Thailand's debt reduction plans can work

By Thomas Fox

BANGKOK (Dow Jones): After a slow start, Thailand's efforts to remove the burden of nonperforming loans and recapitalize the banking system are finally about to see substantial progress.

Thailand has been criticized by observers like the Bank for International Settlements for acting more slowly than countries like South Korea and Malaysia in starting the clean-up of bad- loan problems, which take years to work out under the best of scenarios.

While Malaysia and South Korea set up centralized government- funded asset management companies several years ago to buy bad loans from banks and get them lending again, Thailand is still in the process of setting up separate corporations for each state and nationalized banks.

Private-sector banks that survived earlier rounds of closure and nationalization were given two years to the end of 2000 to raise capital and gradually meet stringent new nonperforming loan reserve requirements.

Authorities are pressuring private banks to act themselves to set up asset management corporation to handle bad loan portfolios, and most are also in process.

While many analysts wished Thailand had moved more quickly to grapple with the problem, they note that progress is finally being seen.

Net nonperforming loans in the Thai financial system -- excluding restructured loans and bad debt transferred to state and private asset management corporations -- could drop to around 10 percent of total lending at end-2000, depending on the amount of bad debt transferred by private banks, according to a study by Bank of Thailand.

And although the government's market-based approach to the private sector was a political compromise with powerful banking families, it's effects are revolutionary, said one analyst, who asked not to be named.

"There was a balance. The authorities were willing to protect the six large banks, to let them continue operations as Thai banks, but not on a blank-check basis. The oligopoly of the past 60 years wasn't going to be allowed to remain," he said.

Three nationalized banks have been sold to foreign banks, and two private banks found foreign strategic partners themselves.

Foreign competition and regulatory and accounting reforms "will ensure that Thai banks have to change their way of operating, that they will have to operate at basic international standards so that the government doesn't have to step in and bail everyone out again," the analyst said.

Still, many analysts think the government will have to go further.

Standard & Poor's said in a report last week that ownership of asset management companies will mean that distressed assets transferred to those companies will remain on the consolidated books of the banks.

Therefore, the transfer won't significantly reduce the banks' capital needs. Nonperforming loans will weigh on profitability for years, and profit margins won't return to pre-crisis levels for years, if ever, S&P said.

S&P noted that the asset management corporations will free bank management to develop business, that the process of writing off losses can begin with the transfer of assets at a discount to face value, and that expert assistance can be brought in from outside to operate in a more flexible environment.

Local bankers have already learned a great deal from the experience, analysts said.

But Merrill Lynch said in a recent report that unrestructurable nonperforming loans, or NPLs, amount to as much THB1 trillion, or about 18 percent of total loans, and the workout process is likely to be lengthy.

"Banks cannot outgrow the problem of unrestructurable NPLs in an acceptable time frame by themselves, in our opinion ... We think the government realizes that further support is necessary," the report said.

Takahira Ogawa, Asia Pacific director for sovereign ratings for S&P, however, said a centralized buyout of private banks' bad debt, in addition to the ongoing absorption of state and nationalized institutions' debt, simply wouldn't be practical.

"If we have a centralized government-controlled asset management corporation, the fiscal costs to the government will be quite substantial. Practically speaking, I'm not too sure this is feasible," Ogawa told Dow Jones Newswires.

Indeed, Thailand's problems do seem to pose a larger burden on its economy than those of Korea and Malaysia.

The Korean Asset Management Corp. has purchased bad loans with a face value of some US$66 billion since the end of 1997, while some $9 billion of bad loans have been removed from Malaysia's banking system.

In Thailand, around $20 billion in assets of closed finance companies were auctioned, and nearly that much again will be pulled from state and nationalized banks.

But in South Korea and Malaysia, nonperforming loans have dropped to around 6.2 percent to 6.5 percent of total lending in the banking system, while the comparable figure in Thailand is 28 percent, if loans at the private banks' asset management companies are included.

Finance Minister Tarrin Nimmanahaeminda said earlier this month that further purchases of bad debt could lead to a dramatic increase in public sector debt, leaving the country in a very vulnerable fiscal position.

Analysts said the government has the ability to service its debt -- including losses to be absorbed by the state -- at currently projected levels, but the assumption of further burdens might leave future governments with a severely restricted capacity to respond to any renewed economic downturn with fiscal stimulus.

Projected losses on bad debt and financial sector restructuring, planned deficit spending and current government and state enterprise debt combined are equivalent to more than 60 percent of gross domestic product, although that level could be reduced through state enterprise privatization and proper management of assets under the Financial Institutions Development Fund, it said.

SG Asia Securities head of research in Thailand, Sriyan Pieterz, said the issue probably can't be addressed until after a new government is formed, following elections expected in the fourth quarter.

He said a no-cost solution could be worked out if government bonds were issued in return for distressed assets in a five-year buy-back arrangement, with interest costs covered by the banks.