Thailand: Meltdown In Progress?

As the crisis deepens, Thailand Inc. is in danger

It was meant to be the end of a trauma. After the government had already pumped up to $3 billion into Finance One, a high-flying finance firm undone by massive bad loans made during Thailand's go-go years, word spread through Bangkok that a state-controlled bank would take the firm over. The merger, if it goes through, would be the first move under a package of emergency measures unveiled on June 24 by new Finance Minister Thanong Bidaya to ease Thailand's mounting fiscal crisis.

But at this point, Thailand's economic problems defy quick solutions. Too many companies such as Finance One--ranging from huge property developers to producers of steel and semiconductors--are sinking under mountains of debt for the government to bail everyone out. Thailand has spent $5 billion in foreign reserves over the past month defending the baht, but speculators are still circling the currency. And even though Thai blue-chip stocks have lost two-thirds of their value in 18 months, falling exports and a widening trade deficit suggest the market still hasn't hit bottom.

At stake now is the very credibility of Thailand Inc. During previous slowdowns, investors usually were confident that fiscal management was in the hands of experienced professionals. No longer. Open infighting within the six-party ruling coalition of Premier Chavalit Yongchaiyudh is making it extremely difficult for technocrats to follow through on needed reforms, raising doubts about Thailand's resolve to continue defending its currency, now around 25 to the dollar.

WEAKER BAHT. The problem lies in the trap the Thais have set for themselves. To help boost exports, which fell 11% in April, it would seem logical for the central bank to allow the currency to devalue a bit and reduce its strong peg to the U.S. dollar. Bankers and analysts also want lower interest rates, which have stayed high to shore up the baht, to get the economy moving again. But any devaluation would actually hammer Thailand's biggest companies because they relied heavily on cheap, short-term borrowings in U.S. dollars to finance their breakneck expansion. A weaker baht would make those loans more expensive to service and could push many companies over the edge.

The crisis also is forcing the government to decide whether to subsidize floundering companies that were to lead Thailand's charge into heavy and high-tech industries. These corporations--such as Sahaviriya Steel, NTS Steel, Thai Petrochemicals Industry, and Siam Cement--are known to be financial backers of every political party in the ruling coalition and in Parliament. "They will make sure the government does not devalue, because they would collapse," explains Nipon Poapongsakorn, vice-president of the Thai Development Research Institute, a government-linked think tank. Executives of several of these companies did not respond to or declined requests for interviews.

The Alphatec Group, the country's biggest electronics concern, illustrates the depth of the problem. In 1995, founder Charn Uswachoke broke ground on a $1.4 billion silicon wafer plant, putting up only $80 million of his own money. Today, Alphatec cannot pay off foreign equipment suppliers; Finance One, its lead backer, has collapsed; and joint-venture partner Texas Instruments Inc. has pulled out. Now the company cannot make a $45 million bond payment to creditors, who may insist on Charn's resignation. Robert Mollerstuen, CEO of Alphatec Electronics PLC, the group's Bangkok-listed unit, thinks the government should supply low-cost loans or take an equity stake to keep Thailand in the high-tech race. "We can't be expected to do it all on our own out here," Mollerstuen says. So far the government has declined to intervene.

MERGERS? The plight of Sahaviriya Steel Industries is almost as dreary. In the past year, Sahaviriya's stock has crashed by 75%, to around 20 cents. The company has run up staggering losses because it has not been able to compete with cheaper imports. And with much of its $508 million in debt in U.S. dollars, the steelmaker has been hard hit by the baht's deterioration. Merrill Lynch & Co. is projecting a $40 million loss this year for the company on sales of $530 million. To keep Sahaviriya and other steelmakers afloat, Thailand's Industry Board is considering hiking steel tariffs from 2.8% to as high as 25%.

Thailand's banks and real estate developers have also borrowed heavily in dollars. By the end of this month, Thai banks must report the extent of their bad debts, a figure that is not expected to instill confidence. The June 24 measures unveiled by Thanong are meant to stem the bleeding. They include allowing up to 25% foreign ownership of banks and finance firms, easing the way for failing institutions to merge with stronger ones, and letting lenders sell off loans in the form of securities.

But it will be months before these measures become law, and they are likely to come under fire in Parliament. And rescuing every big company may be out of the question. The Bank of Thailand already has committed the equivalent of more than half its $14.4 billion in capital funds to help the beleaguered finance sector, estimates Scott Christensen, head of research at Jardine Fleming Thanakom Securities. The idea that the Thais may try a bailout anyway scares investors. "The financial system is running out of money to pump into the economy," says Christensen. "That hits everybody."

It doesn't help that confidence in the government is hitting new lows after the departure of former Finance Minister Amnuay Viravan, who quit over opposition to his plans for a tax hike. This was "the first concrete evidence that politics has entered economic policy," says global markets analyst Devi Aurora of DRI/McGraw-Hill. "This will do great harm."

MISSTEPS. As the government moves to shore up big players, smaller ones that hope to climb out of labor-intensive industries such as garments and textiles may have to wait years before they receive loans. Says James Stent, executive vice-president of Thailand's Bank of Asia: "No one has given very much attention to the real economy, the people who make things."

And the people who make things will suffer even more if policy missteps hurt prospects for a recovery. One fear now is that if the government wavers at all in its defense of the baht, speculators could push its value down by 25% or so, precipitating an even bigger crisis. "We might see a meltdown quite soon," warns Arporn Chewakrengkrai, chief economist at Deutsche Morgan Grenfell Securities (Thailand). The irony is that brokers say the Thai baht may be no more than 10% overvalued. But confidence is so low that a panic-driven sell-off of the currency is quite possible.

Some analysts are cautiously optimistic that the government will take a middle road between devaluation, bailouts, and meltdowns. That would be a monumental achievement, since no one has yet figured out how to resolve all of Thailand's contradictions.

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