Public Information Notice No. 02/33

Public Information Notice: IMF Concludes Post-Program Monitoring Discussions with Thailand

March 21, 2002

On February 8, 2002, the Executive Board of the International Monetary Fund (IMF) concluded post-program monitoring discussions with Thailand.¹

Background

Thailand successfully completed a 34-month Stand-by Arrangement on June 19, 2000. Over the course of the arrangement, a total of US$14.3 billion (including US$3.2 billion from the Fund) was drawn from the US$17.2 billion official financing package. Scheduled repayments began in late 2000, and have so far amounted to US$3.6 billion (of which US$1.7 billion to the Fund).

Following the severe economic crisis in 1997-98, progress has been made in fostering economic recovery and advancing structural reforms. A broadly supportive macroeconomic policy framework, and still-favorable external conditions, helped to restore growth to over 4 percent in both 1999 and 2000. Low capacity utilization kept inflation well within the Bank of Thailand's (BOT) inflation target range. International reserves have been rebuilt and external vulnerability significantly reduced, following large repayments of external debt (particularly short-term).

However, the recovery has been restrained by a number of structural weaknesses, the removal of which is a pre-condition for lasting growth. In particular, system-wide distressed assets remain high, and the slow progress in corporate debt restructuring continues to undermine bank profitability and capitalization. In a significant step, the Thai Asset Management Corporation (TAMC) was established in mid-2001, and will eventually acquire about half of the total distressed assets in the banking system (around 21 percent of GDP), mostly from state banks. It has the potential to catalyze a broader restructuring of the corporate sector.

The global slowdown intensified by the September 11 events has adversely affected the near-term outlook for Thailand. External demand has fallen sharply and domestic demand has weakened. As a result, GDP growth is expected to have reached only 1½ percent in 2001. For 2002, the policy stimulus in the pipeline and a global recovery should help support a modest growth revival. International reserves are expected to remain comfortable, with the current account balance still in substantial surplus.

Executive Board Assessment

Executive Directors welcomed the progress that Thailand has made in fostering recovery and pressing ahead with important structural reforms. In particular, Directors noted that external debt has declined significantly and reserves have been rebuilt to comfortable levels. As a result, they considered that Thailand's external vulnerability has been much reduced.

However, Directors observed that economic growth has fallen with the current global slowdown, and that near-term prospects remain weak. Domestic demand is still held back by the slow pace of restructuring in the corporate and banking sectors as well as guarded investor confidence. In addition, support from macroeconomic policies has been slow in materializing. In this context, Directors noted that monetary policy had focused until recently on external stability while fiscal support has been constrained by delays in spending on public investment programs. Directors agreed that a pick-up of growth in 2002 would, thus, depend on a recovery in the global economy and on responsive domestic policies. However, they emphasized that higher growth in the medium-term will require sustained efforts at structural reform, debt restructuring, and improvements in the legislative system and in governance.

In this regard, Directors welcomed the recent easing of the monetary stance. Many Directors saw room for further interest rate cuts given the subdued inflation outlook and the widening output gap. However, some Directors also emphasized that the effectiveness of monetary policy would be enhanced by the completion of the reforms in the banking and corporate sectors. While some Directors expressed concern that the central bank may have been pursuing conflicting policy objectives, most welcomed the BOT's reaffirmation of its commitment to inflation targeting and exchange rate flexibility.

Directors endorsed the fiscal stimulus planned for 2001/02 to support economic activity, deeming it consistent with the authorities' medium-term fiscal consolidation plans. However, they cautioned that the high and rising public debt provided little additional room for maneuver. They advised that future budgets should reflect the need to resume fiscal consolidation, and welcomed the authorities' intention to do so in FY 2003. Most Directors also cautioned against the proliferation of off-budget initiatives that could compromise budget transparency and create new contingent liabilities. Directors commended the authorities' commitment to privatization, as demonstrated by the recent listing of two state-owned companies. In their view, an ambitious privatization program could play an important role in delivering a sustainable fiscal position and increasing access to direct foreign investment.

Looking ahead, Directors considered that a key risk to sustained high growth in Thailand arises from the slow pace of structural and institutional reform in the banking and corporate sectors. These are reflected in still highly leveraged firms and the large stock of distressed debts. Directors acknowledged the many steps taken by the authorities to address these problems. Nonetheless, Directors were concerned that, without more vigorous and wide-ranging reforms in these sectors, Thailand would not be in a position to fully share in the expected global recovery.

In this regard, Directors saw considerable potential in the newly established TAMC to catalyze corporate debt workouts, restructuring, and asset recovery in a timely way. Directors stressed that every effort needs to be made to ensure that the TAMC lives up to this mandate. They encouraged the authorities to seek the most cost-effective means for resolution, emphasizing liquidation as much as rehabilitation. Directors welcomed the TAMC's efforts to keep the public informed, and encouraged the authorities to move to a formal quarterly report that would disclose the terms of restructuring arrangements.

Executive Directors noted that, even in the best of circumstances, the TAMC would not be a panacea for the corporate and banking sectors because of the substantial share of distressed assets that remained outside its purview. Directors, therefore, urged the authorities to press ahead with other reforms to strengthen the corporate and banking sectors—and thereby reactivate credit flows—and encouraged them to return intervened banks to the private sector. In particular, Directors advised early passage of key pending legislation, especially a revised bankruptcy law, which would facilitate restructurings outside of the TAMC. They also stressed the importance of other legal reforms to reinforce the prudential and supervisory framework for financial institutions, and enhance the independence of the BOT. In this context, some Directors expressed concern about recent provisioning and accounting changes, designed to increase lending, that could affect the long-term outlook of the banking sector. Many Directors also cautioned against the resumption of state-directed lending in the recapitalized state banks, as this could again weaken their balance sheets.

Directors welcomed the government's commitment to address the many remaining challenges and, thereby, put the economy on a sustainable high growth path. They looked forward to continued close collaboration between the Fund and the Thai authorities in support of this common goal.