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Thailand's Debt Undertow


Five years after Thailand's financial crisis triggered a regionwide economic meltdown, central Bangkok looks pretty flush. A $1.3 billion elevated Skytrain ferries commuters above traffic jams, while work proceeds on a $2 billion subway below. On Phloenchit Road, the formerly run-down Gaysorn Plaza has been restored, attracting new tenants including Hugo Boss, Armani, and Prada. And shoppers pay for their handbags, shoes, and suits with brand new credit cards.

Why the turnaround? Credit an economic stimulus package backed by Prime Minister Thaksin Shinawatra. He has shored up banks by nationalizing billions in bad loans and tempted shoppers with low interest rates that stimulated a 3.5% spike in consumer spending in June. While some criticize many of the measures as populist--Thaksin also backed a three-year moratorium on billions of dollars in debt held by farmers--so far, they appear to be working. In local currency terms, Thailand's gross domestic product has climbed back to the level it hit in 1996, the year before the crisis.

Lurking just below the surface of Thailand's apparent recovery, though, is a problem that could put the brakes on future growth. The country is still sitting on a mountain of corporate debt left over from the crisis. Nonperforming loans now total $42.5 billion, or 34% of GDP. That's the same level as two years ago, since restructured loans frequently go bad again. "The private sector is still very weak," warns Chalongphob Sussangkarn, an economist and president of the government-funded Thailand Development Research Institute. "There's a danger that if we're not careful, we could follow the problems of Japan."

A one-hour cab ride from Thaksin's office takes you to the heart of the problem: the headquarters of the Thai Asset Management Corp. Thaksin set up the TAMC 15 months ago to take over nonperforming loans. But the TAMC has been cloaked in secrecy, and no one can tell what progress it has made in its mission to get tough on borrowers. The agency claims to have worked through $5 billion of the $20 billion in bad loans it carries on its books, but it has announced the details of only one deal so far: a debt-equity swap involving Submicron Technologies, a bankrupt maker of computer chips.

While $5 billion isn't peanuts, it's far below the $12.5 billion the TAMC has pledged to take care of by yearend. It's true that the TAMC has taken these bad debts off the books of the banks, which can now clean themselves up and get on with their business. But TAMC now has to negotiate with the companies that owe it money and work out plans to get as much of the debt repaid as possible.

That's painful stuff: It often involves seizing a debtor's assets or forcing a nasty restructuring. But failure to reorganize or to call in the loans means that the economy continues to be littered with inefficient, unprofitable companies that go on operating, while others might make more productive use of their assets. "If Thailand had sold the things that needed to be sold and had a meaningful restructuring program, it would be better off today," says Jack Rodman, a debt restructuring specialist with Ernst & Young in Tokyo.

The bad loans hurt in other ways, too. Continuing debt problems led Standard & Poor's to keep Thailand's sovereign debt rating at junk-bond level in a a recent review. To be fair, S&P did increase a less stringent indicator, Thailand's currency outlook, to "positive" from "stable," citing increased growth. But the poor sovereign rating will make it much harder for the country to raise money. Unless loan restructuring picks up, GDP growth could lose half a percentage point this year, dropping to 3.5% from a forecast 4%, warn analysts at Merrill Lynch Phatra Securities.

There may be some relief on the horizon. On Sept. 1, Thaksin appointed a new director of the TAMC. His choice: Somjate Moosirilert, a veteran financier who made his mark as head of a local investment bank, National Securities Co., by snapping up cheap assets and restructuring them in the early days of the crisis. He takes over from Yodchai Choosri, who resigned on Aug. 16, three weeks after a meeting in which Thaksin chided him for moving too slowly. "There was no quarrel, but on principle I had to resign," says Yodchai.

Somjate appears ready to shake the agency out of its torpor. On his first day on the job, he called its senior managers into a conference room and warned them that he wanted the agency to exceed its targets for loan workouts. "He's quite an aggressive, goal-oriented guy," says Kunjanaphan Phansuwon, a TAMC vice-president. "He wants to run the TAMC like a private practice." Somjate and Thaksin declined to comment for this article.

The TAMC certainly needs some help. Although founded in July, 2001, the agency didn't actually begin buying up dud loans until January of this year. Moreover, critics argue that most of the handful of deals it has completed were negotiated directly between debtors and creditors before the debt was even sold to the TAMC. "They did all the easy ones first," says a diplomat in Bangkok. The TAMC has managed to sell $5 billion in debt for around 39 cents on the dollar--about 6 cents more than it paid--although Kunjanaphan acknowledges that those deals were often financed by new loans. Only 40% of the deals have reached the final "successfully restructured" stage. Worse, the remaining $15 billion in its debt portfolio may not have enough collateral backing it for the agency to recover much of its investment, according Merrill Lynch Phatra.

Foreign investors might be able to help Thailand work out its debt problem, but they say the TAMC has stonewalled them. Earlier this year, a senior executive of an international private-equity fund met with TAMC officials. They refused to tell him what was for sale or what it would cost. "I had a suitcase full of money, and I couldn't spend it," complains the executive.

TAMC officials are just doing their jobs, says Kunjanaphan, the agency vice-president. They're barred from disclosing information about assets under management, he says, due to client-confidentiality agreements. He notes with approval that Thaksin's administration won't sell "national assets" too cheaply to foreign investors. During the economic crisis, Kunjanaphan says, "foreign investors made too much profit. People don't want to see that happen again." He also rejects assertions that the TAMC has been lethargic: "We've been moving around the clock."

Somjate has hinted that he will be more open about the agency's activities and give foreigners a chance to invest. For starters, he's encouraging the TAMC to sell assets for less than it paid for them and make up the difference with profitable sales of other assets. Somjate could do Thailand a world of good. If he fails, the Thai turnaround could be at stake. By Michael Shari in Bangkok


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