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Thailand and the IMF
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On June 10, 1998, the IMF Executive Board concluded the Article IV consultation with Thailand1.
Until recently, Thailand had enjoyed more than a decade of rapid growth and low inflation. However, beginning in1993, demand pressures intensified, leading to higher inflation and a sharp widening of the current account deficit. Though monetary and fiscal policies were tightened, the combination of a pegged exchange rate and an increasingly open capital account resulted in large capital inflows, which led to rapid credit growth, and the emergence of a rising level of external debt, especially short-term.
These developments greatly increased Thailand’s vulnerability to a series of domestic and external shocks, including a sharp slowdown in export growth (in part reflecting appreciation of the real exchange rate in line with the strengthening of the U.S. dollar), growing difficulties in the overexpanded property sector, large falls in the stock market, and a rapidly weakening financial system. A succession of speculative attacks of increasing magnitude was met by the Bank of Thailand with capital controls and increasing intervention in the forward exchange market. This led to the virtual depletion of Thailand’s net international reserves, which forced the authorities to abandon the exchange rate peg on July 2, 1997. However, the resulting exchange rate depreciation increased the real burden of foreign currency denominated debt, adding to the problem of non-performing loans already afflicting the real economy.
In response to these problems, in August 1997 the Thai authorities reached agreement with the International Monetary Fund on an economic adjustment program, as part of an official financing package totaling more than U.S. $17 billion. Under the program, macroeconomic policies were tightened to support external adjustment, but the centerpiece of the program was financial sector restructuring. However, initial delays in the implementation of the program, doubts over a speedy resolution of problems in the financial sector, and deteriorating economic conditions in the region, led to a mixed performance in the first phase of the program.
Following the formation of a new coalition government in November 1997, policy implementation has improved considerably. Monetary policy has been kept tight, with the decline in interest rates in recent months lagging considerably behind the strengthening of the baht. The fiscal deficit has been kept within the targets set at the quarterly reviews; however, in light of the continued recession, the deficit target has also been flexibly revised to accommodate increased social expenditures and recession-induced revenue shorfalls. In addition, decisive steps have been taken to restore confidence to the financial system. The authorities closed all but two of the 58 suspended finance companies, and have commenced the process of orderly disposal of their assets; and, in early 1998, four insolvent banks were intervened, wiping out shareholder capital while protecting the value of deposits. To prevent any recurrence of the present financial crisis, the authorities have strengthened prudential regulations in line with international best practice, and have begun the process of recapitalizing banks to meet international capital adequacy standards by the year 2000.
These measures have already helped to improve the balance of payments and stabilize the exchange rate. Current account adjustment has proceeded ahead of schedule: through the first three months of 1998, the cumulative surplus has exceeded U.S. $4 billion, and the surplus for the whole year is projected to be more than U.S. $8 billion, or close to 7 percent of GDP. At the same time, the Bank of Thailand’s gross international reserves already exceed 6 months of imports—or more than the entire stock of Thailand’s short-term debt—even though the Bank’s offshore forward foreign exchange market commitments have been lowered substantially. Reflecting these improved international conditions, the baht has appreciated to around B 40 per U.S. dollar, up by roughly one-third from its B 50–55 trading range at the start of the year.
However, developments in the real economy have been less favorable. Manufacturing production in the first quarter was 17 percent lower than a year earlier; real GDP is expected to fall by 4–5.5 percent in 1998; unemployment is projected to rise from about 3½ percent in mid–1997 to 6 percent by the end of 1998; and inflation has risen to just over 10 percent. In addition, the difficult task of financial and corporate restructuring has still to be completed, and regional economic prospects have become more difficult.
Executive Board Assessment
Executive Directors commended the authorities for persevering courageously with the economic program, thereby rebuilding the confidence of financial markets in Thailand’s economy. Since the beginning of the year, and despite difficult regional conditions, the balance of payments outlook had improved markedly, international reserves had been substantially replenished, and the exchange rate had strengthened significantly. Directors noted the important role played by macroeconomic policies in rebuilding financial market confidence. Domestic money creation had been kept under control, so that increased money demand had led to substantial foreign exchange inflows. Correspondingly, interest rates had been lowered only gradually and cautiously, without impeding the greater strength and stability of the baht. Fiscal policy, too, had been implemented prudently, with the deficit maintained within the program targets, despite the deepening recession. Directors also commended the authorities’ decisive implementation of structural reforms, particularly in the financial sector.
However, Directors noted that the real economy was even weaker than previously anticipated, and that it was necessary for monetary policy to remain vigilant in the current period of regional instability. Directors cautioned that confidence remained fragile, that the economy had not yet bottomed out, that the export recovery was weak, and that a considerable part of the task of financial and corporate restructuring still lay ahead. Thus, Directors urged the authorities to continue their careful policies of macroeconomic management, and to accelerate the structural reforms needed to return Thailand’s economy to sustained growth.
Against this background, there was general support for the proposed rebalancing of macroeconomic policies. Directors agreed that monetary policy should continue to be guided primarily by the objective of stabilizing the exchange rate. However, they noted that the appropriate exchange rate to stabilize is the effective rate against a basket of currencies, rather than the dollar rate. Directors generally agreed that, with reserves at more comfortable levels, there was room for judicious interest rate reductions. However, many Directors urged caution in making use of this room, and urged the authorities to act on their commitment to raise interest rates if the exchange rate were to become subject to renewed pressure.
Directors agreed that the wider fiscal deficit for 1997/98 was an appropriate response to the deepening economic recession, noting that it would accommodate the automatic stabilizers and allow for a strengthened social safety net. Directors expressed concern that efforts to strengthen the safety net in Thailand were still at an early stage, and they urged the authorities to develop with the World Bank and other institutions cost-effective and well-targeted mechanisms to support the unemployed and prepare them for reemployment. In this regard, they would support some further increase in the fiscal deficit if conditions worsened further.
Directors urged the authorities to be unrelenting in their commitment to rebuilding the financial system. Thus, close monitoring of the progress of banks and finance companies in meeting international capital adequacy standards by the year 2000 and a strategy for quickly returning the intervened banks and finance companies to private ownership was considered essential.Some Directors expressed concern about the substantial nonperforming loans of the intervened banks and underscored the urgency of moving ahead with their restructuring. While noting the authorities’ intention to make increased use of the specialized state financial institutions, many Directors cautioned against relying on directed government credit schemes without strong safeguards. Even so, noting the difficulties being experienced by small- and medium-sized enterprises in obtaining credit, Directors welcomed the program to provide enhanced financing for such enterprises. They recommended that the authorities focus on trade financing, provided on commercial terms, and not directed toward specific industries. Directors also urged the authorities to redouble their efforts to strengthen bank supervisory and regulatory capacity to help reduce the risk of any recurrence of the present financial crisis.
Given the considerable debt overhang, Directors saw corporate restructuring as a key challenge for Thailand, noting that these efforts were still at an early stage. Directors agreed that corporate restructuring should be market-based, and did not see any need for state intervention other than removing institutional barriers and tax distortions and facilitating negotiations between debtors and creditors. Directors underscored the importance to the corporate restructuring process of accelerated legal and institutional reforms—including changes to the bankruptcy law, improved foreclosure procedures, and tax and regulatory reforms—and greater openness of the economy. In this context, Directors stressed the role that increased private sector competition—both domestic and foreign—could play in securing efficiency gains, and in reviving capital flows to Thailand’s economy. Thus, Directors encouraged the authorities to pursue their plans to revise the framework for foreign direct investment, including through amending the appropriate laws. Directors also stressed the importance of implementing the agenda for privatization.
In concluding, Directors commended the authorities on the considerable progress toward recovery and restructuring that had been achieved over the last few months. Despite this, many risks still lay ahead, including the complex task of completing financial and corporate restructuring, the need to maintain the political consensus for sustained economic reform, and the possible worsening of the already adverse regional economic environment. These would all complicate the task of revitalizing Thailand’s economy. However, Directors noted that the Thai authorities had, by now, accumulated an impressive track record in economic policy making, and believed that, if sustained, this record would set the stage for economic recovery.
|Thailand: Selected Economic Indicators, 1996-98|
|Real GDP growth (percent)||5.5||-0.4||-4 to -5.5|
|Gross fixed investment||6.0||-16.0||-24.0|
|CPI inflation (end period, percent)||4.8||7.7||10.0|
|CPI inflation (period average, percent)||5.9||5.6||10.5|
|Saving and investment (percent of GDP)|
|Gross domestic investment||41.7||35.0||28.2|
|Gross national saving||33.7||32.9||35.0|
|Fiscal accounts (percent of GDP)1/|
|Central Government balance||2.4||-0.9||-2.4|
|Revenue and grants||19.5||18.3||15.5|
|Expenditure and net lending||17.1||19.2||17.9|
|Overall public sector balance||2.7||-2.1||-3.0|
|Monetary accounts (end period, percent)|
|Reserve money growth||12.0||4.7||6.6-8.0|
|Balance of payments (billions of US$)|
|Growth rate (in dollar terms)||-1.9||3.8||1.4|
|Growth rate (volume terms)||-5.1||9.2||8.8|
|Growth rate (in dollar terms)||0.6||-13.4||-17.7|
|Growth rate (volume terms)||-4.0||-11.8||-13.6|
|Current account balance||-14.4||-3.0||8.5|
|(percent of GDP)||-7.9||-2.0||6.9|
|Capital account balance||16.5||-15.6||-14 to -16|
|Medium- and long-term||11.3||6.3||4-6|
|Short-term 2/||5.2||-21.9||-18 to -20|
|Overall balance||2.2||-18.6||-6 to -8|
|Gross official reserves (end year)||38.7||27.0||26-28|
|(Months of imports)||6.6||5.3||6.2-6.7|
|(Percent of short-term external debt)||103.0||90.1||114-123|
|Forward position of BOT (end year) 3/||-4.9||-18.0||-9.0|
|External debt (percent of GDP)||49.9||59.6||72.5|
|(billions of US$) 4/||90.5||91.8||89.7|
|Debt service ratio 5/||12.1||15.8||19.5|
Sources: Information provided by the Thai authorities; and IMF staff estimates.
1/ On a fiscal year basis.
2/ Including outflows associated with the closing of swap and forward contracts by the Bank of Thailand, and errors and omissions.
3/ Consistent with the elimination of all BOT offshore forward and swap obligations by end-1998.
Excludes loans (estimated at around $4 billion at end-1997), proceeds of which were not brought by Thai corporations into Thailand.
1Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.
IMF EXTERNAL RELATIONS DEPARTMENT