Thailand Steps Closer to Bailout Deal With IMF

The government of Thailand agreed Tuesday to a major overhaul of its financial system, a key step toward securing an international bailout and restoring stability to Southeast Asian economies hurt by the devaluation of the Thai baht in July.

After resisting for weeks, the Thai Cabinet approved austerity measures linked to what Finance Minister Thanong Bidaya said would be a $12-billion to $15-billion credit line from the International Monetary Fund, foreign banks and governments.

Details of the credit line were not announced, and talks with the IMF and other prospective lenders were continuing. Analysts expressed confidence, however, that a final deal with the IMF will be reached within days. It would be the IMF’s second-biggest bailout ever, after Mexico in 1995.

“This is a turning point,” said Stephen Zhen, a regional currency analyst at Morgan Stanley Asia in Hong Kong. “By the end of this week they will get an IMF package that is very tight and very tough.”

In response to IMF pressure, the Cabinet agreed to raise Thailand’s value-added tax rate to 10% from 7%. That is expected to add about $2 billion, or 6% of projected revenue, to government coffers next year.

The government also ordered 42 troubled finance companies to suspend operations, submit rehabilitation plans within 60 days and seek mergers with stronger firms or banks. This was in addition to 16 such firms given similar orders in June, and it meant that only 31 finance firms, which play a major role in the country’s economy, are considered healthy.

In Washington, IMF managing director Michel Camdessus commended the “immediate and sweeping measures” to keep the country’s financial system afloat. “I found particularly appropriate the adoption of a comprehensive restructuring of troubled financial institutions,” he said.

Thanong predicted that under the new economic plan, Thailand’s deficit in its current account--a broad measure of trade in goods and services--would fall to 5% of gross domestic product this year and to 3% in 1998, from 8.2% in 1996.

Earlier Tuesday in Tokyo, Finance Minister Hiroshi Mitsuzuka reiterated Japan’s readiness to participate in the bailout package. Japanese media have reported that as part of an IMF-led rescue package, the Export-Import Bank of Japan is expected to provide as much as $4 billion in loans. Private Japanese banks would also participate.

Apparently still being debated are IMF demands for deeper cuts in government spending, analyst Zhen said. Prime Minister Chavalit Yongchaiyudh said Tuesday the government would be willing to cut as much as $3.2 billion from its budget, or 10%, if necessary.

Thailand floated the baht, in effect devaluing it, on July 2. Since then the currency has lost about 23% of its value, creating ripple effects in other regional economies, including those of the Philippines, Malaysia, Indonesia and Singapore.

The Thai baht was trading late Tuesday at 31.30 to the U.S. dollar, slightly stronger than Monday’s 31.67. The Stock Exchange of Thailand index fell on news of the finance company shutdowns, closing with a 2.3% decline.

Malaysian stocks Tuesday posted their biggest one-day drop in 31 months after the announcement of a larger-than-expected June trade deficit of $1.1 billion. The Kuala Lumpur composite index fell 33.48 points, or 3.42%, to close at 945.08.