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The mother of all water fights has been going on in Thailand recently. In the Songkran festival, Thais celebrate the lunar new year by sprinkling water in temples. At least that’s the tradition. Now the ceremony has developed into a three-day water-hurling exercise. No-one, including passing motorcyclists, is spared a drenching from exuberant Thais armed with water guns, buckets and hosepipes. The Songkran excesses are perhaps proof that the people of Thailand have not lost their sense of fun, although they have lost much else. Repossessed Mercedes and BMWs line up in the parking lots of hire purchase companies, the property market has ground to a halt, and the stock market has been in free-fall for the last year. Thailand in 1997 is definitely not flushed with success. Finance minister and deputy prime minister Amnuay Viravan, together with Bank of Thailand governor Rerngchai Marakanond, spent the run-up to their Songkran holiday in the US, presenting a series of roadshows to investors. They apparently came across well enough to convince institutions to oversubscribe for $1 billion of the country’s $600 million yankee bond issue. But, with a Moody’s downgrade from A2 to A3, the country’s image in the international capital markets is very different to the blossoming Thailand of a few years ago. “It’s going to get worse,” forecasts Mike Stead, head of research at Union Securities, echoing the sentiment of many. “There is no positive news in sight.” In May the Stock Exchange of Thailand index fell below 600 points, a six-year low, which tempted some observers to make comparisons with the Nikkei’s 1989 to 1992 slump and Mexico’s 1994 to 1995 crash. Investor confidence has been shaken further by headlines stating the prime minister, Chavalit Yongchaiyudh, plans to oversee economic affairs personally. This caused speculation that finance minister Amnuay had resigned, something he refuted vehemently. Amnuay has been criticized in the past for acting indecisively on questions such as the devaluation of the baht. (Rumours of a baht devaluation, and the central bank’s repeated denials, have been plaguing the market for the last few years.) The government has a stated policy of widening the band within which the currency trades, but so far has resisted calls for a full float. In March, the country’s largest finance company, Finance One, announced plans for a merger, now abandoned, with Thai Danu Bank, news which was greeted with panic on the stock exchange. Chavalit called for calm and the Bank of Thailand announced measures aimed at shoring up the beleaguered finance industry. As well as imposing new reserve requirements, the government also introduced the property loan management organization, whose initial brief was to raise around Bt50 billion through the issue of zero-coupon bonds in the domestic market, at a likely cost of around 9%. That limit was later raised to Bt100 billion, but the first Bt1 billion issue saw bids of between 9.75% and 10.27%. According to Thirachai Phuvanatnaranubala, director of the Bank of Thailand’s Financial Institutions Supervision and Development Department, the proceeds will be used to provide liquidity to lenders by taking on secured property loans, on condition that collateral is reassessed and revalued if necessary. But many commentators are far from impressed by the government’s paternalism. Asia Equity managing director Mark Greenwood believes the property developers should be told to “take a running jump”. He goes on: “Now things are turning nasty they are trying to go back to the patriarchal feudal system and persuade the government or the banks to bail them out.” Property loans, hire purchase and margin lending account for around 45% of finance company loans. The official disclosed level for non-performing loans in the portfolios of finance companies is 3%, but the real figure is likely to be much higher. Moody’s, the international rating agency, believes the total amount of property loans is more than Bt800 billion (US$30 billion). But, as the agency comments: “Estimating the loss content in the property loans is best done on the basis of educated guesses.” The same applies to Thailand’s banks. It is difficult to quantify what proportion of the banks’ property loans are non-performing, according to Moody’s, although property analysts suggest the figure may be 40%, or approximately US$13 billion. This is set against system equity plus loan loss reserves (which may be viewed as another form of capital) of approximately US$37 billion. Bank of Thailand figures for non-performing loans at banks have been put at 7.73% as of June 1996, against 6.92% in December 1995. (The figures exclude those of the collapsed and scandal-ridden Bangkok Bank of Commerce.) “Writing off the problem loans in the property sector would reduce the system’s equity by approximately 33%,” says Moody’s, in its Banking System Outlook report for Thailand. “To replenish the system’s equity base, in other words, would take approximately four years of earnings based on the sector’s 1996 earnings of approximately Bt90 billion.” Salomon Brothers’ financial institutions analyst Donaldson Hartman reckons the cycle of bad news could continue until the end of 1998, but he believes the level of non-performing loans is “not as high as some people think”. The central bank has helped to lift the pressure on banks and finance companies, in allowing them to exclude restructured loans from their lists of non-performing loans when (for the first time) they file detailed figures with the bank in June. Despite this concession, though, Hartman forecasts negative earnings growth for the bank and finance sectors this year. The big debate now, on which few analysts seem to agree, is whether the market and the economy have bottomed out. “Even though there are no sure signs of recovery yet we are now right at the bottom,” asserts Thirachai of the central bank. Others are less sanguine. Expectations of a mid-year turnaround for the stock market are now being pushed back to the end of the year. Union Securities’ forecast that the Stock Exchange of Thailand index could drop as low as 570 points has already been proved correct. “This is a huge drop even by Thai standards,” says Stead at Union Securities. But he goes on: “There are institutions overseas who believe there will be a strong rebound in the Thai market and there is good money to be made, but it’s all a question of timing.” At the moment luck is not going Thailand’s way, however. “When the market rallies it will probably move up pretty quickly, but the problem now is that almost every day some new disaster befalls Thailand,” says Stead. One of those disasters has been the withdrawal of Texas Instruments from a joint venture. On the day the market first slipped below 600, the us company announced it was pulling out of an electronics joint venture with listed Thai company Alphatec. “When Thailand’s most promising industry falters it really is bad news,” says Stead. He expects minimal earnings growth for the whole market this year, mainly because of the banks, which constitute around a quarter of the market. “It’s going to be a pretty poor year for banks and a disastrous year for finance and property companies,” he says. Corrina Lim, head of research at James Capel, concurs. “Things are pretty grim. When you go out and visit small and medium-sized companies people tell you they are not going ahead with purchases of new machines and equipment and they are cutting back on investment. All that must have a multiplier effect.” Lim continues: “Most companies will need to do an extensive period of restructuring of debt, which implies the need to raise more capital through rights issues and placements. Existing shareholders will have to do their bit and put in more money.” The likely direction of the market depends on how you view it, according to Salomon Brothers’ analyst Hartman. “If you looked at the banks on a price-to-operating profits basis, they looked pretty cheap six months ago,” he says. “But you have to have impetus for psychological change through certain drivers such as export growth, and also earnings growth.” And the macroeconomic figures are far from rosy. A slowdown in export growth has fuelled Thailand’s current account deficit in recent years. The central bank’s preliminary figures for March report a 4.8% increase in exports year-on-year to Bt127 billion. The current account deficit worsened, however, rising 8.2% to Bt15.9 billion in March from Bt14.7 billion in February, with imports falling 7.7%. Nevertheless, according to Asia Equity’s Greenwood, “the current account deficit is certainly improving. On an annualized basis on the past five months, the 1997 deficit is likely to come down to around 4.5% of gdp, against 7.9 to 8% for 1996.” Greenwood is exasperated by the negative attitude taken by some investors. “I’m beginning to wonder what people want from this country. Do they want blood?” Greenwood urges people to have faith: “In the longer term things are already beginning to look more positive, but people seem to be finding it rather difficult to believe.” Thirachai at the Bank of Thailand sees the country’s problems over the last two years as stemming from two main sources, the first being that the economy has reached maturity. “We have grown in the past 15 years at an average rate of 8.2%. That has been a long stretch of growth that moved us up the class in terms of manufacturing capability and sophistication of business.” He believes Thailand has now moved on to a second stage: “We have to consolidate and change the composition of export goods from lower to higher technology and from lower to higher value-added goods,” he says. In the medium term the central bank is forecasting growth of between 6% and 6.5% in the next five to six years. The second reason for Thailand’s economic problems, Thirachai believes, is liberalization. “When we entered the gatt Uruguay Round we were aware we had to shape the banks to face more intense domestic competition. We tried to prepare them for that by liberalizing the financial market. Exchange controls and interest rates ceilings were lifted and it was a learning process for banks and supervisors.” Dr Mark Sundberg, head regional economist for Salomon Brothers Asia Pacific, believes Thailand’s recent woes should be looked at in the context of the phenomenal change that has taken place in the country in the last 20 years. He says its per capita income of around $2,900 is comparable with Malaysia’s six years ago, Korea’s 16 years ago and Taiwan’s 20 years ago. The savings rate is around 38% of GDP and investment 45%, while exports at 41% are “among the highest in the world”. “Thailand is facing a downturn which is causing a lot of soul-searching and forcing a rethink,” says Sundberg. “Investment has slowed but it is still promising. Improvements to the current account deficit have helped buy time and relieved some of the pressure on the baht.” So far unemployment has not occupied the headlines or exercised the minds of Thailand’s analysts much. This is due mainly to the absence of a welfare system and the statistics it would provide. But it is not an issue that can be ignored. “I don’t think it is a major problem but I am concerned it is going to rise fairly quickly in the next year or two,” says Union Securities’ Stead. “We are already seeing companies laying off people and white-collar jobs in newspapers, brokerages houses and banks are starting to go.” However, to balance this, the economy is still growing and new companies are still being established, including three new banks and a host of new insurance companies. This makes it difficult to gauge unemployment. Most new jobs are being created in the white-collar world. More worrying is the level of employment in basic manufacturing industries such as textiles and seafood processing, on which Thailand based its initial economic growth. “These people are going to be hurt a bit more, which can create some social unrest,” says Stead. In the area of wages, Stead criticizes the government for sending the wrong signals to investors. He cites a recent incident in which prime minister Chavalit gave the impression that he supported workers’ demands for a 12.5% increase in the minimum wage, now Bt157 a day. “This is one of my biggest concerns about Thailand at the moment,” says Stead. “There have been strong wage rises in the last few years, which have made many of the low-tech industries uncompetitive, and if the politicians approve big wage rises, even if it is only half the 12.5%, that’s substantial enough and the economy is probably only going to worsen.” However, Stead acknowledges the difficulties facing the politicians. “If they take a stand they run the risk of industrial unrest, so they are caught between a rock and hard place.” Greenwood takes a different tack: “It is not the strength of the currency, and not the fact that Thailand has been priced out of the world markets because of rises in the minimum wage, although that is all true,” he says. “What is an issue is management.” According to Greenwood, a distinction should be drawn between the established firms and those run by people who have recently moved from trading into manufacturing. The second group, which Greenwood describes as the “nouveau riche”, are failing because they lack experience in manufacturing. “The established producers,” he says, “are actually doing quite well.” . |
