As of April 2001 accumutlated re- these accountability organizations with other entry NPLs h-ave reached 33% of reform agenicies; and promoting public accumulated NPL restructuring. awareness of the roles and responsibilities of these organizations. Emerging issues, as Figure 28: Distressed Loans Remain emphasized in the new Government's High program, include developing and vigorously implementing a government-wide Dlstressed Loans Remlairo High anticorruption strategy. oan50% . .? . . Loans 4 W 40/n 35/0 IV. Financial Sector 25 a Development 15%2iS Q X A'2'3Q4Q1Q'a 98 98 98 99 99 99 99 on oo oo oo 01 -0o Resolution of NPLs -Reported NPLs --N---Distressed Loans* . Add bach wnte-ofRs and Transfers to AMCs Total distressed loans of financial s"ouice: the BOT, the U'orld Batik's Estimate institutionis remain high. Reported non- performing loans (NPLs) of the financial Figure 29: Contributors to2NPL system peaked in May 1999 at 47.7% of Reductions(4Q1999toApril2001) total loans and have declined markedly since 2001. ~~~~ ~~BahitonlaSopna then to 17.42% of total loans in April 2001. Bat 4Q i99toApril2001 If tranisfers to AMCs and write-offs are 1 0 added back, total distressed loans of the 0 .. ... financial system have declined to a lesser 06 extent from its peak to 31.8% of total loans ........aa.Ea in April 2001. This means that NPL 0 .."... reduction does not represent a similar 0o2 .... . ...... decline in corporate inidebtedness. 0 Debt Reciassified Transfers to Wnte off Others Reduction in distressed loans had Restructuring aspenforrring AMCe accelerated during 1999 and 2000 mainly Sousc thesBT from accelerated NPL restructuring. 15 Figure 30: Quarterly Changes in directors for reasonable actions taken within Reported NPLs their authority, and for non-viable cases, foreclosure and disposal of collateral Quartedy Changes in Reported NPLs security without going througlh the civil 200 court. Baht 0 A key characteristic of the TAMC Act is that it keeps the current players in place. The creditor with the largest exposure on an account will become the asset manager, 4099 1Q00 2Q00 3000 4QOO 1Q01 working for the TAMC under a gain/loss ',,New & Re-entry NPLs Decrease in NPLs E Net NPL reducbons sharing agreement. Except in the case of non-viable loans in which foreclosure is the SoBurce: the BOT only option, debtors are favored as planners Figure 31 Rising NPL Re-entrv Rates and plan administrators for the firms they Rising NPL Re-entry currently own and manage. The debtors can 35 ........ ..... .. .... . .... . slow a reorganization plan. It appears that 30 :e: 1 planners are liable for losses stemming from _ 25 . . n , fulfilled plans; this is a risk that the debtor 2i 20 I. :S1BP : H already incurs and which outside professionals may not accept. And it is not s . . clear whether the TAMC will offer v reorganization candidates to the 8narket in order to produce optional plans, management and sources of funding. As a Source: the BOT result, the Act addresses inter-creditor problems. as did the CDRAC process, but The government has enacted an emergency retains a draw back of CDRAC in that decree wlhich fulfills its campaign promise debtors can change their minds and obstruct. to establish a centralized Thai Asset The only option for TAMC, in case debtors Management Colporation (TAMC). The reject a plan, is to liquidate the finn. TAMC will acquire up to about Btl.24 Finally, the Act is favorable to guarantors trillion of NPLs: Btl.1 trillion from state a tril ~~~~~~~~~~and debtors in that it allows release i;rom banks and their AMCs and BtO. 14 trillion liability if a plan cannot be fulfilled in good from private banks at net book value fiaith, and in the case of a debt restructunrng, (principal balance net of provisions). These if two thirds of the outstanding debt is paid. less viable loans have failed voluntary restructuring to date and many are in the While the TAMC Act provides for some courts. TAMC will exchange FIDF special powers that could speed up debt guaranteed bonds, which pay at the same rescturing her challenge s minmiin rate as bank deposits, for the transferred testr to the txayer and mffctv NPLs. Loans to be transferred from private ipemnta tio the axpayer and effectve banks will be limited to nmulti-creditor, non- outcomen wioo depend pon The performing accounts larger than Bt5 million professionalism of management and the per account. Private banks would share droeestonwhic te n employ salsth gains and losses with the goverrunent on expertise from the private sector; the their transferred NPLs if recovery rates are tr se of the deal eakngto avi different than initial transfer prices. Key conflict of terest, th poit powers include: rapid vesting of ownership interference from above and collusion from by TAMC in assets transferred by banks, itreec rmaoeadcluinfo bynTAi Cification asseTs M tsferedy eank below; the effort put forth by the Executive indemnification of TAMC officers and t6 Board, given that they are part time; the sheets, and will continue to postpone quality issuance of clear debt restructuring restructuring of their N PLs. guidelines for borrowers and guarantors; whether the bankruptcy court provides an The large NPL burden retained by the expedited, green lane for TAMC matters; private banks will continue to be a source of and the degree to which management seeks vulnerability, as the economy slows down. to maximize recoveries and minimize the The TAMC is clearly intended to alleviate cost to the taxpayer. Maximizing recoveries stress on the banks and delay any need to is not an explicit objective in the Act, but raise capital in the near future. The net book there is enough ambiguity for the value transfer price and the delay until year management and the Board, under direction five and year ten before settlement of loss of the Minister of Finance, to steer the sharing between the government and the TAMC one way or the other. banks for assets transferred to TAMC accomplish this. But the TAMC will not Implicit forbearance by the BOT on the level have a large effect on private banks, given of provisioning or loan losses continues, that private banks will transfer only about however, and several banks remain 25% of distressed assets (NPLs plus loans Lundercapitalized on an economic basis. transferred to AMCs and write-offs, but not Since the crisis broke in 1997, Thai banks yet restructured), which equates to about (state owned and private) have raised Bt 910 30% of their NPLs. While operating billion total capital, of which Bt 848 billion earnings by the best banks and their is tier-I capital. Of the total tier 1 raised to customers have trended up into positive date, Bt 529 was from the government and territory over the past year, bank earnings Bt 319 from private investors. Thai banks remain fragile, given recent negative trends have complied with the final step of the in exports, continued capacity utilization in phase-in of provisioning guidelines as of the real sector of 50-60%, and debt equity year-end 2000, but significant unrecognized ratios among firms of between 2-3 times. losses remain. Implicit forbearanice props up As a result, banks cannot rely on earnings as the weaker institutions at the expense of the source of recapitalization. banks which have more aggressively taken realistic losses in debt restructuring and The policy towards state banks should be raised capital in the markets. Three types of consistent with the medium-term objective implicit forbearance on provisioning of developing a sound financial system. The requirements exist. First, financial government has announLced plans for state institutions are allowed to provision for loan banks to significantly increase lending, losses net of collateral value. This generally including BtSO billion from KTB. understates provisions because appraisals of Unfortunately, excess capacity in the property tend to be overstated. Second, the economy, low credit demand among credit regulator does not require stringent quality worthy borrowers and poor risk control over the reclassification of management capacity of state banks limit restructured loans. Third, the regulator has their ability to lend on a risk adjusted basis. postponed the implementation of the The Governmrent also announced plans to accounting standard (IAS 39) which requires sell minority stakes of KTB and Bank Thai net present valuation of restructured loans, to local retail investors over the next year. instead of the current practice of relying on Hlowever, a change towards commercially collateral value. Without removal of based corporate governance for these banks existing forbearance, banks have little is necessary to enhance their viability and to incentive to revalue their collateral to market promote incentives which favor the mnost levels and to recapitalize their balance competitive banks. Given excess capacity in the banking sector, the Government's policy 17 on the state banks should lead towards weaken the incentive tor change'. Weak consolidation. However, the Cabinet market information does not support a decided to keep Siam City Bank and change in credit culture. Since the crisis, Bangkok Metropolitan Bank, anotlher two regulators and standards setters have made nationalized banks, under separate attempts to promote a change in Thai credit management by approving the Government cLlture from collateral based lending to Pension Fund's proposal to take a 51% stake analyzing operating cash flow while in both banks. underwriting new projects. Since not all improved accounting standards are fully Figure 32: Non-performing Loans by implemented and credit information is not Types of Financial Institutions available for Thai firms, particularly SMEs, banks are dissuaded to move away from Non-performing Loans collateral based lending. Large number of SOS - $ -t2R,,5:,- -''' _-p3SMEs are believed to maintain alternate sets 70%ii ' t _ I . of books for various stakeholders. including 5 0%. ~~~~~~~~~~the tax authorities, anid have limrited skills 40% -Fg .oroign and incenitives to present their real operating 30'.4 > - braindes cash flow. As a result, most banks continue to demand collateral when approving credits ,orM 5 ,. for SMEs. Changes in tlhe incentive structure are needed in order to improve transparency. Source: the BOT Loans are starting to grow slowly after The enactment of the "Credit Bureau Bill" subgtantial declines. The ratio of should reduce the uncertainty on the sharing subsantial declnes .te ratio to of credit information. It is expected that the commercial bank loans (after write-offs) to Bl ilb eiwdb h eaei h GDP~~~~~~ manandadciigtedfo. Bill will be reviewed by the Senate in the GOP maintained a declinig trend from a next parliamentary session (July-August). peak of 128% in 1997 to below 104% in QI Afert crisis,two redit bureAUStwr 2001. Adjusted for write-offs and transfers esthe in tha central Cre to ACs,ineen-inta bak lons tiried established in Thailand: Central Cr-edit to AMCs, incremental bank loans turned Information Services (providing both positive in 2000 (Bt23 billion) ad ireased commercial and consumer credit in Qi 2001 (Bt33 billion). This is aBureau significant improvement from the substantial inf on cns Creditio tion). decline in incremental loans in 1999 (Btl 13 g * * - billion) and 1998 (Bt580 billion). Because The former was initially founded by the banks are capital constrained in economic BOT and the latter was set up by the MOF and placed withlin thie Government Housing tem, an ar stl.oigwt P Bank. Both are operating under constraints problems, they will continue to be cautious in extending new loans, given the poor credit quality and unavailable credit 'Previously, loans to companies which information of most borrowers. Althouglh experience losses for two consecutive vears and large corporate can raise funds directly from a net book value which is less than 50% of paid the capital market, SMEs still rely on bank l up capital would be classified as substandard by loans for their funding. the BOT. A new regulation allows banks to classify those such loans as "normal", if the Recent policy may not provide incentives following conditions are met: (1) debtors must for,restructuriiig.of banks and firms., Tile be able to service loan obligation, (2) debtor's frecen restctuion of bhoank clandfir. Th financial statements receive clean audit opinion, recent relaxation of the loan classifilcation by and (3) thleir EBITDA (earnings before interest, the BOT to encourage new lending may tax, depreciation and amortization expenses) must be positive. 18 and uncertainties because the Credit Bureau dropping the guarantee, the authorities plan Bill has not passed into law. Key issues to set a strategy which restores public need to be resolved. First, should the confidence in Thai financial institutions and borrower's consent be a precondition for the resolve the overhang of NPLs. creditors to access credit information? The existing draft would demand creditors to Capital Markets receive debtor consent. Instead, options could be explored which would provide for Primary issues in the capital market declined broader information sharing while protecting significantly in 2000, and picked ulp slightly the consumer. Second, a time bound plan in Ql 2001. In 2000, fund raising in the should be developed for rationalization of domestic market totaled Bt677 billion, down the two new credit bureaus. Third, there is from total fund raising in 1999 of Btl still uncertainty about data sharing trillion. Total fund raising from the capital agreements between banks and non-banks market picked up againi in Ql 2001, to like utilities, given that the draft has not Bt228 billion, mainly from primary issues in been finalized. the equity market. The Thai private sector has raised a total of Bt72 billion from equity market and Btl 70 billion from bond market The Supervisory Regime in 2000 (compared to Bt277 billion from the equity market and Bt320 billion from the BOT is developing a Financial Sector debt market in 1999; Bt34 billion from the Master Plan. Thailand's Financial Sector equity market and Bt4O billion from the Task Force drafted strategy notes on the bond market in Ql 2001). The decline in Banking sector and Capital Markets last fund raising activities by banks, which were year. The Bank of Thailand (BOT) is the biggest issuers in the market in 1999, currently planning a larger project (master- caused the drop in private issuance in 2000. plan) to recommend a structure for the Thai The contribution of banks to total fund financial sector in the mediLun term. Over raising in the capital market ha-s declined the year, they plan to seek assistance from from 66% in 1999 to 28% in 2000 and to international experts in two areas: (I) the 17% in IQ 2001. Government and State role of deposit takers over the next five owned organizations remain the biggest years, includinig identification of gaps in issuers in the bond market at around Bt400- services via surveys of suppliers and users, 500 billion per annLm. and (2) the development of financial conglomerates, including NBFI's and The BOT recently conducted open market holding company structures. The operations to increase repurclhase and Government has also given the SET the interbank rates, with the stated goals of mandate to develop a medium term strategy curbing capital outflow and preserving the for capital market development, which will level of foreign exchange reserve. Firms be integrated into the financial sector master had been taking advantage of the excess plan. liquidity in the market and paying down foreign debts by raisinig funds in the Transition to a Limited Deposit Insurance domestic bond market. Thai depositors had Scheme (DIS) is being developed. The gradually shifted their money from banks to authorities have started the design process fixed income mutual funds for yield pick up, for an eventual transition from the present given risk return trade-offs. The fixed blanket guarantee on financial institution income mutual fund industry had grown deposits to a limited guarantee. However, substantially to around Bt8O billiotn. before large depositors can be put at risk, the However the uLnexpected raise in interest banks will have to be strengthened. Before rates halted this trend, causing sudden 19 redemptions of about 10% over the past and investment in retirement funds (see Box three weeks. The Thai government and the 1). Tax incentives will be provided for FIDF, the biggest borrowers in the domestic existing and newly listed companies on the market, have been hit by increasing costs. SET and to newly listed companies on the The market estimates that a 1%IX increase in MAI (Market for Alternative Investment). interest rates cause the domestic bond Necessary infrastructure will continue to be market to lose about Bt7O billion in value, developed. The Finance Ministry was Banks, which are the biggest investors in the quoted in the press as saying that the domestic bonds, will have to recognize a expected losses in tax revenues from this portion of these losses over the next year, package of around Btl.4 billion will be depending on how much they hold to recovered if more companies are attracted to maturity. The potential benefits of rate list on the stock exchanges, which will hikes should be carefully weighed against enlarge the number of companies with the costs. If the rise in interbank rates spills transparent tax reporting. over to increased deposit rates, most of the benefit will flow to wealthier Thais. 75% of A more effective clearing and settlement deposits are over Btl million in size. Only (C&S) platform for the bond market is being 17.5% of deposits are less than BtS00,000 in developed. The Securities Exchange size; 7.5% of deposits are between Commission (SEC) is leading the initiative Bt500,000 and Btl million, to enhance the effectiveness and efficiency Figure 33: Domestic Funding Sources for of the existing C&S platform -for the Private Sectors secondary bond market. Currently, there are Do.roooFo dF.SWrosff. orPriwetsooooo3 two C&S systems for the Thai bond market. 1.5 .-. rvbvvofx rtr. *f olrrororoor One is for corporate debentures, which is 1.0 - C0.>orrltc}t33executedr by the Thai Securities Depository t 0.5 (TSD). The other is for government 0 0o- securities, and is currently executed by the ... ...- ......BOT. A more practical medium term 1996 1997 1998 1999 2000 1I solution may be to i 2001 C&S by shifting the C&S finctions for ilodwkg oqWy Iroisog roo dbif msOud by b-k. govemnient bonds fronm the BOT to TSD. " t d foroy nt onroff C ord t 3ff0T}o ro AM Cs Over the longer term, a thorough review and Source: SEC tileWorld Bank's Estimate upgrade of TSD's capacity will be needed The Cabinet recently approved measures to regarding risk management, ownership support the capital market. Several structure, and software and systems to measures involve the removal of tax execute straight through processing. obstacles in debt transactions, securitization 20 Box 1: MEASURES TO STIMULATE THE CAPITAL MARKET EQUITY MARKET * Lower corporate tax rate for existing listed companies on the SET to 25% of net profit for the amount lower than Bt300 million for 5 years. * Lower corporate tax rate for newly listed companies in the SET to 25% of net profit for 5 years. * Lower corporate tax rate for newly listed companies in the MAI to 20% of net profits for 5 years. * Companies can issue stock dividends; the stock dividend is subjected to income tax; the value of a stock dividend is equal to the retained earnings appropriated for the stock dividend divided by the number of shares issued for the stock dividend. * Removal of the requirement that a finiancial advisor conduct due diligence for newly listed companies on the MAL. * Time botnd privatization plans will be developed for state enterprises, including Internet Thailand, Petroleum Authority of Thailand, Krungthai Bank, and Thai Airways. * Linking BOI promotions to whether a firm is listed on the stock exchanges. * Review the niew accounting standards and the disclosure requirement which have been difficult to enforce. DEB MARKET AND SECURITIZA TION * Banks, finance companies, securities companies, and credit fonciers will soon pay their monthly specific business tax (SBT) on net capital gains (total capital gain minus total capital losses) from bond trading in each month; formerly capital losses cannot offset capital gains wlhen calculating monthly SBT. * Waiver of personal income tax oni interest earned on debt instruments by individual persons beyond his/her holding period. * Waiver of corporate income tax for special purpose vehicles use in securitization. * Waiver of SBT on capital gains incurred by the sellers (borrowers) from collateralized bonds in repurchase (REPO) transactions; Waiver of duty stamp on REPO transactions. * New "Public Debt Law" will be issued to make it easier for the government to issue bonds. RETIREAIEIVT MUTUAL FUND * Removal of tax obstacles to investment in -retirement finds. FINANCIAL INFRASTRUCTURE * The draft "Law on Derivatives" will be presented to the Cabinet in the near futLre. * Amendments to the "Securities Act" to allow for electronic trade and delivery of debt instruments. * Amendment to act to allow mutual ftnds to borrow. * Banks will be allowed to trade interest rate derivatives in the stock exchange. 21 V. Corporate Restructuring (3) loans of state-owned asset managemetit companiies. As a result, more cases have The overall debt restruicturing comnpletion been added to the CDRAC target group. At rate2 has slowed system wide. At the end of the end ot April 2001, a total of 14,386 March 2001, a cumulative total of Bt2.1 target cases (Bt2.62 trillion ) are under the trillion was restructured, Up from a auLspices of CDRAC. This includes 2,845 cumulative total of Btl.95 trillion at the enid corporate cases (Bt2.31 trillioni) and 11,541 of 2000 a lid Btll. t trillion at the edd of 1999 snmall-medium-sized cases (Bt307 billion). The completion rate has slowed since June Sixty three percent of total target debtors 2000, from an average of Bt86 million per (9,780 cases, for Btl.65 trillion), signed the month during the first halofof 2000 to an accession agreements (DCAIICA/SA) to average of Bt6 millior per month during enter the CDRAC process. Of this group therlast sixnolths of2000. Duringthe rst 47% (Btl.23 trillion) have conmpleted debt quarter of 2001, the debt restructuring restructuring, while 51% (Btl.34 trillion) completion rate dropped to an average of did not sipg the voluntary agreements or Bt47 million per doeonth. failed the CDRAC process, and must be resolved in cou7rts. The decline in the completion rate can be primarily attributed to: (1) viable cases have been restructured; the remaining cases are more complex and may require considerable time to reach agreements; (2) an increasing number of distressed loans have been transferred to private asset management corporations, where they are not counted in the completion rate; (3) creditors and debtors are waiting for the Thai Asset Management Corporation (TAMC) to commence operations in the hope that the loans will be worked out more favorably if transferred to the TAMC. Voluntary Framework for Debt Restructuring Debt restructuring under the CDRAC process has been extended, and a significant portion of the cases may be transferred to the TAMC. The volunitary agreements under the CDRAC process were due to expire at the end of December 2000, but have since been extended. CDRAC received an additional mandate to facilitate and monitor the restructuring of (1) less viable cases, or the so-called small-medium-sized loans; (2) loans of affiliated companies; and 2 Includes proactive debt restructuring. 22 Table 5: Status of CDRAC Target Cases As of April 30, 2001 Unit: Million Baht Corporate (Groups 1,2.3,4) SMEs T'otal Stages #Cases Atnt. #Case Amt. #Cases Amt. % of Total s T'otal completed cases* 981 1,113,815 6,973 122,367 7,954 1,236,182 47% In Restructuring Process (draft' propose/amend plan, to be voted) 124 32,076 497 14,411 621 46,487 2% Unsuccessful restructuring cases filed and to be filed in court. 469 312,102 736 59,443 1,205 371,545 Debtors not signatory under DCA/1CA/SA, proceed to coult 1,271 855,802 3,335 110,547 4,606 966,349 'I'otal In Process of Legal Action 1,740 1,167,904 4,071 169,990 5,811 1,337,894 51% 'T'otal Approved ''arget Debtors 2,845 2,313,795 11,541 306,768 14,386 2,620,563 100.0% * Completed cases comprise of: 1. Completed cases (restructuring Colntract has been signed) 2. Agreed on plan, in process of signing restructuring contract 3. Agreed on plan, ile for reorganization in Bankr uptcy Court Source: Bank of Thailand The debt restructuring of large corporate financial institutions have been able to cases under the CDRAC process is having a restrtcture about 12,000 SME cases per significant impact on the reduction of month. overall NPLs. But the impact of the completion rate of small-medium-sized Court-supervised Framework for Debt (SME) cases has been minimal. The total Restructuring number of cases and credit exposure of SME loans under the CDRAC process is minute Business reorganization filings have slowed compared to the total SME credit exposures in the Central Bankruptcy Court, while the in the system. To accelerate the debt filings for liquidation have increased restructuring of SME loans, between 500- significantly. The volume of business 700 cases have been added to the CDRAC reorganization filings were steady in year target group each month since January 2001. 2000, but have slowed in year 2001, It takes an average of 45 days to complete consistent with the decline in the overall the negotiation and sign a restntctLring debt restructuLring completion rate. contract for the SME group. The CDRAC Liquidation filings average less than 80 process strictly enforces the time restriction million baht per case, and more than 55% of under the Sitnplified Agreement, which the cases are from the commercial governs the debt restructuring of SME cases wholesale/retail and personal consumption in CDRAC. In aldition, the Bank of sectors. This suggests that the bankruptcy Thailand sets a target for financial court is being used to collect smaller-sized institutions to restructure SME loans at debts, and that larger rehabilitation cases are 15,000 cases per month. On average, not entering the process. 23 z:1Z>*h 8 .RasS ''I#?zp Table 6: Progress of Central Bankruptcy Court Business Reorganization and Liquidation* Jun-Dec Jan-Jun Jul-Dec Jan-Mar Type of Filings Volume 1999 2000 2000 2001 Total (6 months) (6 months) (6 months) (3 months) Business Cases 37 65 69 16 187 Reorganization Mill Bt 362,841 418,164 242,754 77,122 1,100,881 Cases 416 464 522 224 1,626 Liquidation Mill Bt 10,500 28,552 48,505 38,775 126,332 Source: Central Bankrtiptcy Court of Thailand * As of March 31e 2001 The Central Bankruptcy Court is not yet The mediation center within the Civil Court fully staffed or trained permanent court aims to alleviate the backlogs by providing personnel and judges. The court has been an alternative resolution mechanism for the operating with temporary court personnel, easier cases. The Financial Dispute and the turnover rate is high. There is also a Mediation Ceenter (FDMC) was opened in frequent rotation of judges. This could April 2001 with the aim of relieving the weaken the effectiveness of the court in potential burden on the courts of handling a higher volume of cases. On overwhelming number of debt restructuring average, it takes 7 months to render a cases by settling the dispuLte out of couLrt. To judgement in an uncontested bankruptcy gain public acceptance, FDMC needs to case. While the placement of permanent illustrate that the voluntary mediation court staff is expected to be completed by process can be fair, effective, and lessen the mid year, the court should start formulating case backlogs of the courts. The first a plan to train anid build capacity of the challenge is to recruit experienced legal and pernanent staff and to firther streamline financial professionals are to serve as court procedures to improve efficiency. mediators, a process now tmderway. FDMC will need to also add business restructuring The pace of restructuring is underminied by expertise to their services in order to the backlog of cases in the Civil Courts. expedite resolution. Civil courts enforce mortgages in Thailand. Cases that are not resolved in CDRAC or in bi-lateral negotiations are filed in the Civil VI. The Legal Framework Courts. The Civil Courts estimate that there are over 55,000 debt restructuring cases While serious backlogs exist partictilarly in pending 'udgeneiit. At current judgem-enit paending j tgen At curreto cuement the civil courts, the government has not rates, it will take 6-7 years to clear the moved to expedite civil procedure or the current backlog, plus another two years to evidentiary process. In addition, the legal auction the collateral. NPL cases are more execution department now has about Bt 500 ciowplexgetheandoth caseies, d reuires billion of property waiting to be auctioned. knowledgeable and experienced judges. The existing legal regime lacks the There is a shortage of experienced Judges mechanism for debt collection and and court administrators. To expedite the enforcement of security rights outside the court judgements and clear the backlogs, the evidentiary process, control of cash flow bankruptcy law. Even though debtors are fromcollateralpros, courtprocedus an cshe fable to use the legal framework to delay fromn collateral, court procedures and thle restructuring negotiations (see Box 2), the auction process should also be streamlined. Ger nen hai at the Gover24zent has indicated that the 24 Bankruptcy Act should be amended to level comprehensive reform efforts may need to the playing field more in favor of debtors. be coordinated and expanded to broadly The Secured Transactions Act, which is include participation of the private sector, awaiting Parliamentary consideration before legal professionals, academia, and civil it is passed into law, is expected to provide society. The comprehensive reform of debtors with the flexibility and option to use bankruptcy law shoudd also be expedited, a more liquid asset (e.g. accounts expanded to consider other related business receivables and securities) as collateral in laws and placed within the framework of an debt restructuring and applying for new easily monitored schedule. The amendment loans. to the Code of Civil Procedures (Evidence) has been drafted but not yet passed into law. The Legal Reform Committee for The Evidence law would allow the Courts of Development of Thailand (LRC) was Justice to issue decrees to streamline the established in March 2001 to initiate and discovery process and provide for coordinate the reform of the country's legal continuous hearings to speed up the court framework. It is still too early to assess the judgements. effectiveness of LRC. However, the Box 2 Why corporate restructuring continues to be slow ? Lack of objective criteriafor commencing bankruptcy proceedings. Conflict in the definition of insolvency (balance sheet insolvency instead of ability of debtor to meet debt obligations as they fall due) enables debtors to contest the insolvency issue and delay bankruptcy proceedings Uncertainties in the planner process. The appointment process has been adversarial, potential criminal liability for "excessive" fees and fear of not being paid has impaired the quality of debt restructuring. Delays in converting unsuccessfid rehabilitation into liquiidation proceedings. A non-viable debtor can use delays under rehabilitation to prevent liquidation. If rehabilitation fails, the creditor terminates activities, and the court must re-affirm insolvency before bankruptcy proceedings can begin. Slow,foreclosure. Debtors can mount a variety of legal challenges to slow down foreclosure proceedings. The disposal process is also lengthy and cumbersome. Problem of personal crimi?inal liahilitv in state-ownedfinanzcial institutions. Under cunrent law, state emnployees face potential criminal liability for taking losses on behalf of the state. This puts a legal cloud over taking reasonable losses in debt restructuring, and explains in part why officers in state-owned banks unwilling to accept haircuts in debt restructuring. Legal and tax obstacles impede mergers anid acquiisitions. Business consolidations or mergers are viewed as a market-based tool to aid and accelerate businiess restructuring. However, the present tax code regime does not provide incentives for businesses to consider mergers and acquisitions. A new business entity is not allow to transfer net losses from the merged entities onto its books. Secondarv mzarkets are moribund. One of the main channels for corporate restructuring is asset disposal via secondary markets. This has yet to happen in Thailand because firms are reluctant to let go of assets and banks (with a few exceptions) are reluctant to accept losses realized from the sale of loans or collateral at market prices. 25 VII. Corporate Governance standards. Amendment of the Accounting Professional Act to allow the establishment Thailand has improved reporting and of the Thailand Finanlcial Accounting disclosure standards. A total of 18 new or Standards Board and strengthening of the disproved accolting standards .ave been ICAAT could be speeded up. The proposed adopted. In the last six months, 6 more amendments to the Public Company Act accoptting standards (Intangible Assets, have been split into two tracks. The first Events after the Balance Sheet Date, track, dealing primarily with nmeasures to Eventsianternthset BanceSheetiaties, facilitate corporate restructuring (i.e. Contingent Assets anid Liabilities, prvsoseltdothteauytck Discontinuing Operations, Accouniting for provisions related to the treasury stock, par Government Grants and Disclosures, and value, debt equity swap, preferred stock and Income taxes) have been issued and will voting rights, offsetting losses with retained become effective at later dates. Additionally, earnings) has been passed by the Parliament. a total of 8 accounting standard However, the amendnments empowering interpretations have been issued. Improved corporate governance through the auditing standards consistent with strengthening of minority shareholder rights international standards have been put into and the fiduciary duties of directors are yet practice, and year 2000 accotaits were to materialize. These amendments are audited in accordance with these standards. expected to help improve investors' The Accounting Act has been amended to protection and strengthen market improve its compliance with the standards confidence. issued by the ICAAT m-nandatory. The training of directors of public A revised code of best practices for companies is a high priority. There are over company directors has been issued by the 3,800 directors of listed companies in SET to guide the listed companies to Thailand and only a fraction of them have improve their corporate governiance. More completed the training program provided by than 90% of the listed companies now have the Institute of Directors. For SOEs that an audit committee in place. More than 180 prepare for privatization, the challenge is to adhere to the hig~hest standards of executives of Thai companies have a&erency and highest pardsuof conmpleted the 5-day training program for transparency and accountability, particularly comnpany directors offered by the Institute of inii the appointment of qualified and Directors. Amendment of the Public independent board members. Companies and Securities and Exchange More training on the application of new and Acts is expected to iimprove minority oed accounting standards will be shareholders' rights; clarify accountability impred aclountingap ween be of boards of directors and officers; and required to close the gap between the ofsboardsgthe direorsad poffcers; afor improved standards and real practices. The strengthen enforcement process for role of the ICAAT in provision of Continued imposing sanctions for violation of law. Professional Education (CPE), promotion of But imlplementation is at an early stage. The code of ethics, and adherence to the kut implementationeis arto an eastage. Thefr professional code of conduct will be critical key challenges are to deepen the reformi in improving practices. The audit effort at the firm level and to complete the cominit ipog practdc es. Thed dt remaining legislative changes. Institutionial committees of listed companies need to strengthening will be critical in the areas of become more effective and act as an standard setting and application accounting effective internal monitoring mechanism. 26 Box 3: Premium for Good Corporate Governance The need to persist with reform is underscored in a recent investor survey of six Asian countries (Indonesia, Japan, Korea, Malaysia, Taiwan, and Thailand) by McKinsey . Both Asian and U.S. based investors assert that much remains to be done to catch up with the best practices in the region. The McKinsey survey shows that institutional investors are prepared to pay a premium for good corporate governance. Institutional investors, the survey found, are prepared to pay a markup of more than 20% for shares of companies that demonstrate good corporate governance. The size of that premium varies from country to country: it is as high as 27.1% in Indonesia, 25.7% in Thailand, and 24.2% in Korea, and 20.2% in both Japan and Taiwan. The premium is as low as 18.3% in U.S. and 17.9% in the Ulnited Kingdom. The Asian corporations have much to gain in terms of strengthening investor confidence from making the transition to souLnd corporate governance. Cutry:. :Premiiumfri Go oprteGvrac US 18.3 UK 17.9 Japan 20.2 Taiwan 20.2 Korea 24.2 Malaysia 24.9 Thailand 25.7 Indonesia 27.1 Source: International Investor Opinion survey,, undertaken in SeptemberiOctober 1999 by McKensey and Company. in cooperation with Institutionial Investors Asia pacific Institute. 27 Box 4: Corporate Governance Reform in Thailand-Challenges ahead Recommended Ameiidments to the Public Companies Act, anid Securities and Exchange Act * Enhance the role of regulators in enforcement of securities regulations by streamlining criminal procedures for violation of Securities laws; * Improve enforcement for violation of laws, including the introduction of severe sanctions on insiders for false and misleading disclosure; * Increase accountability of directors and management and further clarify fiduciary duty of directors; * Further increase minority shareholder rights and the case wvith which they exercise those rights, including the tight to access a company's financial information, and the right to approve maj or and connected transactions; * Provide tbr cost-efTective legal channels for shareholders seeking redress or dismissal of' a director for misconduct or violation of the law or article of incorporation. Other Recommended Changes * FIurther improve accounting and auditing standards and practices * Make the audit committees of boards of directors more effective * Amend Accounting Professional Law to allow establishment of the Thailand Financial Accounting Standards Board and strengthen ICAA`. * Improve the process for imposing disciplinary actions and sanctions on accountants in case of violation of pr ofessional code * Issue specific rules on accounting and disclosure for banks * Continue to provide training for accountants on new standards and for directors of public companies on directorship best practices * accountants who violate duties and commit lraud. Amendments to the Public Companies Act by 2003 through minority retail share will help to reduce the cost of capital to Thai offerings on the Stock Exchanige of Thailand firms and improve management (SET). The privatization program is performance by strengthening minority intended to fulfill the Government's promise shareholders rights and clarifying duties and to rationalize the public sector and deepen accountability of boards of directors. the domestic capital market. Privatization of Market competition, increased role for the 18 enterprises could increase the market institutional investor, shareholder capitalization of SET by nearly 50%. activism, and creditors' rights will help improve the business environment for The Government is moving rapidly to create investors and will lead to more transparent a National Holding Company under which it business practices and improved financial will gatlher the commercial state enterprises. performance of corporations in Thailand. Concurrently, it has announced a schedule of Initial Public Offerings (IPOs) of state enterprises on the local Thai markets which. VIII. Privatization & SOE if accomplished, would represent one of the fastest and most dynainic "case by case" Reform privatization efforts of large scale enterprises. The new Government has announced that 18 state owned enterprises would be privatized 28 TABLE 7: Estimated Market Value of State Enterprises and Listing Schedule (million of Baht) 20D1 2001 2003 Q010 Q2 03 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 I Q4 Internet Thailand - 176 |l l l 1 Thai Airways 8700 International Public Company Limited The Petroleum 74783 Authority of Thailand Krung Thai Bank Public Company Limited Bangkok * Metropolitan Bank Public Ltd. _ Siam City Bank * Public Company Limited Telephone 75538 Organization of Thailand I The Communication 63489 Authority of Thailand I Thailand Tobacco 20360 Monopoly Airport Authority of 56286 Thailand The Government 18397 Housing Bank Port Authority of 17455 Thailand The Government 52212 Saving Bank _ _ The Electricity 159016 Generating Authority of Thailand The Metropolitan 34318 Electricity Authority _ _ The Provincial 69548 Electricity Authority _ _ The Metropolitan 23407 Waterworks Authority I_I_I_I The Provincial 23639 Waterworks Authority Source: MOF 29 The IPO approach offers the opportunity to this process depending on its organization, create dynamism and momentum in the transparency and the competence of its program. If handled with skill, it can (1) management and board. It is expected that a drive forward the regulatory and structural major advantage of the IPO approach will be reforms already formulated, (2) instill the alleviation of employee concerns confidence in the public, employees and through the inclusion of Employee Share investment community regarding Ownership Programs (ESOP) in the privatization, and (3) stimulate Thai capital transactions. All previous transactions, such markets and competition. The national as ECCO, Ratchaburi and PTTEP have holding company can facilitate or obstruct included an ESOP componenit. Box 5 Lessons of Experience on National Holding Company Many countries faced with privatization have created national holding companies, or sector holding companies. l'hc benefits of such an approach include centralizing control over the enterprises (moving control away from powerful ministries), organizing an efficient privatization cffort (a centrally controlled disposal process is typically more cost eflfctive, efficient and transparent than a distributled approach), and management of remaining government interests in the enterprises from a group of professional commercial managers and board members. The experience globally however with such holding companies has not matched their potential. Frequiently the creation and organization of holding companies causes delays in the privatisation process itself. In addition, management of the holding companies have vested interests in preserving the state role in the enterprises (and thereby preserving their jobs), thus delaying or obstructing privatisation. Without proper consideration givcn to the power and reporting structure of the holding companies, they can also be as subject to the whims of political expedient as the SOEs Lmder their respective miniistries. Egypt provides an example of the challenges holding companies can face in executing privalisation programs, while T'mesak Holdings in Singapore (the model Thailand has chosen) demonstrates some of the advantages holding companies can bring. Among the important issues which need to be addressed in 'I'hailand's holding company formation include: board's composition, the relationship betveen the holding company and the State, the role ol' the Oflice of State Enterprise, the relationship between the NHC and the IPO process; conflict of interest with competition policy, and plans to improve corporate governance of the SOEs. IPO PROCESS 'I'he approach the goverment appears to be taking is to begin the partial divestiture of shares of SOEs (usually not more than 25%) before the full regulatory reforms are in place. 'I'he advantages to this approach include: rapid clemonstration of commitment to share sales; stimulation of domestic capital markets by placing shares on the exchange; demonstration of benefits of privatisation (if done correctly) to key stake holders (management, public, employees); rapid corporatisation of affected SOEs, making them subject to commercial corporate governance and transparency requirements, and capital injection for the government. 'I'he disadvantages or risks to this approach include: transf'crring public to private monopolies; rapid depletion of domestic capital available for share purchases, entrenchment of' existing managemcnt and practices (this process raises capital without compelling needed internal and structural reforms in the SOEs); low valuations for shares (as limited liquidity in domestic market); no benefits of foreign strategic participation (management, technology, capital. know- how. global sales networks). To minimize these risks, the following could be done: make explicit in the sales information memorandum the govermnent's plans and commitments to regulatomy refonn and the timneline for accomplishing this (privatise first approach creates a powerful "anti-regulation" lobby in the fbrm of this enterprise and its shareholders); announce concurrently the government's policy for implementing regulatory reform in support of the privatisations (ideally in a Cabinet decree), open up a tranche of shares in each IPO for foreign investment fi'nds (this will bring capital to 'I'hailand and also pressure the board to be more response to corporate governance and transparency matters), promote the domestic share offering to the general public by offering discounted shares to special groups (farnmrs, cooperatives, etc.); rigorously enforce corporate governance and transparency requirements. 30 n tZ>t!z. 4 .3g mwi..'e A$ .}o B.avgt Table 8: Key Initiatives in Infrastructure Regulatory Reform Kev Reform Initiatives from Master Plan Progress as at March 2001 Policy Corporatisation of State Enterprises Passage of the Corporatisation Act (1999) on 16 December 1999. Establishment of State Enterptise Capital Policy Committee (.SECPC), under the Colporatisation Act (1999) on 26 July, 2000. chaired bythe Prime Minister. Establishment of Independent Regulators in Establishment of SEPC subcommittee on independent regulatory utility1 infrastructure sectors fiaameworks, on 5 Apri], 1999. Regulatory Framnework (Guidelines approved by Cabinet on 19 October, 1999 Regulatory Training Program approved by SEPC Regulatory subcommittee on 18 September, 2000 Market Sector Reform Establishment of SEPC Subcomnmittee on Transportation Restructuring chaired by Minister of Transport and Coummunications on 8 July, 1999. SEPC approval of transport sector restructuring policy fiamework on 9 October 2000. Authorisation for Ce- establishment of sub-commiittee on 13 June 2000. Public Hearing on TDRI Transport Sector Restructuring Report on 15 Junc 20(1. TDRI report under consideration of the sub-committee. Telecomm and Domestic market liberalisation Establishment of Concession Conversion Committee on 1 7 March. Post 2000. Concession Conversion process under review. Domestic market liberalisation projected on completion of the corporatisation of TOT and CAT. Creation of independent regulator. National Spectrunm Allocation and Regulation in the Broadcasting Sector and Communications Commission (NCC) the Teleconmnmunication Sector Act 2()00 has been effective since March 7 2000 Selection Committee for NTC established. Proposal of the 7 member commission nominees to the Senate has been rejected and a new proposal is now expected by end 2001. Cotporatisation of the Telephone SECPC approval for TOT, CAT and Thai Post Corporatisation on 26 Organiisation of Thailand (TOT) and the July, 2(100. Communications Authority of Thailand Company Establisilmenit Preparatory Commliittee (CEPC) convened (CAT). on 6 November 2000. Anticipated conclusion by March, 2001 Privatisation of TOT and CAT Cabinet approval of TOT and CAT privatisation plans on 4 November, 1998 Privatisation of TOT and CAT through Strategic Investor stake of 25%o and Initial Public Offering anticipated to conimence in 2 nd and 3`' Q 20(02 respectively. Broadcast Creation of independent regulator, National Selection Committee for NBC established. Broadcast Commission (NBC) Proposal of commission nominees to the Senate delayed. Energy PoNver Sector restructuring Power Pool Phase I Report March, 2()00 Consultants selected for Power Pool Phase ll studies on Market Rules. Stranded Costs & Secondary Regulations October, 20)(). Work ongoing. Gas Sector liberalisation Draft Third Party Access Code Public Hearing 9 December, 1999 Separation of PTT gas trading and distribution approved by Cabinet. Work ongoing. Department of Mineral Resources, Ministry of Tndustry to draft the TPA regulations under the Petoleum Act. Establi.sh independent energy regulator Draft Energy Industry Act tt establish the regulator and implement power pool Public Hearing 24 August 2000. Cunently wider consideration by Juridical committee of the Parliament. Privatisation of Electricity CGenrctinig Ratchaburi Initial Public Offering approved by Cabinet oni November Authority of Thailand (EGAT) 30, 1999 launched on 18 October 2000. Domestic retail offering of 40"K, EGAT empiloyees anfd' or EGAT EPF 15% with EGAT lholdinig 45%. Share Traidingz commenced 2 Noveniber, 2000. Privatisation of Petroleum Authority of Privatization plan approved by Cabinet on23 January, 1996. Thailand (PTT) Privatization anticipated 4 Q 2(1(1 Privatisation of Bangchak SEPC approved plan on 17 December, 1999 for 32% share sale, with 16No domestic PO. Sale of MoF shares in Esso Financial Advisors for 12.5% share sale selected on 16 September. 1997. Status quo. Transport Market and Regulatory refoon of Aviation SEPC approved restructuring fianework on 9 October 2000. sub sector Initial study on corporatisation of provincial airports completed November 1999. Study on detailed market and regulatory structure to commence September 20(01, expected to produce legislation for the independent 31 aviation regulator by mid^ 2002. Marrket and Regulatoryrefooan of Maritime SEPC approved restructuning fiamework on 9 October 2000. sub sector Port Authority of Thailand (PAT) study on corporatisation undertaken in 2000. PAT scheduled fir privatisation for 3rd Q 2002. Market and Regulatoly reform of Rail and SEPC approved restructuring framnework on 9 October 2000. Bus (long distance) sub sector Restructuring study on State Railway of Thailand (SRT) completed November 2000. Market and Regulatoty refoni of Highways. SEPC approved restructuring framework on 9 October 2000. Further Expressways and Motorways (Roads) sob work contingent on development of regulatoty framiework. sector Market and Regulatory reform of Public SEPC approved restucturing framework on 9 October 2000. Transit (including urban bus) sub sector Study on detailed market and regulatory stucture to commence Sept. 2001, expected to prnduce legislation for the independent public transit regulator and authority by end 2002. Corporatisation of State Railway of Thailand Cabinet approved corporatisation of SRT on 7 November, 2000. Corporatisation Committee established January 2(X) l SRT Restructuring Committee established June 2)1)1. Privatisation of TIHAI Airways Plao approved by Cabinet 14 March 2000. Secondary Public Offering 23%. including ESOP an(i Greenshoe.. Ready to proceed -- scheduled for 4t Q 2001. Privatisation of Airports Authoiity of Cabinet approved ptivatization on 21 July. 2000. Thailand (AAT) Regional Airpotts. Juridical Council ruling for use of Corporatisation Act in September 20)0. Water Market and Regulatoty Reform of Water and Consultant consortiumn led by Tasman Econotmics commissioned to Wastewater sector. execute a stldy to recomimenid market anal regulatory structure and prepare privatisation plans for Metropolitan Water Authority (MWA), Provincial Water Authority (PWA). and Wastewater Management Authority (WMA). Commencing August 2000 and results expected Jnie 2001. Autiorisation for the establishment of SEPC Water and Wastcx,vater Sub-committee in Jtne 2001 Govt. announced corporatisation of Water utilities and privatisation lvy 2003. Source: MOF 32 A Master Plan for State Enterprise Reform work will continue on the full restructuring was prepared in 1998 which outlines the of regulatory regimes through the use of objectives and timetable for regulatory legislation, although this will take more time reform in Tlhailand's utility and and may not be required for all sectors (eg infrastructure sectors (telecormmnunications, where private participation is increased transport, water, energy). For the under a concession model, then economic utility/infrastructure, the Master Plan and regulation can be achieved through the related policy documents being prepared by contract). sector Ministries and the Ministry of Finance define the market and regulatory Governance and transparency issues have structure in each sector. The plan calls for a previously been, and are expected to clear separation of policy, regulatory and continue to be, the major challenges of the operational responsibilities and the SOE privatization and regulatory reform liberalization of markets where possible. program, given the number of agencies Consequently, incumbent State Enterprises involved and the decision making models will need to be prepared to compete as an utilized in Thailand. The government's operator as well as being positioned to be commitment to ftmdamental principles such privatized. as the separation of policy, regulatory and operational responsibilities; the operations With the acceleration of the privatisation of its enterprises on commercial principles program, the govermnent would need to and the implementation and maintenance of increase its focus on regulatory reform. A international best practices will need to be review of sectors and enterprises shows that consistently reinforced and commtnicated. the government is making progress, although the key challenges are the pace, VIIII. Information, Science consistency and transparency of the process. In the Telecom sector. tlhe failure of the and Technology selection process for the National Telecommtnications Commission could be The Thai Cabinet recently approved the regarded as the system of checks and establishment of the National Scienice and balances working in favor of transparency. Technology Policy Committee (NSTC). The corporatization of the telecom Thailand's slow progress in penetrating enterprises, while proceeding slowly higher value-added product market segmenits (commenced in October 2000), is on track to and in industrial innovation is a key meet the 2002 deadline. In the energy sector, challenge to medium-term competitiveness the establishment of the independent and productivity growth. A number of regulator and the wholesale electricity analyses over the past decade have market is delayed. Of more concern are the suggested that Thailand's technology transport and water/wastewater sectors. The infrastructure, including institutions, policies reform process for these sectors is more and incentives, do not support appropriate recent and a significant amount of work research nor meet private sector needs. The remains to be done to ensure that the NSTC provides a significant opportunity for challenges can be successfully met. The first Thailanid to implement an effective strategy phase of regulatory reform will be to reform technological infrastructure. It can implemented through the use of powers also serve to coordinate the many under the Corporatisation Act, which allow overlapping functions and mandates of the the removal of special privileges and Ministry of Industry, Ministry of Science authorities from state enterprises to a and Technology, Thai Research Fund, transitional, existing or newly established NSTDA, and several autonomous conmnittee or agency. Where appropriate, organizations. 33 Moving to a market-oriented technology the incentive is unlikely to cause new strategy and greater inter-firm collaboration. investment. Gireater use of flexible grant- The Thai innovation system can be based mechanisms to stimulate firms to characterized as supply, rather than demand undertake technology development activities driven. A refonn strategy would need to involving design and engineering could be work at several institutional levels, including more effective. NSTDA and other public agencies, tniversities, and industry-specific institutes The new Government intends to strengthen under the Ministry of Industry, as well as the impact of information and trade associations. Starting with the communication teclhology in governance, recognition that the majority of technology commerce and education. Drafts of the transfer takes place between companies (and national IT plan, IT20 10, have been not from state organizations), industry circulated to some stakeholders. IT2010 associations in such key sectors as food builds on the previous e-Thailand draft, processing and automotive manufacturing which contained laudable goals for e- need to strengtlhen their capacity to serve the education, e-cornmerce, e-industry, e- technology needs of their members, promote government and e-society, as well as policy cooperation within the industry on technical reforms to enhance access to information standards, and provide linkages with more broadly. But as ICT has become more external suppliers of key services such as essential to more areas of national logistics and distribution. Industry development, reviewers have suggested that associations can also support, through the plan needs to be backed by more robust linkages with the software sector, the implementation and governance measures., development of industry-specific software including leadership and accoumtability. and services. The strategy would also need Previous ICT plans have had limited impact to start with a more realistic framework for at the implementation level. Pilot projects in technology development, oriented less E-Governmenit, for example, frequently use toward research and development, and more differing standards, even different physical toward value-added manufacturing and networks, which will ultimately make service competencies. information sharing goals unachievable unless reformed. Management of the tax incentive for research and development has been changed, To support systematic ICT implementation, but it is time to rethink it entirely. In the Government has annoLmced its intention stimulating private R&D, Thailand has to create the National ln/brmation Bureaut. offered generous incentives - up to 200% of By having an independent secretariat and by eligible expenditures can be credited against reporting to the Prime Minister, such an corporate income tax, and a range of soft- office would have the power to coordinate loan programs are available - yet the work and policy matters across Ministries. corporate sector's investment in R&D is This function, more about management (and among the lowest for middle-income change management) than technology, countries and much of this is focused on would help to ensure the interoperability of physical capital rather than skills. data throughout the Governmnent, well- Managemenit of the incenitive has been specified functional requirements and recently clhanged to allow NSTDA to verify processes, and to support the efficient that the activity proposed for the incentive is development of ICT projects consistent with a legitimate research and development national development strategies. The NIB expenditure. But incentive only covers a would help address the current lack of small and less relevant portion of the accountability and standardization among teclmology development spectrum, and that govermment agencies pursuing e-government 34 projects as well as support the strategic process of enabling better citizen services through [CT. Empowering rural communities througlh information technologies has emerged as a priority. Many of the current Govemment's priorities for conm mity development (the Village Fund, the fanner debt moratorium and the One Tambon-One Product program) rely extensively on local capacity building that can be facilitated by ICT. The increased importance of networking, coulpled with the recent devolution of power from Bangkok to rural villages, calls for a more fluid and transparent information and communication flow. To this end, ICT can be a powerful and complementary tool to help implement the new government's plans for resource transfer. However, the obstacles to rapid ICT diffusion are very large, and include the prevailing skill and awareness levels outside of Bangkok, the distribution of infrastructure, the lack of locally-relevant ICT content, income levels and the lack of a policy for provision of universal access. ihile over 80% of Thai villages nIow have telephone access, teledensity (lines per person) is five times higlher in urban areas. According to a Government survey, 91°%, of internet users are urban, and only 9% are nrral. Roughly 10,000 villages remain without telephone service. The Digital Signatures and Electronic Transactions Act passed the lower House of Parliament and is being scrutinized by the Senate. The National Information Infrastructure Act has passed Cabinet, while other bills related to data privacy and security, electronic funds transfer, and cybercrimes have been drafted but not yet entered tlhe Parliamentary process. ' Internet User Profile 2000, National IT Conimittee Secretariat, 2000. 35