Thailand's Recovery Is Only Skin Deep

Pump-priming and cosmetic restructuring won't work for long

On the surface, Thailand's economy appears to be chugging along nicely again. It has economic growth projections of 4.5% this year and is stacking up huge monthly trade surpluses. Banks' nonperforming loans are down to 37% of their portfolios from a high of 48% last year. And companies have restructured about $26.5 billion in corporate debt.

But dig a little deeper, and a more troubling truth comes out. Much of the recovery is surface-deep and vulnerable to external shocks like a recession in the U.S., which absorbs about a quarter of Thailand's exports. A big chunk of the growth is the result of government pump-priming and loose monetary policy. And the quality of much of the restructuring is poor: Some three-quarters of the restructured loans have merely been rescheduled, and more of these loans are relapsing into non-payment. In February, these weak credits accounted for 35% of the $1.05 billion in new nonperforming loans.

Family-owned conglomerates, at the core of Thailand's manufacturing economy, remain moribund, with no profits and with factories running well below capacity, if at all. Rescheduling debts has helped some stay open. But until companies work out their debts, creditors will shy away from new loans for upgrades and modernization. These corporations are also largely unwilling to surrender management control and incur losses by streamlining operations. Of 1,727 companies registered with the government's Corporate Debt Restructuring Advisory Committee, only 210 had successfully restructured. "If you keep these problems on life support you are just postponing the problem," warns Lynn Exton, Thai banking analyst at Merrill Lynch & Co.

Consider Nakornthai Strip Mill Co., which despite restructuring its debt has been unable to resume operations. Part of the sprawling steel empire of the ethnic Chinese Horungruang family, NSM defaulted on its debts in August, 1998, after steel prices collapsed in the wake of the Russian default. Finally, in February, NSM reached a deal to restructure $850 million in loans with its Thai and U.S. creditors, who swapped 90% of their debt for equity. But the company still lacks working capital and needs a strategic investor who can help manage it. "The problem is, banks have huge equity in companies they can't run," says NSM Chief Financial Officer Gary Heasley.

Even a stepped-up bankruptcy law isn't helping much. The 146 creditors of the country's largest debtor, Thai Petrochemical Industry Co., were relieved last month when a bankruptcy court ordered the company to settle its $3.5 billion debt. But since then, CEO Prachai Leophairatana, whose family owns about 60% of TPI, has kept fighting to keep management out of the hands of foreign bankers. So far, he has failed. But he will remain at the helm for at least six more months while an interim management plan is worked out. Creditors point to TPI as the example of their ordeals as they struggle to get even part of their money back.

NO BUYERS. Thailand's good guys of corporate restructuring are getting tarred with the same brush, and now find it harder to sell assets or raise new equity. Siam Cement Co., for example, wants to sell a dozen units ranging from makers of TV tubes and computer monitors to a pulp and paper factory. Its president, Chumpol Nalamlieng, would like a price based on five or six times earnings. Those interested are offering only three or four. "Having no buyers is a very, very major obstacle," he says. "Thailand is not very high on the popularity list for foreign investors."

But investors say that until Thai companies lower their asking prices for assets, foreigners will be wary of buying in. Bankruptcy courts still operate slowly, if at all, and foreigners want a discount for risk. Many Thais still demand a premium. "There's still a big valuation disparity," says Eric Silverman, head of project finance at New York law firm Milbank, Tweed, Hadley & McCloy. "These companies don't want to part with their assets."

That's short-term thinking. Thai companies need to return to profitability. Otherwise, they risk collapsing entirely in the next downturn. Thailand won't be able to sustain recovery for much longer by papering over the problems.

Before it's here, it's on the Bloomberg Terminal.