Press Release Regarding
Fifth Letter of Intent
No. 90/1998 August 25, 1998
The Thai government has already made four out of twelve withdrawals from the IMF Financial Package amounting US$ 11.1 billion of the total US$ 17.2 billion. The subsequent withdrawals can only made after the Thai government meets all the performance criteria set in the Memorandum of Economic Policy. The evaluations will be conducted every three months.
During August 3-17, 1998, the IMF mission completed the fourth review on the performance criteria for the end of June 1998, 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 Fifth Letter of Intent.
On August 25, 1998, the Cabinet entrusted the Minister of Finance and the Governor of the Bank of Thailand to co-sign the Fifth Letter of Intent to be submitted to the IMF Board for consideration of the fifth disbursement approval from the stand-by arrangement. The withdrawal will be in the amount of US$ 494 million with the additional US$ 362.10 million as a back-withdrawal from Canada who offered to provide financial assistant in the amount of US$ 500 million replacing the pledge from Indonesia. In the Fifth Letter of Intent, the Ministry of Finance, the Bank of Thailand and the IMF have agreed to revise six aspects of the economic program which the Thai government will continue to implement. The details can be summarized as follows:
The summary of the gists of the Fifth Letter of Intent can be highlighted as follows:
1. Macroeconomic Framework and Policies
The implementation of the program for economic recovery has progressed steadily as the Thai government has met all the performance criteria. However, the recovery has been delayed, partly reflecting the deepening recession in Japan and elsewhere in the region, the declining in domestic production, corporate indebtedness, and inadequate bank capitalization. Thus, the modified macroeconomic framework projects the real output growth for 1998 will be negative 7 percent with the anticipation for bottoming out toward the end of the year, setting the stage for a modest recovery of growth in 1999. A supportive regional environment will be important to this prospect. Reflecting the deeper recession, we now expect inflation to decline to 9.2 percent and the external current account surplus will be higher to 10 percent of GDP.
1.1 Fiscal Policy
The overall public sector deficit for 1999 Fiscal Year is targeted at 3 percent of GDP. Within this, the central government deficit will amount to 1 percent of GDP and the public enterprises deficit will amount to 2 percent of GDP. This excludes about 1.5 percent of GDP in interest costs related to the ongoing fiscalization of FIDF bonds and other financial restructuring costs. Within this framework, The government is carefully planning to channel additional spending through the central government and the state enterprises budgets both in the infrastructure and employment. In addition, the government will revise tax structure to create positive impacts on employment and the real sector.
1.2 Monetary and exchange rate policy
The government will continue to give highest priority on exchange rate stability. However, the government will allow for a very substantial reduction in short-term money market rates. As inflation declines, the government will increase focus on restoring liquidity and bringing down the broader structure of bank lending and deposit rates. The government has begun to give greater prominence to interest rates with 1-3 month maturities in the repurchase market. This is aim at providing the market with a somewhat longer-term benchmark than the overnight repurchase rate. However, were foreign exchange market pressures to arise, short-term interest rates of all maturities, including the overnight repurchase rate, would be promptly raised to counteract speculative pressures.
Based on the latest outlook for inflation and output, the program sets upper limits rather than precise targets for reserve money, and NDA of the BOT. In the meantime, the government has supported the targeted extension of credit to the export sector and is augmenting the capacity of the specialized financial institutions and strengthening their regulatory framework to support their operations.
1.3 External policy
Based on developments in the first half of 1998, the current account surplus is expected to be 10 percent of GDP due to the continuing compression of imports. On the other hand, the capital account is now expected to record a large deficit, despite higher foreign direct investment, on account of a decline in the debt rollover rate. The international reserves are expected to remain within the US$ 26-28 billion range by end-December 1998 with the reserves continue to provide more than full coverage of short-term debt.
For 1999, the capital account deficit is likely to narrow sharply due to the large stock of offshore forward and swap obligations having been settled. Therefore, the current account is expected to record a surplus of about 7 percent of GDP, based on a projected recovery of the regional economy. The international reserves are projected to rise increasing room for maneuver and facilitate the process of lowering external debt that is already underway.
2.Financial Sector Restructuring
A comprehensive announcement on financial sector restructuring was made on August 14. This announcement focuses on a wide range of immediate measures to resolve Thailands banking crisis, stabilize banks deposit base, and resume lending. There are four major aspects of the financial restructuring program. First, the consolidation of the banks and the finance companies has been accelerated through additional BOT interventions and proposed mergers. Second, private investment and entry (domestic and foreign) into the banking system is to be encouraged through the immediate sale of two intervened institutions, as well as the preparation of other state banks for eventual privatization. Third, public funds are to be provided for recapitalizing all remaining financial institutions, with appropriate safeguards and conditions, and linked to progress in corporate debt restructuring. Fourth, a framework has been developed for the creation of private asset management companies.
With the technical assistance from the IMF and the World Bank, the government has initiated a broad review of financial sector legislation and regulation, as well as the review on BOT restructuring which will be completed by October 31, 1998. As the result, the government will finalize proposals for legal, regulatory, and institutional reforms, including that of bank supervision, consistent with international best practices.
3. Corporate Debt Restructuring
The government has established Corporate Debt Restructuring Advisory Committee (CDRAC) to promote market-based corporate debt restructuring with a view to supporting the economy and employment. In supportive, the government is eliminating impediments and strengthening the broader incentive framework for restructuring. This also includes the elimination of tax disincentives for debt restructuring; the revision of BOT regulations for loan classification and collateral appraisal in line with best international practice; and increasing the reliance on the BOT for monitoring and supervision of debt workout. In addition, the government attempts to contribute in the Tier 2 capital support schemes to assist in debt restructuring.
The government is amending bankruptcy legislation and reforming judicial foreclosure proceedings to create incentives for debtors and creditors in accelerating the negotiations and resolution. Amendments to the bankruptcy law have been approved by the Cabinet and are expected to be enacted by the current session of Parliament (by October 31, 1998). Regarding foreclosure and the enforcement of security rights, the Cabinet has approved amendments to the Code of Civil Procedure, which should significantly accelerate judicial proceedings applicable to the enforcement of mortgages. These amendments are also expected to be enacted by Parliament by October 31, 1998.
4. Social Safety Net
With the deepening recession, more severe and prolonged than previously anticipated, the government has made improvements in the targeting of social safety net program by increasing the current year expenditure for the social program, including the extension of the scholarship program, the expansion of employment generating public works programs and providing free medical treatment and the improvement of rural health care facilities. The government also introduces many measures to ease the impacts on the poor and the unfortunates. These activities are supplemented as increasing the investment budgets of the public enterprises, introducing of the New Labor Protection Act, accelerating the social investment program and extending the coverage under health, disability, and maternity benefits for the unemployed insured in the Social Security Fund from 6 to 12 months.
5. Market Opening Policies
The market opening policies aim at increasing the role of the private sector in Thailands economy, especially through privatization. The government must establish Master Plan for State Enterprise Reform, overall strategy, principles for regulatory bodies, and sequencing of divestiture by September 1, 1998. The government also amends the Alien Business Law to support the foreign investment and amends foreign ownership procedures including the Land Code and Condominium Act to allow individual foreign investors to own land up to 1 rai for residential purpose and to allow Thai citizens married to foreigners to own land. In addition, the amendment of Condominium Act allows foreigners to purchase for the next five years window of 100 percent of condominium buildings of 2 acres (5 rai) or less. The amendment of the lease provisions of the Civil and Commercial Code extends the period of the foreigners leasing real estate property from 30 years to 50 years with the renewable for an additional 50 years. These measures aim at encouraging new inflows of foreign direct investment.
Posted :August 25, 1998