Commentary: A Ray Of Sunlight For Thai Reform

The situation was looking grim for the nation that triggered Asia's economic meltdown. Thaksin Shinawatra, a tycoon and leading candidate for Prime Minister, had proposed a dubious moratorium on paying Thailand's $36 billion in corporate debt. Meanwhile, the politically powerful Senator Prachai Leophairatana was blocking a painful workout of $3.5 billion in debt at his company, Thai Petrochemical Industry. Prachai and TPI had come to symbolize Thailand's inability to clean up in the aftermath of the 1997 crisis.

Then, in late December, came a ray of sunlight. Prachai was removed as managing director and CEO of TPI by a bankruptcy judge and lost control of the company after a series of legal maneuvers failed to fend off persistent creditors. Not long after, a government commission found that candidate Thaksin had understated his wealth in financial-disclosure statements, disqualifying him from holding elected office. Suddenly, it seemed the premiership would slip from his grasp even if his Thais Love Thais party won the Jan. 6 election, as was widely expected.

HEROIC RULING. The unexpected turn of events could well be a deciding moment in Thailand's ongoing effort to fix its financial system. The ruling sends the message that corporate defaulters may not get off the hook after all, which will bolster investor confidence. With the TPI case, the Central Bankruptcy Court, a relatively untested institution, proved itself willing to put accounting standards ahead of politics--and to ignore efforts to intimidate its judges.

The TPI case will not immediately prompt corporate debtors to pay up, though 15 additional companies are expected to be hauled before the bankruptcy court soon. They may not be as influential as Prachai, but many of them are equally recalcitrant. Some are downright violent. In March, 1999, a Deloitte Touche Tohmatsu insolvency expert was slain outside a Thai sugar mill where he was working to restructure $450 million in debt. "TPI is a milestone," says a foreign workout expert. "But workouts will go on a case-by-case basis, and more people will be murdered." At TPI, court-appointed CEO Anthony Norman of Bangkok-based debt-workout firm Effective Planners Ltd., expects a fight from Prachai, who has vowed to remain in his plush office and is expected to organize rallies by loyal workers.

But the ruling against TPI at least gives reformers a fighting chance to end Thais' dangerous complacency about debt. Many businesses can easily afford to pay their debts but have simply decided not to do so. Workout experts have dubbed this "strategic nonrepayment" and believe it accounts for at least one-third of Thailand's nonperforming corporate loans.

Indebted Thai companies found much to like about Thaksin's platform. During the campaign, the telecom tycoon had promised to create an asset-management company that would buy bad debt--in effect, granting a debt moratorium to Thailand's biggest business leaders, among them supporters of his political party. The plan, if executed, would wipe the slate clean--and possibly set the stage for resumed bank lending. But it would also hike public-sector debt above its already dangerous level of 70% of gross domestic product and put an extra burden on the already beleaguered taxpayer.

Thaksin's electoral troubles appear to have put that plan in doubt. The new National Counter Corruption Commission ruled that he failed to disclose his personal wealth as required and that he had "dishonestly" put assets in the names of his chauffeur and maids. Thaksin denies that and says he will appeal. But the commission has the power to remove him from office. Without Thaksin around to push it, his seductive debt-forgiveness plan might fade away.

That would leave debtors at the mercy of the bankruptcy court, which assesses a company's worth at current net value. Since Thai currency, stocks, and real estate are all depressed, such assessments will make it harder for companies to claim they're solvent when they're not. That will make it easier for the court to foreclose. If the judges are allowed to do their duty--and the new Prime Minister doesn't create new confusion with a debt moratorium--confidence in Thailand could be restored. It might even get the banks lending again.

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