During February 2-14, 1998, the IMF mission completed the second review on the performance criteria for the end of December 1997, in which the Thai government has met all the performance criteria. In addition, the IMF mission, together with the Bank of Thailand and the Ministry of Finance have already drafted the Third Letter of Intent.
On February 24, 1998, the cabinet has entrusted the Minister of Finance and the Governor of the Bank of Thailand to co-sign the Third Letter of Intent to be submitted to the IMF Board for consideration of the third disbursement approval from the stand-by arrangement. The summary of the second review on the performance criteria and the necessary measures that the Thai government must continue to implement under the advisory of the IMF can be highlighted as follows :
1. Revised Macroeconomic Framework
We have reassessed the macroeconomic framework in light of the sharper ongoing decline in domestic demand and output, as well as the less favorable outlook for capital flows following the intensification of the crisis in the region. Real output growth has been adjusted from 0.6 percent to negative 0.4 percent in 1997, and from 0-1 percent to negative 3-3.5 percent in 1998. The inflation in 1997 has been adjusted from 6 percent to 5.6 percent, and from 10.0 percent to 11.6 percent in 1998. The current account has been adjusted from a deficit of 6.4 percent of GDP to a deficit of 3.3 percent of GDP in 1997, and from a deficit of 2.5 percent of GDP to a surplus of 4.4 percent of GDP in 1998. The gross official reserve target has also been adjusted from US$ 23 billion to US$ 27 billion in 1997, and from US$ 24.8 billion to US$ 23-25 billion in 1998.
2. Financial Sector Restructuring
2.1 Asset Disposal of the 56 Closed Finance Companies
Following the decision of the Financial Sector Restructuring Agency (FRA) to close all but 2 of the 58 suspended finance companies in early December 1997, we have been working to completely dispose all assets of the closed finance companies by the end of 1998. In order to assure reasonable bids for each asset, the government has established two new financial institutions namely, the Radhanasin Bank to bid for the high quality assets and the Asset Management Corporation to bid for the lowest-quality assets, and will participate effectively as a buyer of last resort. In addition, the time frame has been set for the disposal of these assets.
2.2 Strengthening the Core Financial System
2.2.1 The intervened financial institutions
In recent months, the government has intervened 4 medium-sized banks which were unable to raise capital, by replacing their managements, writing down the capital of existing shareholders, and recapitalizing them through debt-equity conversion by the FIDF; however, it remains the government’s paramount objective to reduce its ownership of the intervened banks as soon as possible.
2.2.2 The Existing Financial Institutions (inclusive of 2.2.1)
The government is accelerating efforts to strengthen the capital base of remaining domestic financial institutions by further strengthening loan classification and provisioning rules so as to bring these in line with international standards by the end of year 2,000, and consider their early implementation by March 31, 1998. In addition, by August 15, 1998, all domestic banks must sign MOU with the Bank of Thailand on recapitalization plans until the end of 1998, to meet the phased timetable for implementing the stricter rules on loan classification and provisioning requirements. As for finance companies, the MOU must be signed by September 15, 1998.
2.3 Strengthening the Efficiency and the Credibility of the Financial
Institution Development Fund (FIDF)
The government-guaranteed bonds with medium-and long-tem maturities and lower interest rates will be issued to restructure liabilities of the FIDF. In addition, the government will begin to incorporate the interest costs of the debt of the FIDF into the budget beginning with FY 1998/1999, and expect to have interest on its entire debt serviced by the budget by about the year 2000. Amortization of principal is expected to be met, in part, by privatization receipts.
2.4 Strengthening Supervisiory Role of Related Government Agencies
To strengthen supervisory role of related government agencies, the government will form a task force including eminent international financial experts to develop specific proposals regarding the independence and institutional strengthening of the central bank. This is expected to result in revisions to the BOT law by 1998. In addition, the government will undertake a comprehensive review of the roles of various financial institutions and the way they are regulated and supervised. This will involve not only the Bank of Thailand, but also the Securities and Exchange Commission, the Fiscal Policy Office, and the Department of Insurance. It is expected that these efforts to result in a modern and efficient supervisory regime that can support the development of a sound and competitive financial system.
3. Macroeconomic Policies
The government intents to impart symmetric flexibility to interest rate policy. First, when the exchange rate is under pressure, the repurchase rate will be adjusted upwards to support the exchange rate. Second, when the exchange rate has shown sustained stability in a more realistic range, interest rates will be brought down.
The government is also assuring the adequate availability of credit to the priority nonbank corporate sector, especially exporters, agricultural producers and small borrowers. The EXIM Bank of Thailand and the Industrial Finance Corporation of Thailand have negotiated trade finance facilities with the Japan Export-Import Bank and the AsDB; these facilities are being supported by the increased refinancing (up to 60 percent) by the Bank of Thailand at concessional interest rastes through commercial bank loans to exporters. In addition, existing facilities provide for the extension of some subsidized credit to agriculture (through the Bank for Agriculture and Agricultural Cooperatives), small business (through the Small Industry Finance Corporation), and low-income housing (through the Government Housing Bank).
3.2 Fiscal Policy
Due to government’s conduct of tight and disciplinary fiscal policy, the government has been able to meet the end-December quantitative performance criterion for the central government balance. However, because of the further weakening of the economy, and the excessive depreciation of the baht, the government revenues are projected to decline by some 2 percent of GDP while raising the government spending by 1 percent of GDP this fiscal year. Without further measures, the result will be a projected central government deficit of about 2 percent of GDP, instead of the 1 percent of GDP surplus originally programmed.
The government is currently taking some additional revenue measures that will allow the government to raise tax revenue by about 0.25 percent of GDP in 1998. At the same time, the government has cut the budget on lesser-priority investment projects and raised spending on the social safety net which would result in net saving of about 0.25 percent of GDP. The net result of these initiatives will be to limit the projected central government deficit to 1.5 percent of GDP, partly financed by foreign financing and the remainder through modest domestic financing.
With regard to the account of state enterprises, the government will allow state enterprise sector to move from balance to slight deficit of 0.5 percent of GDP which is necessary to allow the full drawdown on priority and ongoing projects. The small deficit will be largely financed by foreign fundings, as well as raising prices for such goods and services provided by state enterprises that would not hurt the poor.
3.3 External Sector
The official reserve will be maintained at the level of US$ 23-25 billion, while the current account is now expected to record a surplus of about 4 percent of GDP in 1998. However, capital outflows are expected to be higher than extimated due to the inability to rollover some short-term debt by private sector. Thus, the current account surplus is providing an important offset to this increase in capital out flows, and the government is assuring that the reserve objectives of the program can be broadly maintained.
4. Supporting and Revitalizing the Real Sector
The government will complement the above measures to support the poorest members of society affected by the downturn with the implementation of the following measures.
Social Safety Net
The government has coordinated with the IMF, AsDB, and OECF in drawing up social program to ease the effect of this economic downturn on the poor. The program will be financed by the loans from the World Bank, the AsDB, and the OECF. The program includes projects to alleviate poverty, projects on education and health, and maintaining urban bus and rail fares at subsidized prizes. This program will be closely reviewed to ensure that it remains well targeted, cost effective, and transparent.
Privatization process will be accelerated. Toward this end, by June 30, 1998, the government with assistance of the World Bank, will establish a privatization secretariat, propose legislative reform, and develop a regulatory framework. The government intends to privatize substantially Thai Airways International, Banchak Petroleum Company, and Electricity Generating (Public) Co., in 1998, if market conditions permit. In addition, the privatization of the Petroleum Authority of Thailand (PTT), the Telephone Organization of Thailand (TOT), and the Communication Authority of Thailand (CAT) will be undertaken, if market conditions permit, by the end of 1999.
4.3 Corporate Restructuring and Legal Reform
The Bankrupty and laws relating to foreclosures will be amended to facilitate corporate and financial sector restructuring. The new Bankruptcy Law, expected to be amended by March 31, 1998, will permit corporate reorganization, increase the scope for out-of-court workouts, and ensure fair treatment of creditors. Early administrative steps are also being taken to allow foreclosure, with comprehensive amendments of the laws relating to foreclosures to be proposed for enactment by October 31, 1998.
In other areas, as part of the modernization of the central banking function,
the government will be modifying the Currency Act to bring it in line with
other central banks. In addition, to facilitate foreign investment and
capital flows, the government proposes to amend legislation substantially
liberalizing ownership laws, including amendments to the Alien Business