IT’S JUST OVER a month since Thailand’s three-month anti-drug crusade came to an end. If success is judged by body count, the campaign gets a grade A. By April 30, 2,274 people had been killed as a direct result of this sharp, brutal war. With these statistics filling the newspapers, along with the histrionics about Sars sweeping Asia, it’s perhaps not surprising that the appointment of Suchart Jaovisidha as Thailand’s finance minister in February has been somewhat overshadowed.
Last month, however, Jaovisidha finally managed to grab some attention, though perhaps not the type he would have hoped for. On May 12 an electrical fault trapped him in his official BMW as he was being driven to a meeting. Unable to unlock the doors or lower the windows he was only released after a guard took a sledgehammer to the glass to bust the minister out into a blaze of publicity.
But attention now finally seems to be focusing on the Thai economy. One of the region’s more robust performers, it is attracting compliments. Last year economic growth rates of over 5% were reported and this year a 3.5-4.5% figure looks to be equally impressive despite the global and regional challenges. Consumer demand is powering growth. In the first quarter of this year consumption increased by more than 6%. And personal loans grew by 15.6% as Thais got the spending habit.
Sars is causing problems despite the low case rate. Some 6% of the economy is tourism-related and tourist arrivals in Bangkok are down by 45% to 50%. It’s estimated that 200,000 jobs could be lost despite an emergency injection of Bt2.7 billion ($63 million) into the sector. The government is attempting to put on a brave face, claiming that since people are afraid to travel, more Thais will stay at home and keep spending enthusiastically. But the government would be unwise to underestimate the power of the tourist dollar.
Before the administration of prime minister Thaksin Shinawahra becomes complacent and too dependent on Thais’ consumption to boost the economy, there are several legacy issues from the fallout of the Asian financial crisis that still need to be addressed.
Thailand’s financial sector is still heavily burdened by non-performing loans. Of all the economic concerns that Jaovisidha could have mentioned during an interview with Euromoney, he starts with NPLs. He blames the country’s private banks for not taking the situation more seriously. According to official statistics, they are burdened with about 15% of NPLs on their books. And though the number isn’t rising, it isn’t coming down either.
Since Thaksin and his Thai Rak Thai (“Thais love Thais”) party came to power with the widest winning margin in Thailand’s democratic history at the beginning of 2001, the manner in which the NPLs are being dealt with has changed. “The administration is a lot more proactive in addressing the situation,” says a local analyst. For a while Thailand had a different strategy to Korea, for example, which set up asset management company Kamco. But the decentralized method that Thailand adopted proved ineffective. “Under Thaksin the approach was modified and it became more centralized, which seems to have worked,” says the analyst.
Six months after Thaksin came to power, the Thai Asset Management Company was set up. Jaovisidha says he is pleased with the progress being made.
Chinese puzzle Another cloud on the horizon is the threat of China. Although it seems that many officials in Asia are tired of answering questions about the competitor to the north and what can be done to counter its power, behind closed doors many of the same officials are desperately trying to find answers. Very few seem to have found them yet. In 2002 China received $54 billion of foreign direct investment, making it the region’s largest recipient. And FDI continues to grow.
For other countries in the region it’s a different story. Since 1990 the share of the foreign investment flow into Asia received by the five largest Asean members has fallen from 51% to just 11%. Pre-crisis in 1996, Thailand was pulling in Bt529 billion. In 2000 it attracted Bt279 billion. But last year only Bt162.5 billion struggled through the door. Chia-Lian, an analyst with JPMorgan, points out: “The lag of September 11 and the poor global economy are much to blame. And it’s not just Thailand that’s affected.” The country’s Board of Investments is offering ways to help companies that enter Thailand to market and distribute their goods. It is also looking to attract high-end electronics companies rather than the mass manufacturers heading into China. Thailand could however find itself on the periphery if the board fails in its mandate.
It is perhaps this fear of being left on the sidelines that makes Thaksin’s government bang the drum about the Asia Bond Fund. Some observers are confused as to why it would want to promote the fund so aggressively. “Sorry, I shouldn’t laugh,” says an analyst based in Singapore when the fund is mentioned, “But it really is their thing isn’t it. They are into it more than any other nation in Asia.” An analyst with a US house in Hong Kong says: “The government is trying to make political points out of it. It’s just an attempt to raise the country’s profile.”
Cynical remarks apart, the idea behind the fund is for the region to keep its foreign currency reserves in Asia rather than in Europe and the US. The region’s central banks would contribute a small proportion of each country’s reserves to the fund and these would then be invested in local debt instruments. This, it is argued, would help create deeper, more sophisticated debt capital markets. But it won’t happen overnight. To start with, the fund will only invest in dollar-denominated, high-grade sovereign bonds. Later, it is hoped, it will be able to invest in local sovereign issues. “The fact that they are only prepared to start investing in US dollar bonds shows how modest they are in taking the first step compared with what they are saying on the ground,” says a debt capital markets banker.
Thailand is definitely signing up to the plan, but other nations seem less vocal and less committed. However, Jaovisidha assures Euromoney that this month, at the Asian Co-operative Dialogue meeting, all will become clearer. And the nations that want to participate in the fund will be announced.
What are the most important economic issues facing Thailand? And what is being done to address them? The most important issues are the non-performing loans in the banking system. And the government is trying to find ways of disposing of them as soon as we possibly can. However, there are some problems because the commercial banks still want to keep everything. I don’t understand the reason. But what is under the power of the government is doing very well. The Thai Asset Management Company took over Bt700 billion of NPLs and now only 25% of these remain. And the TAMC has promised that it will do away with the rest this year. So that is a big hurdle that we have jumped.
The rest is within the commercial banks that we are trying to get to hand over the NPLs to the AMC or to quickly dispose of them themselves, so then they can return to their normal life.
If the encouragement doesn’t work what measures can you take? We don’t have any legal powers to do anything.
The recovery in Asia after the financial crisis was rapid and many countries took their foot off the pedal and failed to make the necessary reforms in the financial sector. Is that what has happened in Thailand? We are reforming and we are still going ahead with our plans. Regarding privatization, take for example, Krung Thai Bank, which is a huge bank by Thai standards and the biggest bank in Thailand. We want to privatize it and I think the end of the year will be a good time. Maybe the market is not what we are looking for, so we will wait a while until it comes back. But not at the moment.
President Gloria Arroyo, when discussing the sale of the Philippines transmission assets, says that the most important thing is to privatize, not the price. I am surprised.
She said that the process is more important. So rather than sell it as a Rolls-Royce she would be prepared to sell it as a Cadillac. You don’t agree? If she can sell it as a Cadillac that is good but I am afraid she will only be able to sell it as a Toyota. We will go ahead with privatization, but are awaiting a better time. There is no point getting big enterprises into the market now because prices will be depressed.
What are you doing to attract foreign investment? There is the Board of Investment and there are tax privileges. And if corporates set up regional headquarters in Thailand they will have privileges in corporate income tax rates. The existing rate is 30% but for them it will be just 10%. That is one enticement. And the BOI is another. I hope that will be adequate. Some experts are against giving tax privileges to direct foreign direct investment so that is why we have the BOI in addition to tax privileges to get headquarters here. I believe that it will be adequate. We will clean up our house and put Thailand in order and make it a profitable place for them to come in. And they will come in and come back.
But what about the threat of China taking foreign investment away? Some people say that China is a threat to our competitiveness; others that China can be a complementary partner. I believe the latter. It has 1.3 billion people and we only have 60 million. How much can we buy from them? A population of 1.3 billion can buy a lot from Thailand. From this angle I don’t see China as a threat but as a good trading partner. I believe we have all the advantage.
What will be the impact of Sars on Thailand’s economy? Will it be the blow to the Asian economies that people suggest and will it last a long time? It’s not only Thailand. It’s under control here. But if it persists in China and Hong Kong it will pose a problem for Thailand. I hope it can be controlled very soon. The news from China is that they can control it. I hope that we will get back on our feet very quickly.
Can you make contingency plans for something like this? Or is there a back-up plan to help the economy? Not really. The plans that we wrote down were before Sars. A few targets that we planned for have not yet started. So I hope that there will be a replacement because of the fallout from Sars.
What is the Asia Bond Fund and the idea behind it? The thinking behind it is that the prime minister says look, all of us in Asia have $1.3 trillion deposited in Europe and America. That is quite a lot – more than enough to finance Asia development. If we need money we go to Europe to the intermediaries to borrow our own money at a high interest rate. So the idea was simple. Why don’t we get the money back in Asia and borrow at a cheaper rate. It’s a very sensible concept. And that started the whole idea.
The figure being spoken about is 0.5% of reserves being put in to the pool? They propose 1% of foreign reserves.
What can be achieved with that? That is a starting point. For every long journey you take you need to take a first step. And slowly we will grow bigger and bigger.
How rapidly do you think these funds will grow and to what sort of size do you think it will get to? Some members talk about $10 billion in the first year. As a finance minister I am slightly more conservative. First let’s get it started. That is more important than a big fund in the first few months.
It’s said that nine countries are going to sign up but it’s not official yet. It’s more than nine. Nine plus something. But I will not reveal who they are today. I will this month.
How easy has it been to get more than nine on board. Japan for example seems to be wavering in joining. No, no. The prime minister of Japan wants to be one of the first.
The western intermediaries are not going to like this, are they? Naturally not. How can they like it?
Does that worry you? That is why we asked the Bank for International Settlements to come and help us.
These intermediaries are very powerful. In a way yes, but the BIS is very powerful too.
What do you most want to achieve while in your present position? To overhaul the tax system. To try to set up some guidelines for the ministry. I have served in the ministry for a long, long time. That is why I hope to have a set of guidelines that the minister can follow – although not 100%. Under democracy there may be an MP who becomes minister who knows nothing about finance or fiscal affairs. And that would adversely affect the ministry. But if there was a set of guidelines it might help. I want to overhaul and do away with all the corruption. I have started it already. The foreign businessmen are starting to feel the improvement already.
