Public Information Notice: IMF Concludes 2001 Article IV Consultation and Post-Program Monitoring Discussion with Thailand
IMF News, August 16, 2001
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- Published: August 16, 2001
Background and recent developments
- Thailand successfully completed a 34-month Stand-By Arrangement on June 19, 2000, part of a US$17.2 billion official financing package; a total of US$14.3 billion was drawn (including US$3.4 billion from the Fund). Scheduled repayments have so far amounted to US$1.6 billion (of which about half is to the Fund).
- The 1997–98 crisis followed large capital inflows, rapid growth, large current account deficits, loss of reserves, abandonment of the exchange rate peg in mid-1997, large depreciation, and steep economic contraction with a large increase in non-performing loans.
- Policy responses included: easing macroeconomic policies as the exchange rate stabilized in mid-1998; a World Bank–supported social safety net; takeover of unviable institutions; a comprehensive deposit guarantee; phasing in enhanced prudential frameworks (capital adequacy, loan classification, provisioning); measures to facilitate voluntary debt restructuring including the Corporate Debt Restructuring Advisory Committee (CDRAC); bankruptcy procedure reforms; and elimination of various tax impediments.
- Recovery indicators: external vulnerability reduced through large payoff of short-term external debt and rebuilding official reserves; economy expanded by over 4 percent in each of 1999 and 2000; private banks raised almost US$10 billion in new capital; two-thirds of the banking system emerged in private hands; headline NPLs have fallen sharply; bank profitability recovered.
- Deterioration in 2001: weakening global environment led exports (which grew by almost 20 percent last year) to fall sharply this year; domestic demand pickup too weak to offset faltering global demand; economic outlook weakened.
Key weaknesses and structural challenges
- Slow pace and questionable quality of corporate debt restructuring undermine bank profitability and capitalization.
- Lack of significant deleveraging in the corporate sector means system-wide distressed assets remain high, especially among state-owned and intervened financial institutions.
- Continued poor operating performance of state banks remains a concern; risk that increasing lending through state banks without regard to borrower viability could create future losses.
- Need to enhance legal framework for debt restructuring outside the TAMC and consider amendments to strengthen bankruptcy law, while improving implementation of current laws.
Thai Asset Management Corporation (TAMC)
- TAMC was formally established in June and expected to begin acquiring assets by the third quarter of the year.
- Expected acquisitions: about half (US$30 billion) of the financial system's distressed assets; almost all (US$25 billion) of state-owned financial institutions' distressed assets; about one-quarter of private banks' distressed assets (US$5 billion).
- Implication: private banks will still need to engage in debt restructuring for remaining distressed assets.
- Executive Directors urged TAMC to use strong legal powers to secure debtor cooperation; operating guidelines should ensure maximization of asset recovery, transparency, and even-handedness.
Executive Board assessment and policy guidance
- Overall assessment: much progress in stabilizing the economy and fostering recovery; sharp reduction in short-term external debt; rebuilding of official reserves; financial sector restructuring and regulatory reforms strengthened oversight.
- Growth outlook: GDP growth likely to be around 2 percent this year and subject to downside risk.
- Recommended policy priorities:
- Maintain supportive macroeconomic policies while containing vulnerability to external developments.
- Accelerate restructuring of bank and corporate balance sheets.
- Ensure consistency in formulation and presentation of economic policies.
- Maintain an open trade and investment regime and implement appropriate macroeconomic and structural policies, including in education and skills development, to achieve sustained high GDP growth over the medium term.
- Exchange rate and monetary policy:
- Welcomed BOT Governor’s commitment to maintain a flexible exchange rate regime.
- Emphasized clearly defining and, when necessary, prioritizing monetary and exchange rate policy goals to enhance credibility.
- Authorities clarified aim is to limit short-term exchange rate volatility rather than target a particular level or range for the baht.
- Caution: objective of reducing exchange rate volatility should not compromise the strength of reserves.
- Welcomed statements ruling out tightening of capital controls but cautioned that aggressive tightening of foreign exchange reporting requirements could undermine confidence and discourage foreign investment.
- Welcomed BOT affirmation of the inflation-targeting framework; most Directors concerned over last June's interest rate increase undertaken for objectives outside inflation-targeting framework and, in the absence of inflationary pressures, cautioned against further increases. Some Directors noted context of recent decline in the current account surplus. Authorities intend not to increase interest rates further in the near term; some Directors thought lowering interest rates should not be ruled out. Emphasized importance of legislation to enhance central bank independence.
- Fiscal policy:
- Balancing support for activity with fiscal consolidation to reduce public debt is a difficult challenge.
- Public sector deficit for the current fiscal year is appropriate, but fiscal consolidation should prevail from next year on, with some flexibility for risks to outlook.
- Welcomed intention to set aside a reserve fund for flexibility but stressed its size should remain limited and conditions for use clearly specified.
- Cautioned to assess new fiscal initiatives (e.g., debt suspension program for farmers) for lasting economic effectiveness and impact on credit culture.
- Commended authorities' medium-term fiscal framework: commitment to balance the budget within five years and contain public debt to no more than 60 percent of GDP; recommended announcing schedule for reversion of VAT rate to 10 percent to bolster credibility.
Data transparency and monitoring
- Commended Thai authorities for excellent record in improving data dissemination to the Fund and public; an impressive array of economic statistics is now available.
- Post-Program Monitoring will continue close policy dialogue.
- Next Article IV consultation expected on the standard 12-month cycle.
Selected economic indicators, 1997–2001 (highlights and projections)
- Real GDP growth (percent): 1997: -1.4; 1998: -10.8; 1999: 4.2; 2000: 4.4; 2001 Projection: 2.0.
- Consumption (percent): 1997: -1.3; 1998: -9.5; 1999: 3.5; 2000: 4.9; 2001 Projection: 3.4.
- Gross fixed investment (percent): 1997: -21.1; 1998: -45.1; 1999: -4.0; 2000: 5.4; 2001 Projection: 9.0.
- CPI inflation (end period, percent): 1997: 7.7; 1998: 4.3; 1999: 0.7; 2000: 1.3; 2001 Projection: 3.0.
- CPI inflation (period average, percent): 1997: 5.6; 1998: 8.1; 1999: 0.3; 2000: 1.5; 2001 Projection: 2.5.
- Gross domestic investment (percent of GDP): 1997: 33.3; 1998: 20.3; 1999: 19.9; 2000: 22.7; 2001 Projection: 24.9.
- Gross national saving (percent of GDP): 1997: 31.2; 1998: 33.1; 1999: 30.2; 2000: 29.3.
- Foreign saving (percent of GDP): 1997: 2.1; 1998: -12.8; 1999: -10.2; 2000: -7.6; 2001 Projection: -4.4.
- Central government balance (percent of GDP, cash/fiscal year basis): 1997: -0.9; 1998: -2.4; 1999: -3.6; 2000: -3.0.
- Revenue and grants (percent of GDP): 1997: 18.6; 1998: 16.2; 1999: 15.5; 2000: 15.1.
- Expenditure and net lending (percent of GDP): 1997: 19.5; 1998: 18.7; 1999: 19.0; 2000: 18.5.
- Comprehensive public sector balance (percent of GDP): 1997: -2.7; 1998: -5.8; 1999: -6.1; 2000: -4.6; 2001 Projection: -5.4.
- M2A growth (end period, percent): 1997: 6.1; 1998: 2.2; 1999: 6.0.
- Current account balance (billions of US$): 1997: -3.2; 1998: 14.3; 1999: 12.5; 2000: 9.2; 2001 Projection: 5.2.
- Current account (percent of GDP): 1997: -2.1; 1998: 12.8; 1999: 10.2; 2000: 7.6.
- Exports, f.o.b. (percent of GDP): 1997: 56.7; 1998: 52.9; 1999: 56.8; 2000: 67.9; 2001 Projection: 67.2.
- Exports growth rate (in dollar terms): 1997: 3.8; 1998: -6.8; 1999: 7.4; 2000: 19.6.
- Exports growth rate (volume terms): 1997: 7.3; 1998: 8.5; 1999: 11.1; 2000: 22.5.
- Imports, c.i.f. (percent of GDP): 1997: 61.3; 1998: 40.6; 1999: 47.5; 2000: 62.4; 2001 Projection: 65.9.
- Imports growth rates (dollar terms and volume terms): 1997: -13.4; 1998: -33.8; 1999: 16.9; 2000: 31.3; 2001 Projection (dollar terms): 5.5; 2001 Projection (volume terms): -9.9; 1999 volume: -27.5; 2000 volume: 22.3; 2001 Projection volume: 4.1.
- Capital account balance (billions of US$): 1997: -15.3; 1998: -16.8; 1999: -10.5; 2000: -11.4; 2001 Projection: -3.8.
- Medium- and long-term capital flows (billions of US$): 1997: 10.0; 1998: 5.1; 1999: 1.9; 2000: -0.7.
- Short-term capital flows (including portfolio flows, billions of US$): 1997: -25.4; 1998: -21.9; 1999: -12.4; 2000: -8.2; 2001 Projection: -3.1.
- Gross official reserves (end year, billions of US$): 1997: 27.0; 1998: 29.5; 1999: 34.8; 2000: 32.7; 2001 Projection: 30.9.
- Reserves (months of following year's imports): 1997: 8.0; 1998: 7.5; 1999: 6.7.
- Reserves (percent of maturing external debt): 1997: 57.1; 1998: 77.6; 1999: 109.9; 2000: 131.0; 2001 Projection: 137.2.
- Forward position of BOT (end year, billions): 1997: 18.0; 1998: 6.6; 1999: 4.8.
- External debt (revised series): In percent of GDP: 1997: 72.3; 1998: 93.9; 1999: 78.4; 2000: 65.8; 2001 Projection: 60.2. In billions of US$: 1997: 109.3; 1998: 105.1; 1999: 95.6; 2000: 80.2; 2001 Projection: 70.1.
- Public sector external debt (percent of GDP): 1997: 24.1; 1998: 31.1; 1999: 36.0; 2000: 33.8; 2001 Projection: 30.3.
- Private sector external debt (percent of GDP): 1997: 85.2; 1998: 74.0; 1999: 59.6; 2000: 46.4; 2001 Projection: 39.7.
- Short-term (incl. portfolio flows, percent of GDP): 1997: 46.9; 1998: 45.7; 1999: 39.8; 2000: 32.2; 2001 Projection: 28.5.
- Debt service ratio (percent of exports of goods and services): 1997: 38.3; 1998: 28.3; 1999: 19.8; 2000: 11.2; 2001 Projection: (not explicitly provided in table beyond source note).
- Sources for indicators: Information provided by the Thai authorities; and IMF staff estimates.
Source: IMF Public Information Notice, August 16, 2001.