Bank of Thailand (BoT) Governor Tarisa Watanagase on Wednesday conceded that non-performing loans (NPLs) incurred by the country s financial institutions were rising as a resu…

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Bad loans rising with sluggish economy, says BoT

When Thailand went through the 1997 Asian Crisis, we took measures to strengthen the financial institutions. The government then guaranteed bank deposits as well as their debts. Banks had their capital reduced and replenished. But even after they had been strengthened, banks still could not lend new money because the financial health of their corporate customers was still weak.

The root cause of the Thai crisis was over-investment by businesses. Non-performing-loan companies were therefore the weak link, causing a lack of confidence.

The Thai government solved the problem by setting up Thai Asset Management Corporation. TAMC restructured NPLs by rescheduling payment dates to suit the debtors’ cash flow. Basically, the reschedule was done to match the debtors’ ability to pay, with conditions for them to pay more should their actual cash flow be better than forecast. This enabled the NPL companies to obtain new trade credits and new working capital. They resumed their operations and retained their employees.

The economy would not have recovered otherwise.

The lesson is that a comprehensive crisis resolution must address the problem at the root cause. In the case of Thailand, it was the NPL companies that experienced cash flow problems because they over-invested and over diversified. In the case of the USA, it is the residential mortgages.

In this crisis, therefore, all efforts must be made to stop the first domino from falling, the residential mortgages – and only the US government can do it.

Bank of Thailand (BoT) Governor Tarisa Watanagase conceded that non-performing loans (NPLs) incurred by Thailand financial institutions were rising
Bank of Thailand (BoT) Governor Tarisa Watanagase conceded that non-performing loans (NPLs) incurred by Thailand financial institutions were rising

Demand from businesses have increased rapidly over the years in Thailand
Imports from new ASEAN member countries also have lower import duties. As part of ASEAN Integration System of Preferences (AISP), tariffs of products such as vinegar, chili, certain vegetables, wood products, and electronic switchboards imported from Cambodia, Myanmar and Lao PDR are either reduced or abolished from September 2008.

Import tariffs on machinery are waived for regional operating headquarters. The Board of Investment cancels import tariffs on machinery used in conducting research and development activities by regional operating headquarters (ROHs). This is in addition to the existing privileges such as a permission to own land and remit foreign currency abroad as well as preferential corporate and income tax rates. Looking forward, related agencies such as the Revenue Department, the Bank of Thailand, and the Department of Business Development plan to streamline other rules and regulations that help to promote ROHs in Thailand.
Externally, the trade balance in January 2009 recorded a 1,688 million US dollar surplus. Export value contracted for the third consecutive month while import fell even more rapidly. Export value dropped 25.3 percent (yoy) to 10,382 million US dollars. This was due mainly to contraction across the board except for labour-intensive industries which still expanded from gold export. Import value contracted 36.5 percent (yoy) across the board to 8,694 million US dollars. When accounting for the net services, income, and transfers surplus of 601 million US dollars from lower investment income transfer compared to the previous month, the current account balance registered a 2,289 million US dollar surplus.

Economists and analysts forecast gloomier times, predicting Thailand’s GDP to contract by 0-3 percent while the country descends into a deflationary spiral. Moody’s says Thailand could be the Asian economy that suffers the most from the global financial crisis. Plus the spectre of further political unrest remains on the horizon. However, there are some signs that Thailand can ride out the economic firestorm. Government debt-to-GDP remains below average regionally speaking, the financial sector learnt from the 1997 meltdown and remains relatively well capitalised and liquid, and Board of Investment privileges are some of the best in Southeast Asia.

For the year 2008, the Thai economy decelerated from the previous year, particularly in the last quarter where global economic downturn and internal political unrest adversely affected manufacturing production and tourism. Nonetheless, farm income in Thailand still expanded well from higher major crop production and price compared to the previous year. On the demand side, private consumption and investment declined notably in the last quarter, despite falling inflation during the second half of the year in line with lower oil prices. Both export and import expanded satisfactorily during the first three quarters. However, during the last quarter, export contracted following trading partners’ economic slowdown while import decelerated markedly in line with export and domestic demand conditions.

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