Can Thailand Turn Around?

It's 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 at home and abroad for pushing through reforms mandated by the International Monetary Fund's $17 billion bailout package. Feted in New York and Washington in early March, Chuan left the U.S. with $1 billion in Export-Import Bank credits, a release from an onerous contract to buy military planes, and an endorsement from President Clinton urging investors to return to Thailand. No wonder a sense of 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 banking and finance 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 posted a record loss of $1.3 billion last year.

But shocking numbers like those indicate just how much pain Thai companies are enduring. Chuan's economic adviser Arporn Chewakronkai says that over the next three months, the economy will contract at an annual rate of 6.5%, a recession rate much deeper than the one predicted by the IMF. The pain is deep--and getting deeper.

"THE EASY PART." While the baht may be rising, so is unemployment. The stock market is recovering, but high interest rates continue to cripple companies. And while the trade surplus is building, that is largely a result of plummeting imports rather than any surge in exports. Even Chuan admits that "the full impact of the crisis has still to be felt."

For all its woes, Thailand is far ahead of fellow IMF patients Indonesia and South Korea in instituting the reforms prescribed by Washington. So political leaders and business executives around Asia are watching how Thailand copes with the difficulties that inevitably will arise 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 through on his 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 let disciplined investors into corrupt sectors and give the Thais well-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. Banks and finance companies are selling off pieces to foreign investors, who are now allowed to take 100% stakes for up to 10 years. Buyers include the Development Bank of Singapore and Societe Generale. In the latest deal, a consortium led by Koo's Group of Taiwan said it would pay $53 million for a controlling stake in leading finance company Securities One.

Such investments show that the IMF--despite all the abuse it has taken in Asia and the West-- is forcing the Thais to address the sources of their woes. Chuan's government is attacking the system of banks and finance companies that funded the country's well-connected business elite. By shutting down dozens of bad companies and forcing the well-connected families that control the big banks to dilute their ownership, Chuan and Finance Minister Tarrin Nammanhaeminda 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 country's economy has become less prone to abuse.

Those hopeful steps are leading some investors to start returning money to the beleaguered manufacturing sector. In March, George Soros chipped $3.5 million into a $650 million package for Nakornthai Strip Mill, an ultramodern minimill that just started producing steel for export. "People will look back and say this was the deal that restored confidence in Thailand," boasts David Stickler of McDonald & Co., the investment bank that got Soros involved. Such deals, however, are still a rarity.

Luring back foreign investment will be essential during this difficult period as the banks tackle the hard 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 rebuilding their balance sheets by 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 commercial lending anytime soon, even though it has completed its recapitalization, having raised $120 million by selling a controlling stake to Thai Farmers Bank. Now, Thai Farmers Bank, too, is focused on recapitalizing instead of lending and is having Goldman, Sachs & Co. lead an offering of 376 million shares, which the bank hopes will raise at least $95 million. But Thai Farmers Vice-Chairman Narong Srisa-an says even a successful recapitalization won't change his stingy lending policy. Nonperforming loans already amount to 18% of his portfolio, and that number could go as high as 25% once the Bank of Thailand announces stricter requirements. "We will be very, very slow in making loans," he says.

While this kind of conservatism is painful for businesses that need capital, 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 secretary general of the FRA, vows "to let market forces determine prices." Thailand, says Vicharat, has learned from Japan the price of dragging out a financial crisis. "We want to address the issue as quickly as possible," he says. "We don't have the luxury of time."

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 in earnest. "This is only round one for the banks," says Graham Catterwell, a managing director at Deutsche Morgan Grenfell Inc. in Bangkok. The banks now carry property on their books at inflated, pre-bust values.

CANCELED LAUNCH. Already, the credit crunch is forcing companies to scale back their big regional ambitions. Telecommunications conglomerate Shinawatra Group, for instance, is looking to sell its joint-venture companies in India and the Philippines. The group, which owns three Thaicom satellites serving the region, has killed plans to launch Thaicom4. It has merged its cable-TV company, IBC, with archrival UTV, a division of TelecomAsia, the ailing joint venture of Bell Atlantic Corp. and another Thai conglomerate, CP Group.

Instead of expanding around Southeast Asia, Shinawatra now has little choice but to concentrate on its Thai cellular telephone operation, Advanced Information Services (AIS). "It's the only company that makes a profit," laments Paiboon Limpaphayom, Shinawatra Group executive chairman. As for the company's long-term strategy, Paiboon says that there is none. "We can't do long-term planning," he says. "It's just monthly planning now."

The salutary willingness of the Thais to acknowledge their own role in the crisis could help them as they dig their way out. Changes now in the works, such as making directors more responsible for overseeing management, could lead to a revolution in the way corporations are governed, says Charnchai of the Thailand Management Assn. He ticks off other moves he would like to see: Bankruptcy laws need to be toughened, foreigners need to be allowed to own property and operate businesses without restrictions, and Chuan's government has to plow ahead with privatization of such industries as airlines, airports, and energy.

"IT'S NOT REAL." If Charnchai and others have their way, Chuan's government will keep up the pressure on banks and companies and courts until solid structural reform is in place. The Thais have gone further down the road than many outside observers thought they would. But, says Charnchai, "we still have a long way to go."

Thais caught in the squeeze of reform are resentful. Sathit Uthaisri, group executive vice-president at Bangkok Bank Ltd., has heard all about the brightening economic picture. Yet in his spacious office in the headquarters of Thailand's biggest bank, Sathit is in no mood for such happy talk. "That's all going on above our heads, up in the sky. It's not real," he says. "Our clients' financial positions are going down day by day." Sathit's boss, Chairman Chatri Sophonpanich, is reluctantly obeying a government mandate ordering him to recapitalize his bank. By issuing new shares worth 29% of capital base, the controlling Sophonpanich family will have to accept a big dilution in its stake.

If such resentment among Thai executives keeps building, many necessary market-opening moves may remain undone. Industry experts fear the FRA is responding to antiforeign sentiment by trying to limit the number of foreign bidders who can participate in the auctions, which begin in April. Moreover, they worry that the FRA plans to keep winning bids secret for six months in an attempt to prevent prices from falling too much. Says one Western banker in Hong Kong of the Thai efforts to involve foreigners: "They're not doing it wholeheartedly."

A bigger fear 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 just at the time when it cannot raise taxes further for fear of crushing the economy.

LOOSEN UP MONEY? The only way out for the government may be to print more money. More liquidity would allow it to recover some of its loans to the finance companies. "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 rocketing up to 20%, he says, even though the markups haven't yet been passed on to consumers. The alternative is for the government to write off the loans, which means more taxpayer money lost bailing out the finance companies.

That means the risk premium on the baht is unlikely to come down soon. And killer interest rates will stay high, since new weakness in the 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.

The most pessimistic observers are willing to concede that the Thai government has made some impressive moves. But even with a responsible government, recovering from years of mistakes will take a long time. And long-term issues, such as Thailand's substandard education system and the loss of manufacturing competitiveness to China, still need to be addressed. The Thais deserve praise for starting down a difficult path. Now, the world is watching to see if they can finish the journey.

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