Thailand risks remain until economy recovers

Thailand risks remain until economy recovers

By David Brunnstrom

BANGKOK (Reuters): Markets have applauded Thailand's long-
awaited passage of bankruptcy and foreclosure legislation but the
mood could unravel unless tangible signs of economic improvement
emerge soon, analysts say.

Pain inflicted by deep restructuring in ravaged industries is
bound to increase in coming months. As it does, potential hazards
will rise for a generally well-regarded government facing the
daunting task of turning the economy around.

And time is not on its side.

Economists and political analysts say that if the government
fails to show a dispirited population signs of, or at least a
realistic prospect of economic recovery in a matter of months, it
could find itself out of office before the end of the year.

To ease the impact of the job losses that restructuring will
bring, the government needs to expand safety nets and boost
consumer spending to create alternative opportunities. It also
needs to revive flagging commodity export sectors and provide
relief to farmers suffering a prolonged drought.

It is expected to outline tax cuts and massive fiscal stimulus
in a letter of intent to the International Monetary Fund due for
cabinet approval next week.

Passage of legislation last week designed to speed the process
of restructuring the battered corporate sector and the cleaning
up of tens of billions of dollars of bad loans in the banking
sector was a great step forward for the government.

"But the political risk remains if a recovery takes too long,"
said Somchai Phagaphasvivat, a professor of political science at
Bangkok's Thammasat University.

"The patience of people is getting less and less. If
restructuring takes too long, you could see the government forced
to make internal changes or dissolution of parliament."

Government opponents have tried to whip up nationalistic
resistance against the reform legislation, which will make it
easier to declare failed firms and individuals bankrupt and
foreclose on loans.

They warned it would aggravate hardship and leave Thai firms
helpless to fend off foreign takeovers.

While these criticisms have failed to capture much popular
imagination, this could change should pain increase with no
return.

An economist with an accountancy firm involved in
restructuring expects the perceived political risk to make the
government cautious, despite its new legislative tools.

"The potential for serious conflict is there and it will get
greater if financial institutions feel there is some point in
going after dead loans. For that reason, I'm not sure the
bankruptcy bills are going to speed things up much."

"I think financial markets have latched on very firmly to the
symbolic elements of this legislation and have not really got to
thinking about its actual effects."

He predicted large amounts of bad debt would end up being
absorbed by the state, with consequent inflation down the line.

"The natural instinct of most governments is to do nothing,
and to some extent, I think this is what will happen."

James Mitchell, of Salomon Smith Barney, is more optimistic:
"Restructuring is always slow and painful; it's the commitment
that's important and we have seen that. Those it would alienate
have already been alienated. They could cause problems if they
had money, but now they have much less or no money."

Another investment banker said serious unrest was unlikely
unless conditions worsened considerably.

The security-conscious U.S. embassy terms Thailand's current
political risk factor "low" and most analysts dismiss out of hand
a worst-case scenario of the military stepping into a political
breach as it did last with a coup in 1991.

Even with the pretext of a collapsed economy, and pockets of
dissatisfaction that exist within the military, generals would be
very wary of trying to take on a modern financial system.

"I wouldn't say they couldn't stage a successful coup, but
what would they do after that?" the banker said. "They certainly
don't know the difference between debt restructuring and a swap
obligation, so how would they run the country?"