Thailand's Booming, But What About the Debt?
By William Pesek Jr., February 5, 2003 

Tokyo, Feb. 6 (Bloomberg) -- Thailand calls itself the "Land of Smiles'' and, these days, many investors couldn't agree more. 

Growth in the neighborhood of 5 percent, a burgeoning consumer sector and last year's 19 percent advance in Thai stocks are attracting lots of attention -- and capital. In July, Bangkok will finish paying back the $12 billion it borrowed from the International Monetary Fund during the 1997 Asian crisis. 

Five-and-a-half years after its chastening by markets, Thailand is back on investors' radar screens. For good reason, given Bangkok's success in strengthening the financial system and making the economy less dependant on exports. Small and medium- sized enterprises are coming into their own, creating jobs. 

Yet the hype over the Thai economy is masking some important vulnerabilities. The global economy, for one. Non-performing loans in the nation's banking sector, for another. And then there's China, that rapidly growing export power. 

As global growth wanes, so does output in Southeast Asia's second-largest economy. Sure, Prime Minister Thaksin Shinawatra has spent his two years in office recalibrating things. Dubbed "Thaksinomics,'' the strategy aims to move from mass-market manufacturing to an economy led by domestic demand. It's an exit strategy from the trap of export dependence. 

Thaksin's Approach 
Turning an economy upside down, which is the thrust of Thaksin's approach, takes time and comes with risks. Thaksin wants to move from a two-thirds dependence on exports to one-third dependence. China's rise also has Thailand looking to develop niche positions in local industries that will give it some pricing power in a region plagued with deflation. 

Good stuff all around, and Thailand should stay the course. Question is, will the global economic environment slow the process? 

Thailand hopes to grow out of its problems, offering enough of a cushion for policy makers to retool the economy. Yet with the U.S. walking in place, and Japan and Europe stumbling, Thailand can't expect much help on the international side. China is picking up some of the slack in Asia, but it has a ways to go before it's a bone fide regional growth engine. 

Complicating things is the considerable amount of bad loans weighing on the banking system. While it's hardly in the same bad- debt league as Japan or China, Thailand's bad ones amounted to 18 percent of total loans at the end of 2002. That's high by international standards. 

"This is still very high and keeps banks vulnerable to lower economic growth and/or higher interest rates,'' says Christa Janjic, an economist at UBS Warburg. "The Japanese banking sector, though the comparison isn't entirely warranted, provides a good example of this.'' 

Nonperforming Assets 
Japan's experience is instructive, indeed. Thai officials may be kidding themselves in thinking they can grow their way out of their problems. It's a strategy Japan has been failing at for 12 years, and China has since adopted. Bangkok may want to try a more aggressive approach if it wants a healthier financial system. 
Solid growth and buoyant equities -- stocks are up almost 6 percent so far this year -- provide a window of opportunity. Aggressive government spending and low interest rates clearly have stabilized the economy. But investors should pay close attention to whether policy makers use it to depose of the nonperforming assets undermining Thailand's outlook. 

On a recent trip to London, Finance Minister Somkid Jatusripitak was urged by foreign investors to tackle bad-loans more aggressively. The concern is that if the disposal process isn't accelerated, Thailand will be left with double-digit bad- loan ratios for some time. If not, future stock-market gains may not match current ones. 

Somkid countered that Thailand's bad loans were manageable. In November, the Bank of Thailand pledged to rid banks of dodgy debt by the end of 2004. While the details of how that will be done are scarce, it's certainly possible. Analysts believe Thai banks are among the best provisioned against bad loans in Asia. 

Nonperforming Debt 
Bangkok still must convince investors it's on top of things. Ditto for the rest of Asia. Five years after the Asia crisis, few challenges are greater than the need to rid economies of nonperforming debt. It's stifling credit growth and undermining the profitability of financial companies. 

Thailand has another debt challenge on its hands: its budget deficit. Fiscal pump priming was the right policy in recent years; the payoff was last year's 5 percent growth rate and projections for as much as 6 percent this year. 
The question now is whether the government can rein in spending. Officially, public debt is still a not inconsequential 55 percent of gross domestic product. Thaksin aims to erase the deficit by 2007 by trimming spending and increasing tax receipts. The budget deficit is expected to shrink to 100 billion baht ($2.4 billion) in the fiscal year beginning Oct. 1. 

Thailand is a very different place today than five years ago. For it to stay this way, though, policy makers must remember their work is far from done.