Will Thailand Be Hamstrung by Handouts?

Growth is strong, but critics say a debt bomb could go off

Prime Minister Thaksin Shinawatra might have expected accolades when he appeared before Parliament in late June for a two-day budget debate. With Thaksin at the helm, the Thai economy snapped out of its long lethargy and grew by 5.2% in 2002. And in this year's first quarter, growth hit a roaring 6.7% clip, thanks to booming exports and strong consumer spending.

But rather than congratulate Thaksin, opposition politicians assailed his administration's stimulus methods. Since his election in 2001, Thaksin has directed a bevy of state banks and enterprises to dispense low-cost loans to farmers, village governments, small businesses, housing projects, and even individual civil servants. Bangkok is spending billions more to bail out still-shaky banks. By 2006, the handouts could reach $32 billion, estimates the opposition Democrat Party. Critics allege Thaksin could be building a debt bomb as loans mature in coming years. Sansern Samalapa, a Democrat member of Parliament, predicted state banks "will be paralyzed" when they run out of money and said Thaksin is "playing with fire."

The pump-priming is a calculated bet. The credit splurge last year helped spur a 13% jump in property, agriculture, and factory investment, making up for falling foreign investment. And domestic consumption rose by 4.7% -- accounting for half of last year's gross domestic product growth. Business is delighted. Sales of Thai-made pickups and tractors have soared. And a construction boom helped lift profits at Siam Cement Co. by 90% last year, to $348 million on sales of $3 billion. "The money to villagers and small projects is pouring into the economy," says Siam Chief Financial Officer Kan Trakulhoon.

Thaksin has kept public finances in order by arranging loans through banks. The Government Savings Bank is pumping $2.3 billion into the Village Development Fund, which lends to farmers. Just $240 million of that shows up on the government's annual budget. The Government Housing Bank is lending $5.2 billion for housing projects. And institutions like Krung Thai Bank and the Industrial Finance Corp. of Thailand are financing PC purchases by Thai consumers, who pay just $17 monthly.

If Thailand's recovery stalls, though, borrowers may be hard-pressed to repay. The government, whose own debt has shrunk in the past three years to 54% of GDP, could be stuck with the tab. Already, the government has spent $7 billion to take bad loans off the books of commercial banks since the 1997 crisis. It plans to spend $12 billion more by '06. And Arun Lertwilai, vice-president of the Bank for Agriculture & Agricultural Cooperatives' loan department, figures a third of farmers won't meet payments due next spring on $1.5 billion in loans. He says his bank will reschedule the payments.

Thai officials insist a debt crunch is unlikely. Somchai Sujjapongse, the Finance Ministry's fiscal policy director, says the government's potential liabilities are "exaggerated by the opposition." He notes state banks to date have lent just $4.7 billion, since most programs have yet to be enacted. "If they go bankrupt, that would surely pose a burden on the government," Somchai says. "But so far there has been no threat to those institutions." Others are less sanguine. "I'm worried," says Standard & Poor's analyst Takehira Ogawa. "We don't know how many farmers will be able to pay the money back." S&P rates Thai sovereign debt at BBB-, its lowest investment-grade level. The World Bank also warns the stimulus measures "may turn into liabilities for the budget."

Fortunately, Thailand has more than loose money going for it. Exports rose by 5% in 2002, to $67 billion, and by 21% in this year's first quarter. The 68% drop in the baht since 1997 has boosted Thailand's competitiveness in electronics and auto parts. Exports to China leapt 24% last year. Foreign reserves are $40 billion and rising.

But don't expect Thaksin to tighten up. He vows 6% growth this year -- far above the 4% to 4.5% forecast by most private economists. To stay on pace, domestic spending must stay high. And that will likely require lots of cheap credit. "My policies will bring well-being," Thaksin vowed in a recent televised speech. "Everything will be all right." A reassuring message -- but one that Thais have heard before.

By Michael Shari in Bangkok

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