May 26 2000

Dow Jones Newswires

INTERVIEW: Fitch IBCA Finds Improvements In Thailand

By THOMAS FOX
BANGKOK -- A Fitch IBCA team visited Thailand this week to prepare for a review of its sovereign credit ratings and left encouraged by what they saw, although a further ratings upgrade may not be an immediate result, a Fitch official said.
Paul Rawkins, senior director for sovereign ratings at the credit rating agency, told Dow Jones Newswires in a telephone interview following his return to London that the legal framework for regulation of a modern economy is in place.
"There's been a great deal that has happened in areas like institutional reform, which perhaps the market hasn't given them credit for. It will take a long time for (the benefits of) these things to work through, but there will be a growth dividend in the end," he said.
Rawkins' team last came to Thailand in September. The country's sovereign long-term foreign currency rating was upgraded to an investment-grade triple-B-minus in June 1999. The short-term foreign currency rating is F3, and the long-term local currency rating is triple-B-minus.
"We found things better than we expected. I don't think that necessarily should be interpreted as (foretelling) an upgrade, but there were things which concerned us before we came that we are happier about now," he said.
A lot of what has been accomplished - in terms of constitutional reform, bankruptcy legislation and other key areas - is largely irreversible, he said.
"Things are also moving in financial and corporate restructuring. At least it's moving now where before it wasn't. The dam has been broken," Rawkins said.
Nonperforming loans dropped to around 37% of total lending in the financial system as of end March, from almost 50% in the middle of last year, according to Bank of Thailand.
Rawkins said the method of pulling bad debt out of the financial system used in Thailand - through asset management corporations set up by each institution - may not have been as quick as having the state set up an agency to buy the entire stock of bad debt, along the lines of the Malaysian and South Korean approaches.
But there was some validity to the Thai government's argument that they probably couldn't afford it, and that the industry had since developed a big pool of personnel with experience in restructuring, he said.
"There is good reason to believe that they (Thailand) will end up with a stronger banking system as a result," he said.
Rawkins also said Finance Minister Tarrin Nimmanahaeminda is developing a realistic approach to funding the fiscal stimulus and financial sector restructuring that Thailand had to implement to revive the economy, following the 1997 financial crisis.
The government is expected to issue at least 135 billion baht ($1=THB39.199) in goverment bonds every year for each of the next five years, and the cost of servicing that debt as a percentage of annual spending should rise from 9.5% this year to more than 15% by 2004, according to extrapolations from scenarios released by the finance ministry this week.
Tarrin is due to present a detailed five-year plan for government bond issuance to the Cabinet Tuesday.
Rawkins said Tarrin is on top of the issue, and the public debt appears to be manageable.
The major risk for the Thai economy in the next few years, however, is the lack of room the government will have to increase public debt for fiscal stimulus measures, which might be needed in the event of another major shock to the economy, such as a sharp deterioration in U.S. demand for exports.
It isn't clear when the financial sector will return to health and see a resumption in lending growth, or whether recovery in the domestic economy is sustainable at this point if there is a drop in global demand, Rawkins said.
Uncertainty over the policy direction of the next government is also clouding the horizon.
Prime Minister Chuan Leekpai's economic team is highly regarded, but new general elections must be called by September.
The policy approaches of Chuan's team and those of Thaksin Shinawatra's Thai Rak Thai Party, the other frontrunners in the race to head a new coalition government, aren't expected to be very different, Rawkins said.
"Most people say the election is about personalities rather than policies. We just need to see how it turns out," he added.
Whoever runs the government next year, they will be running an economy that has come a long way from crisis toward financial stability, he noted.
Short-term foreign debt fell to $13.7 billion at the end of 1999, from $34.6 billion when the crisis hit.
Foreign direct investment inflows continue, while companies are still paying down and refinancing foreign debt.
"Debt-creating flows are going out, while non-debt-creating flows are coming in," Rawkins said.
The strength of the country's external accounts was the reason for the upgrade in the rating last year. From tourism to exports and the current account surplus, the country's performance left the Fitch IBCA review team far less concerned than when they arrived, he said.