One Tired Tiger

Now, Thailand's leaders are searching for ways to recover from the country's go-go excesses

After a brutal week of bank runs and bad economic news, the elite group of Thai financiers who met on Mar. 8 at a beachside resort in Pattaya were looking for comforting words. Days earlier, the government finally announced measures to shore up the troubled financial sector that many analysts hoped would stem Thailand's long economic slide.

But if the executives at the gathering were expecting a day of happy talk, they didn't get it from Finance Minister Amnuay Viravan. Not only is the current downturn still serious, he said, but the economy isn't likely to resume its rapid growth when the crisis is over. "We have to forget about enjoying an 8% growth rate," Amnuay said. "Those days are gone."

Thailand's descent from miracle to mess in three years shows how even a sure-shot Tiger can stumble with bad management and corrupt politics. It began with a grand plan to make Bangkok into a financial hub that instead addicted the local economy to cheap foreign money. Now, the country is burdened with a property glut and too many factories. The regulators are in a bind. Just when struggling exports need a boost, officials can't devalue the baht without clobbering big companies that have huge foreign-currency debts.

If there is one big blunder on which foreign and local analysts agree, it was the way that Thailand tried to open its sheltered banking sector. "We were too bullish on [financial] liberalization," says Nimit Nontapunthawat, executive vice-president of Bangkok Bank. In 1993, the government decided to let some foreign and local banks make loans, known as Bangkok International Banking Facilities (BIBF), in U.S. dollars and other currencies. By having more loans booked in Thailand, the idea went, the country would become a regional financial hub for neighboring economies.

In reality, most of the $50 billion in the special foreign loans went to local companies, which used them to build everything from steel and chemical plants to condominium complexes such as Mongthongthani, a cluster of white high-rises 30 kilometers from Bangkok that is mostly vacant. And with the minimum set at just $500,000, it was possible for almost any Thai company to secure a foreign-currency loan.

The system also pleased foreign banks that were clamoring for a piece of the booming Thai market. "The Bank of Thailand told them to show their commitment to the Thai economy," says George Morgan, country manager for HG Asia Investment Research. The most aggressive--Bank of Tokyo, Citibank, Sakura Bank, and Hongkong & Shanghai Banking--loaned a combined $10.1 billion.

MISSTEPS. The rush to cheap foreign money was made worse by the government policy of maintaining high rates on local-currency loans to contain inflation and control the baht. Thai companies were able to raise more funds through public stock offerings that were snapped up by foreign investors when the Bangkok bourse was at its peak in 1993. The result was a wild investment binge. In three years, for example, TelecomAsia and Thai Telephone & Telegraph spent $4 billion to add 4.1 million phone lines. But they have signed up only

2 million new subscribers.

The investment spree continued even as growth slowed, deepening Thailand's trade deficit. When Mexico's current-account deficit helped trigger the peso crisis in late 1994, foreign investors started worrying about Thailand, where the gap had reached 5.3% of gross domestic product. The deficit now stands at $14.5 billion, or 8% of GDP, after last year's sharp slowdown in exports and surge in imports. "At a time when we needed to cut down our expenditures, everyone kept spending," says Arporn Chewakrengkai, chief economist for Deutsche Morgan Grenfell (Thailand).

Another misstep was that former Prime Minister Banharn Silpa-archa let cronies meddle with institutions such as the central bank, which had been respected for its independence. Regulators stood by as the Bangkok Bank of Commerce collapsed and the property bubble swelled. Concedes former Finance Minister Tarrin Nimmanahaeminda: "Had we been much more vigilant in terms of monitoring and supervision, it would have been better."

By the time General Chavalit Yongchaiyudh became Premier in November, the bubble was about to burst. Several finance companies have recently failed, and estimates of nonperforming loans in the finance sector range from $15 billion to $27 billion.

After moving in fits and starts, Chavalit's government now is taking action. Regulators are requiring banks and other financial institutions to set aside almost $2 billion in reserves to cover bad property loans, a move that should have been made a year ago. Amnuay has proposed setting up a company that would issue government-backed bonds to buy up sour property projects. He pledges to slash the budget deficit by cutting spending by some $4 billion, more than 1% of GDP. And last year, the central bank introduced rules to discourage short-term borrowing, which has fallen from 86% of total loans to 73% at the end of 1996.

"FINE LINE." Anticipating a rebound, analysts at Morgan Stanley, ING Barings, and Merrill Lynch say it's time to buy Thai stocks. Some Chavalit opponents agree that the latest moves may work, for now. "It seems the situation has stabilized," says Democrat Party spokesman Abhisit Vejjajiva, although "we are still walking a fine line."

Even if the worst is over, however, it won't be easy to bring back the old exuberance. Industries such as steel, which is stuck with serious overcapacity, will remain a drag on the economy. Many analysts think the official 6.5% growth forecast is too high. And projections of 10% to 15% export growth are modest, given exports were flat in 1996. Many long-term problems remain unfixed, such as poor education, overtaxed infrastructure, and a huge wealth gap between Bangkok and rural provinces.

The government will also have to address the problem of valuing the baht. In February, the BOT fended off another in a series of attacks on the currency. If the U.S. dollar keeps rising against the yen, pressure will build for a devaluation. That would help exporters. But with $80 billion in foreign-currency loans, Thai companies would be hit hard. That may give the central bank little choice but to defend the baht.

Thailand's go-go economy wasn't derailed overnight. Policymakers still have a lot of work to do before Thais can catch up with the likes of Hong Kong, South Korea, Singapore, and Taiwan. "We were supposed to be the fifth Tiger," laments economist Bhasu Bhanich Supapol, president of SBC Research Institute in Bangkok. For now, such hopes seem distant. Although the crisis may be abating, it will be a long time before Thais dare dream again of quickly joining Asia's economic elite.

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