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Thailand and the IMF
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IMF Concludes 2001 Article IV Consultation and Post-Program Monitoring Discussion with Thailand
On August 2, 2001, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation and Post-Program Monitoring discussions with Thailand.1
Thailand successfully completed a 34-month Stand-By Arrangement on June 19, 2000. The arrangement was part of a US$17.2 billion official financing package from multilateral and bilateral contributors. Over the course of the arrangement, a total of US$14.3 billion was drawn (including US$3.4 billion from the Fund). Scheduled repayments began late last year, and have so far amounted to US$1.6 billion (of which about half is to the Fund).
Thailand has been recovering over the past few years from the severe economic crisis of 1997-98. In the years preceding the crisis, strong capital inflows fueled rapid economic growth, leading to large current account deficits and concealing financial fragilities. The external imbalances culminated in a loss of reserves, forcing the authorities to abandon their exchange rate peg in mid-1997. Compounded by regional contagion, a large depreciation and steep economic contraction ensued. This resulted in a large increase in non-performing loans, further undermining the health of the financial system.
As the exchange rate began to stabilize in mid-1998, macroeconomic policies were gradually eased to support the weak economy. A social safety net was introduced with World Bank support to cushion the impact of the crisis on vulnerable segments of the population. The authorities also moved decisively to address the substantial problems in the financial sector. Unviable institutions were taken over by the state, while a comprehensive deposit guarantee was put in place to preserve confidence. To prevent financial sector problems from recurring, an enhanced prudential framework was phased in, bringing capital adequacy standards and loan classification and provisioning rules in line with international best practice. In addition, the government adopted measures to facilitate voluntary debt restructuring, including through the establishment of the Corporate Debt Restructuring Advisory Committee (CDRAC). Bankruptcy procedures were also reformed and various tax impediments were eliminated.
As a result of these efforts, significant progress has been made over the past few years in stabilizing the economy and fostering an economic recovery. External vulnerability has been substantially reduced as a result of the large payoff of short-term external debt, and official reserves have been rebuilt. The supportive policy framework, combined, until recently, with strong external demand, has helped restore growth, with the economy expanding by over 4 percent in each of 1999 and 2000. Moreover, private banks have raised almost US$10 billion in new capital, and Thailand is emerging from the crisis with two-thirds of its banking system in private hands. Headline NPLs have fallen sharply, and bank profitability has recovered.
However, the economic recovery remains fragile and is now being undermined by the weakening global environment. Exports, which grew by almost 20 percent last year, have fallen sharply this year, as elsewhere in the region. With the pickup in domestic demand still too weak to offset faltering global demand, the economic outlook has deteriorated.
Recent developments highlight that a number of economic weaknesses must still be addressed for the recovery to remain on track. In particular, the slow pace and questionable quality of corporate debt restructuring continue to undermine bank profitability and capitalization. Although headline NPLs have declined, there has not yet been a significant deleveraging of the corporate sector. As such, system-wide distressed assets remain high, especially among state-owned and intervened financial institutions.
To address these weaknesses, the new government that came to office in March has proceeded with plans to establish the Thai Asset Management Corporation (TAMC). The TAMC was formally established in June, and is expected to begin acquiring assets by the third quarter of the year. All told, it is expected to acquire about half (US$30 billion) of the financial system's distressed assets. It will acquire almost all (US$25 billion) of the state-owned financial institutions' distressed assets and about one-quarter of private banks' distressed assets (US$5 billion). Therefore, private banks will still need to engage in debt restructuring to resolve their remaining distressed assets.
Executive Board Assessment
Executive Directors noted that the authorities have made much progress over the past few years in stabilizing the economy and fostering an economic recovery. Directors particularly welcomed the sharp reduction in short-term external debt and the rebuilding of official reserves, which have resulted in a significant reduction in Thailand's external vulnerability. Financial sector restructuring has facilitated a gradual recovery of the banking sector, while regulatory reforms have strengthened the oversight of the financial system.
|Thailand: Selected Economic Indicators, 1997-2001|
|Real GDP growth (percent)||-1.4||-10.8||4.2||4.4||2.0|
|Gross fixed investment||-21.1||-45.1||-4.0||5.4||9.0|
|CPI inflation (end period, percent)||7.7||4.3||0.7||1.3||3.0|
|CPI inflation (period average, percent)||5.6||8.1||0.3||1.5||2.5|
|Saving and investment (percent of GDP)|
|Gross domestic investment||33.3||20.3||19.9||22.7||24.9|
|Gross national saving||31.2||33.1||30.2||30.2||29.3|
|Fiscal accounts (percent of GDP) 1/|
|Central government balance||-0.9||-2.4||-3.6||-3.0||-3.6|
|Revenue and grants||18.6||16.2||15.5||15.5||15.1|
|Expenditure and net lending||19.5||18.7||19.0||18.5||18.7|
|Government balance 2/||-1.3||-4.4||-4.1||-3.7||-4.4|
|Nonfinancial public enterprise balance||-1.3||-1.4||-2.0||-0.9||-1.1|
|Comprehensive public sector balance||-2.7||-5.8||-6.1||-4.6||-5.4|
|Monetary accounts (end period, percent)|
|Balance of payments (billions of US$)|
|Current account balance
|(Percent of GDP)||-2.1||12.8||10.2||7.6||4.4|
|Growth rate (in dollar terms)||3.8||-6.8||7.4||19.6||-1.1|
|Growth rate (volume terms)||7.3||8.5||11.1||22.5||-1.4|
|Growth rate (in dollar terms)||-13.4||-33.8||16.9||31.3||5.5|
|Growth rate (volume terms)||-9.9||-27.5||22.5||22.3||4.1|
|Capital account balance 3/||-15.3||-16.8||-10.5||-11.4||-3.8|
|Medium- and long-term||10.0||5.1||1.9||-3.2||-0.7|
|Gross official reserves (end year)||27.0||29.5||34.8||32.7||30.9|
|(Months of following year's imports)||8.0||7.5||6.7||6.0||5.2|
|(Percent of maturing external debt)||57.1||77.6||109.9||131.0||137.2|
|Forward position of BOT (end year)||18.0||6.6||4.8||2.1||2.1|
|External debt (revised series)|
|In percent of GDP||72.3||93.9||78.4||65.8||60.2|
|In billions of US$||109.3||105.1||95.6||80.2||70.1|
|Medium- and long-term||46.9||45.7||39.8||32.2||28.5|
|Short-term (incl. Portfolio flows)||38.3||28.3||19.8||14.3||11.2|
|Debt service ratio 4/||15.3||20.8||19.0||14.9||16.8|
Sources: Information provided by the Thai authorities; and IMF staff estimates.
|1/ On a cash and fiscal year basis. The fiscal year runs from October through September such that, for example, the column for 2000 refers to October 1999 through September 2000.|
|2/ Includes extrabudgetary funds, local government and non-fiscalized interest costs of financial sector restructuring.|
|3/ Includes outflows associated with the closing of swap and forward contracts by the Bank of Thailand, and errors and omissions.|
|4/ Percent of exports and goods and services.|
1 Under 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 Executive Directors, and this summary is transmitted to the country's authorities. This PIN summarizes the views of the Executive Board as expressed during the August 2, 2001 Executive Board discussion based on the staff report. Meanwhile, Post-Program Monitoring is conducted concurrently and provides closer monitoring of the circumstances and policies of members whose arrangement has expired but that continue to have Fund credit outstanding.
IMF EXTERNAL RELATIONS DEPARTMENT