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Economic and Political Review of Selected Asian Countries

Vietnam Cambodia Japan
Bangladesh Thailand Indonesia
Gold - was lenin right? PhilippinesSingapore
Inside Asia ReportChina - US Relations Enter A New EraAsian Growth Prospects

Prepared for Asia and Pacific Review 2001

Political developments
On 6 January 2001, Prime Minister Chuan Leekpai after the first elections held since the onset of the economic crisis must have felt much like Winston Churchill felt in April 1945 when an ungrateful populace removed a war victor for the colourless socialist Clement Atlee. Not that Chuan could ever be called a colourful character. He is not. The similarity with Churchill is that he had inherited a country driven to bankruptcy by a cabal of greedy politicians. Chuan set about the painful task of rebuilding the economy and restoring the country's creditworthiness. In this he succeeded and was frequently paraded as the IMF's poster boy.

Gratitude for strength in adversity has a short life span in politics, in Thailand as elsewhere. Chuan was unfortunate that in 2000 steep oil price increases led to a sharp slowdown in economic growth. Prosperity did not return adequately to the countryside and the city dwellers of Bangkok dreamed of a faster return of the glory days of the early 1990s.

Chuan's ability to continue the ambitious restructuring of the economy that began so well in the aftermath of the crisis also hit a brick wall in the pre-election year. Essentially everything was on hold for January 6.

Chuan's opponent and the winner was Thaksin Shinawatra, a former police general and telecoms entrepreneur. Thaksin, who headed the Thai Rak Thai (Thais Love Thais) party ran a blatantly nationalistic and populist campaign promising to get the country moving again. Much like the British in 1945, the Thais were happy to vote for an end to austerity and a free lunch. He won an overall majority of seats in the parliament and is therefore able to rule, in theory, without forming the typical coalition alliances.

However, Thaksin brings a lot of baggage to the position. He is under investigation for corruption and it is quite possible that the investigating commission against corruption will find him unfit to hold office in a few months time. Then the country will be faced with a popularly elected Prime Minister who has to be constitutionally removed for corruption. It would be a first.

He has, in fact, formed a coalition with other parties and has brought back former Prime Minister Chavolit as defence minister. Chavolit was, of course, Prime Minister at the time of the crisis in July 1997.

The country therefore faces an uncertain time politically. The Thaksin government may fall and its replacement is unclear, although it is speculated that Thaksin might try and rule at long distance through a proxy.

He has had some difficulty putting a Cabinet together and, in particular, the first three candidates offered the poisoned chalice of the Finance portfolio turned it down. A relatively unknown Thaksin placeman is now in office.

The country probably faces increased political disturbances compared with the relatively placid but generally accomplished Chuan regime.

International relations
Thailand has a famed flexibility in its international relations that have allowed it to remain independent throughout the colonial period. Since World War II the country has been firmly in the Western camp participating in the Korean and Vietnamese conflicts. It assisted Australia take the lead in helping pacify he newly independent East Timor.

However, as a solid longstanding democracy it was surprised that its ally, the United States, failed to participate in the rescue package during the economic crisis, only to organise the Indonesian, Korean and Russian bailouts. This is seen as a considerable slight. This was then compounded by the insulting treatment the US gave the Deputy Prime Minister Supachai Panitpakdi in his efforts to become Secretary General of the World Trade Organisation. They feared Dr. Supachai's independence and lobbied for an ex-trade unionist, Mike Moore, who is clearly out of his depth and has made a hash of the role.

The famed Thai sense of the way the long-term winds are blowing may again be reasserting itself. They sense a decline of interest in the long term United States interest in the region and the need to accommodate a resurgent China. In early 2001, the Thai military announced closer relations with the Malaysian military with joint manoeuvres at the same time that it announced a scaling back of its joint operations with the United States.

Malaysia and Thailand face joint external threats from ethnic and religious tensions that can spill over into economic instability and, from that standpoint, increased co-operation is eminently sensible. However, if it comes at the expense of the US relationship, that has been so strong traditionally, then US influence within mainland ASEAN would be severely reduced and limited to offshore Singapore and the Philippines.

Thailand also faces continued and troubled relations with the erratic regime in neighbouring Myanmar. If the Taliban is successful in reducing opium production in Afghanistan, as they claim, then increased production in the Golden Triangle seems inevitable. Relations with the Burmese drug lords are likely to deteriorate and that could have adverse consequences on domestic Thai stability.

Economic developments
The Thai economy in 2000 was a tale in two parts: in the first half of the year the recovery of 1999 accelerated to 5.7 percent powered by exports and the lagged effects of previous fiscal and monetary stimulation: the second half suffered by comparison from the effects of higher oil prices, tighter monetary and fiscal policies and the expectation of elections at the turn of the year. Economic growth closed the year at about 4 percent overall, down very slightly from the previous year but the implication was that second half growth was a relatively uninspiring 2 to 2.5 percent.

Whilst the flood-ravaged agriculture and industrial sectors were relatively lacklustre, the services sector, powered by tourism, was a continued strong performer. Export oriented manufacturing continued to grow a rate in excess of 20 percent whilst domestic production fell. However, that was partially driven by changes in the liquor laws that had forced production into 1999 at the expense of 2000. The overall capacity utilisation rate for industry recorded a slight decline to around 55 percent as compared with an overall rate of over 70 percent before the crisis.

Whilst exports, which had powered the economy since the onset of the crisis, again grew solidly, imports also picked up - driven by oil and restocking - with the result that the current account surplus declined from USD 12.5 billion to USD 9 billion. The trade balance shrank even more and by January 2001 the country was running its first trade deficit since the onset of the crisis.

The current account surplus allowed the country's debt profile and exchange reserves to improve. Whilst international reserves grew to USD 33 billion, more than twice short term debt and over seven months imports. Total public and private external debt declined substantially to around USD 80 billion (USD 16 billion short term) as the private sector paid off debt. The debt service ratio fell again to a comfortable level of 17.4 percent.

As noted earlier, the second half slowdown was caused by a combination of sharply higher oil prices and a tighter fiscal policy. In this regard, the budget deficit fell as tax revenues grew faster than outlays to a comparatively modest 3.5 percent. This compares with the economy's savings rate of over 30 percent and a still considerable underutilisation of the country's resources. While the deficit caused the public debt to grow to around 56 percent - three times pre-crisis levels - it is still the lowest of the crisis-affected ASEAN members.

Tight monetary policies held inflation in check at 1.6 percent although how long that can be maintained in the face of higher oil prices and a weaker Baht remains to be seen.

Economic outlook
The global economic outlook, particularly the health of the US and Japanese economies, is likely to make the environment in Thailand in 2001 even more challenging, holding growth to the 3-4 percent range, unless domestic demand can be stimulated. The risks to these estimates are probably on the downside. Critical to getting the country moving to the higher sustainable growth path of which it is capable is further movement on corporate and financial restructuring that will allow investment to make up a substantial portion of the losses - amounting to around 15 percent of GDP - that investment has suffered since the onset of the crisis.

The banking situation
The key to renewed growth is renewed access to credit and critical to this is the proper resolution of the non-performing loan problem.

On the face of it, considerable progress has been achieved on the non-performing loan (NPL) front. From a peak level of around 48 percent in early 1999 to 18 percent at the end of 2000. About 12 percent of the improvement were due to the transfer of some loans to asset management companies thereby taking them off the bank's balance sheets. Moreover, within the sector, there is a huge disparity between the performance of the private institutions and the Government owned banks where the NPL are sometimes double those of the private institutions.

There is a further fear that a considerable part of the improvement is due to rescheduling of old loans to take them out of the NPL status. However, an economic slowdown could easily drive some of these restructured loans back into NPL status again. Finally, healthy borrowers have been reluctant to borrow to expand since they feared contagion from their suppliers being unable to meet their commitments.

Removal of NPLs from the balance sheets has been useful overall and a more aggressive use of the asset management company should be helpful in energising and focussing banks on their core business: lending.

The recapitalisation of the banking sector is well underway with the unfinished business focussing primarily on the state owned banks such as Krung Thai and the Bank for Agricultural Co-operatives.

Corporate sector issues
Thai corporate governance does not rank highly amongst emerging markets world-wide. CLSA - formerly Credit Lyonnais Securities Asia - a regional stock broking company researched corporate governance in Asian, Latin American, South African and Eastern European economies. Thailand cam a disappointing 23rd in the list of 25 countries surveyed, beating only the Czech Republic and Russia. Nevertheless, the same survey showed that two companies - Advanced Information Systems and Telecom Asia - scored in the top 25 of companies incorporated in emerging markets for their corporate governance.

Corporate governance was an issue of minor import during the boom years but the crisis years have shown its vital importance to investors, foreign and domestic. The reluctance of investors to come back to the stock market reflects in part their fears, sometimes well founded, that they receive a less than optimal deal. Hence, the need for sustained improvement in this area. And improvements there have been. A bankruptcy law has been passed and whilst there is sometimes spotty implementation, there has been some improvement over pre-crisis practices. Considerably more work needs to be done in qualifying bankruptcy lawyers and judges and streamlining the laws and implementing rules further. It is now essential that Thailand improve the corporate governance criteria to emerging markets best practice levels.

Other longer term economic issues
Thailand boasts superb physical infrastructure, often at first world standards. Roads, airports, electric power and telecommunications are all superb. The much-hated Bangkok traffic is a minor inconvenience now that world class expressways have opened along with an overhead railway. In addition, an comprehensive underground is being built and it is expected to commence service in 2005.

However, it is on the human capital side that Thailand is lagging and the crisis has delayed improvements in this area. The boom period showed that deficient Thailand was with respect to qualified engineered. A similar problem may be developing with respect to IT professionals that will be critical if Thailand is to improve the efficiency of its business sector. Educational and cultural issues appear partly to blame but also the organisation of the telecoms sector with monopolistic or oligopolistic powers resulting in too high charges for internet access, for instance.

Greater investment in secondary and tertiary education is essential. Greater deregulation of business and vested interest is also a necessity.

Even in areas of strength such as tourism, the country cannot rest on its laurels. The hospitality industry is a natural for the Thai culture and the scenic attractions of the country and its immediate hinterland. Prices are still very competitive but shortages are appearing since there has been virtually no investment since the crisis. In the interim, tourist arrivals have boomed.

That process should continue as long as adequate facilities are available. The country is a natural launching pad for the Mekong sub-region including Indochina with its historical attractions such as Luang Prabang and Angkor Wat. It is useful to note that some deregulation has reached the airline industry and new companies such as Angel Airlines have been authorised to service these areas with competitive fares. In addition, Thailand represents an ideal retirement area for the greying of Japan and to a lesser extent Europe. For the Japanese, there is a close cultural affinity, a benign climate, safety, good health facilities and ample golf. Thailand has instituted probably the most progressive retirement visa program to attract modestly off retirees.

Bangkok is probably one of the safest cities of its size in the world for tourists which is just one of its attractions. Therefore, any rise in urban violence whether drug related or otherwise would be of great concern for the industry. The announced policy of new Prime Minister Thaksin Shinawatra to fight the drug gangs operating in the Golden Triangle is bad news from a peace and order perspective. The assassination attempt against him at Bangkok Airport on March 3rd is a warning shot in this regard.

The Thaksin Government's economic plan
Thaksin's economic promises simply do not add up. He would grant farmers loan amnesties for several years, give each village one million Baht for "investment", and generally practice loose fiscal and monetary policies. (The independence of the Bank of Thailand would be threatened by his policies.)

Of prime importance, he would create a national asset management company to take NPLs off bank balance sheets. In addition, he would keep the remaining banks in Thai hands.

The policies, if implemented would threaten the exchange rate stability of the Baht. Consequently, there are rumours that he might flirt with Malaysian-style exchange controls.

How much of this program will actually be implemented is uncertain as is his longevity in office. Thaksin has a poor record of keeping election promises. But the situation must be carefully monitored.

Stock Market
The stock market had a miserable year in 2000 falling from a February peak of over 500 as measured by the Stock Exchange of Thailand (SET) index by 50 percent to 260 late in the year. In USD terms the market fell by about 55 percent given the 10 percent decline in the Baht against the USD.

With a market capitalisation of around USD 30 billion the whole market is valued at less than 25 percent of GDP and a fraction of just one NASDAQ company. Intel, for instance, lost USD 75 billion in market capitalisation on one day in September. The values are clearly there in Thailand, the question is what can realise them. One possibility is asset allocation from foreign investors as their technology-overweight portfolios are subject to relentless value erosion.

More likely, the Thai market will trade in a wide range for several years as the economy consolidates and establishes on a new growth path. Increased domestic investment is a possibility from domestic pension and provident funds, as these mature. But, underlying all this is the need for the market to become more transparent and provide value to outside investors. The remaining traces of crony capitalism must be consistently reduced and removed.

Country risk:
Economic:Stable (but needs watching)
Political:Fair (but needs watching)
Stock market:Improving

William R. Thomson                               10 March 2001
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