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Can Chuan Turn Thailand Around?

International Business: THAILAND


The country is taking baby steps on a risky course of reform

These are heady times for Thai Prime Minister Chuan Leekpai. His four-month-old government has won praise for pushing through reforms mandated by the International Monetary Fund's $17 billion bailout package. Feted in the U.S. in early March, Chuan left with $1 billion in Export-Import Bank credits, a release from a contract to buy military planes, and an endorsement from President Clinton urging investors to return to Thailand. No wonder optimism is growing. "The overall situation is much better than three or four months ago," Chuan told BUSINESS WEEK.

So is Thailand, the first nation to plunge into Asia's currency crisis, now the first to turn the corner? In some senses, yes. The government is, by the reckoning of the IMF, putting in place the reform measures necessary to get Thailand growing again. And the currency and stock market seem to be stabilizing. "We are no longer drifting down to disaster," says Chumpol Nalamlieng, president of industrial giant Siam Cement Co., which has $4.1 billion in unhedged debt and lost a record $1.3 billion last year.

But shocking numbers like those indicate just how much pain Thai companies are enduring. Chuan's government estimates that over the next three months, the economy will contract at an annual rate of 6.5%--a recession much deeper than the one predicted by the IMF. While the baht may be rising, so is unemployment. The stock market is recovering, but high interest rates continue to cripple companies. While the trade surplus is building, it's largely a result of plummeting imports rather than surging exports. Even Chuan admits, "the full impact of the crisis has still to be felt.""THE EASY PART." For all its woes, Thailand is far ahead of fellow IMF patients Indonesia and South Korea in instituting reforms. So political leaders and executives around Asia are watching how it copes as it struggles back to prosperity. What they see is that even a country saddled with cronyism can begin getting its house in order. What they are eager to find out is whether Chuan is willing to follow IMF-mandated reforms with even tougher measures.

Such steps include allowing foreign investors for the first time to control big pieces of the banking, financial, real estate, and manufacturing sectors. Opening up these areas would bring transparency to corrupt sectors and give the Thais needed liquidity. "What has happened so far is the easy part," explains Charnchai Charuvastr, president of the Thailand Management Assn. "The difficult part is next."

Chuan has started down the right track. He has forced the banks to recapitalize and has shut down dozens of finance companies--the go-go lenders that fueled the bubble economy with easy credit. Foreign investors are now allowed to take 100% stakes in them for up to 10 years. This is aimed at the system of banks and finance companies that funded the country's well-connected business elite. By forcing families that control the big banks to dilute their ownership, Chuan may go a long way toward solving some of Thailand's chronic problems. Moreover, with a new constitution passed last year and tighter regulation, the economy has become less prone to abuse.NO NEW CREDIT. Those hopeful steps are leading some investors to start returning to the beleaguered manufacturing sector. In March, George Soros chipped $3.5 million into a $650 million package for Nakornthai Strip Mill. Such deals, however, are a rarity.

Luring back foreign investment will be essential as the banks tackle the task of restoring their balance sheets. Burned by loans gone bad, banks and finance companies are refusing to extend new credit to companies. Instead, they are parking funds with the central bank, buying government bonds at interest rates of 21%. "It's low risk and very liquid," says Sripop Sarasas, managing director of Phatra Thanakit, one of the major finance companies still active despite losing $150 million last year. "There's no such loan like that." Phatra will not resume lending anytime soon.

This kind of conservatism is painful for businesses that need capital, and a new government agency could force the banks to tighten even more. The Financial Sector Restructuring Authority (FRA), modeled on the Resolution Trust Corp. of the U.S., is in charge of selling off property-backed loans as well as cars, paintings, and even office furniture of the 56 closed finance companies. Vicharat Vichit-Vadakan, the head of the FRA, vows to let market forces determine prices. "We want to address the issue as quickly as possible," he says.

The banks, which lent generously to real estate projects launched by the finance companies, are bracing for big write-downs in their property portfolios once the FRA starts selling off assets. The banks now carry property on their books at inflated, pre-bust values.

Another worry is that the government will never recover some $11 billion in state loans it pumped into the finance companies in a futile bid to keep them afloat. That means the government may stay starved for cash at a time when it cannot raise taxes for fear of crushing the economy. Simply writing off the loans would be politically risky, since it signals that fat cats were bailed out at taxpayers' expense. The only way out may be to print more money. "There will continue to be the temptation to inflate their way out of the problem," says Sriyan Pietersz, at SocGen-Crosby Research. Already, Thailand's wholesale inflation rate is up to 20%, he says, but markups haven't yet been passed on to consumers.

That means the risk premium on the baht is unlikely to come down soon. And killer interest rates will stay high, since a weak baht would quickly scare off the foreigners now pouring into the stock market. The Bangkok exchange's surge since January is nothing but a "bear-market trap," asserts Russell J. Kopp, head of research at Dresdner Kleinwort Benson Securities' Thai office.HANDS-ON BOARDS? Yet the Thais willingness to acknowledge their role in the crisis could help them as they dig their way out. Changes such as making directors more responsible for overseeing management could revolutionize the way companies are governed, says Charnchai of the Thailand Management Assn. Other moves he would like to see: tougher bankruptcy laws, foreigners allowed to own property and operate businesses without restrictions, and privatization of transportation and key industries.

The most pessimistic observers are willing to concede that the Thai government has made some impressive moves. But even with a government tuned to fixing Thailand's problems, recovering from years of mistakes will take a long time. The Thais deserve praise for starting down a difficult path. Now, the world is watching to see if they can finish the journey.By Bruce Einhorn in BangkokReturn to top

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