In Hard-Hit Thailand, Struggle Has Just Begun

Forgive the Thais if they seem a bit skeptical about their government’s promise to clean up its financial act.

They haven’t forgotten Rakesh Saxena. More than a year after the Bangkok Bank of Commerce executive fled the country, accused of embezzling millions of dollars and saddling the bank with a staggering $3 billion in bad loans, he is ensconced in Vancouver, Canada, fighting his extradition to Thailand.

Not a single Thai government official or BBC executive has yet been brought to trial in the massive fraud case, which dwarfs the scandals that destroyed Britain’s Barings and crippled Japan’s Daiwa and Sumitomo banks.

And taxpayers here could end up spending an astounding $7 billion to bail out the crippled bank.

Had the Thai government acted more aggressively to fix the lack of oversight that made the BBC fraud possible, it might have forestalled the unraveling of its economy this year. And had economists and business people in New York, Tokyo and London paid more attention when the bank’s huge problems surfaced in 1996, they would have been far better prepared for what was to come.

A free fall in Thailand’s currency, the baht, in July triggered an economic El Nino that rattled Hong Kong and eventually swept across oceans to the United States, Latin America and Europe.

While other parts of the world have quieted down, here in Thailand the struggle has barely begun. And, by virtue of the global links that were on such dramatic display in world markets last month, this region’s troubles point to long-term skittishness for much of the industrialized world.

Even the temporary boost given to the local markets by the news of Prime Minister Chavalit Yongchaiyudh’s resignation Thursday quickly evaporated after it became apparent that a caretaker government filled with familiar faces signaled more financial instability. The nation’s stock market and currency values have already plunged 50% since July.

Although most people agree that the prospects for Thailand’s eventual comeback are good, a leadership vacuum does not augur well for swift action on the nation’s most critical problem: how to revive the debt-laden financial institutions that are bleeding the life out of the country.

“It’s like a nuclear winter,” said one foreign executive, describing Thailand’s transformation from one of Asia’s biggest buyers of luxury cars and expensive liquor to a nation rumored to be considering a debt moratorium.

Global confidence in Thailand is at an all-time low. Since March, the Thai government has closed 58 of the nation’s 91 finance companies. And although the five largest commercial banks are considered healthy, some of the 10 smaller banks, including BBC, are in trouble.

A rapid outflow of foreign money, at an estimated rate of $4 billion a month, has created a race against time for the cash-starved economy to make the fixes needed to lure foreign investors back into the country. Though the government claims the country still has $30 billion in foreign reserves, few believe it--a measure of the public’s lack of confidence.

The drain of funds and the freeze on billions more trapped in padlocked financial institutions have made credit all but nonexistent. Transactions are by cash or barter. One builder is paying his debts in cement. Hoteliers are giving their suppliers free lodging instead of cash.

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Analysts are predicting flat or even negative growth next year and a significant slowdown for up to five years, a breathtaking turnaround for a country that enjoyed 8% growth rates just a few years ago.

“Thailand has moved from a credit economy to a cash economy and now to a barter economy,” said Eugene Davis, managing director of Finansa Ltd., a Thai merchant banking company.

Restructuring Thailand’s ailing financial system will be extraordinarily complex. In Thailand--as with many emerging economies that seek foreign investment but resist accountability--a cozy relationship has long existed among political leaders, leading bankers and the powerful families that dominate the economy.

Banks and finance companies have historically played a key role in funding the high-priced elections that are a way of life in Thailand. At least $1 billion was spent in last year’s elections to buy votes and loyalty, more than double the amount spent by President Clinton in his 1995-96 reelection campaign.

Twatchai Yongkittikul, the head of Thailand’s newly formed Financial Restructuring Agency, acknowledges that the country’s fiscal cleanup has been slowed by “political interference” from government leaders closely allied with the finance industry.

But Twatchai, whose former job was as secretary-general of the Thai Bankers’ Assn., says he is not vulnerable to outside pressure because he’s a “small person” with no close ties to influential politicians or business people.

The Thai economist has set an ambitious target of three months to complete his assessment of which of the 58 finance companies are strong enough to reopen under stricter standards and which must be sold, merged or liquidated. The Thai Parliament is finalizing six laws establishing the legal structure for the government bailout.

Executives of the shuttered finance companies have estimated that only 37.5% of their $31 billion in assets are good.

Critics say Thailand’s politicians have moved far too slowly in carrying out this fiscal reform, noting that nearly two years have passed since the first warning signs. They predict the banking cleanup will move faster in Indonesia, where the government last week announced the shutdown of 16 financially weak banks, including several with close connections to the ruling Suharto family.

Until more tough measures are carried out in Thailand, foreign investors will not pump badly needed funds into the economy. Meanwhile, Thais fortunate enough to have some liquid assets are also moving their money abroad.

The Thai government, which borrowed heavily in a failed attempt to defend its currency against speculators earlier this year, got a boost in August when the International Monetary Fund offered a $17.2-billion bailout package in exchange for severe budget cutbacks and fiscal reforms.

But unlike Mexico, whose debt in its 1995 peso crisis was largely governmental, at least $70 billion of Thailand’s estimated $90 billion in offshore debt is in the private sector, according to bankers.

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Such private debt is far more difficult to document, and the IMF--whose loan packages are earmarked for government debt problems and typically come with tough reform requirements attached--has little direct leverage over private borrowers.

Of the $70 billion in private debt, at least $20 billion is short-term borrowing due to be repaid in coming weeks. Foreign lenders who hold the debt are being pressured to renegotiate the terms to avoid massive foreclosures.

Five giant commercial banks dominate Thailand’s economy, controlling at least 70% of the mortgage activity.

In the past, the close relationship among the Bank of Thailand, the central bank and the banking community led to lax oversight, risky lending and the implied promise of a government lifeline for problem-plagued institutions, according to local bankers and business people.

The most egregious example was BBC. In addition to living the good life and accumulating a high-risk client list, including Saudi arms merchant Adnan Khashoggi, Saxena and other top BBC executives were accused of giving huge uncollateralized loans to bank management and powerful politicians.

The taxpayer-funded bailout of BBC created a “moral hazard” and an impression among other financiers that they could count on a government safety net, no matter how risky or corrupt their behavior, according to Davis of Finansa. And the public sought out the best interest rates or credit terms without worrying about who was holding their money.

“People thought if BBC’s safe, then everything must be safe,” Davis said.

During Thailand’s boom years, aggressive finance companies provided the nation’s expanding middle-class with loans for big-screen televisions and automobiles, real estate and stock market investments. Many loans went into property development, leading to a spate of overbuilding.

When the Thai economy began to slow down in the early 1990s due to increased export competition and mounting debt, the borrowers of the finance companies were the first to feel the pain. As Thailand’s situation worsened and the baht took its plunge against the dollar July 2, some of Thailand’s biggest companies were pulled down as their dollar-denominated debts skyrocketed and their domestic sales shrunk.

Now every day brings more bad news to a demoralized country. The sharp plunge in the baht’s value has turned even good loans--and good companies--into bad.

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Leading Thai firms such as Siam Cement Group, Telecom Asia and Total Access Communications are burdened with hundreds of millions of dollars in outstanding loans unprotected by hedges against foreign exchange fluctuations. Unhappy executives said they took the currency risk because the government promised it would protect the baht to the bitter end.

“We were brainwashed by the government,” said the chief executive of one of Thailand’s giant family-controlled conglomerates.

Now some of these blue-chip firms are having trouble renegotiating their loans or getting new infusions of cash. Thus they can neither repay their loans nor sell their products in a collapsed, inflationary market.

“These companies are getting squeezed coming and going,” said David Riedel, vice president of equity research in the Bangkok office of Salomon Bros. Hong Kong Ltd.

Cash-strapped Thai companies have laid off employees and quit paying their bills, forcing their suppliers to close their doors. Last week, the Federation of Thai Industries asked the government to allow factories to delay paying their power bills until the middle of next year.

In theory, this climate should be good for exporters. But even Thai exporters eager to take advantage of their lower domestic costs to beef up overseas sales haven’t always been able to fill their orders because their credit lines and supply channels have dried up.

At one manufacturing plant, a transaction involving thousands of refrigerators bound for foreign customers couldn’t be completed because a subcontractor that made an essential screw had run out of money.

Foreign bankers are waiting to see if the Thais make good on their promises to shut down the bad banks and enforce the tougher standards that will govern those still in business.

Depositors at all 58 closed finance companies are guaranteed repayment. The government has agreed to fully repay creditors of all but the first 16 finance companies closed last March.

Foreigners, who are owed an estimated $2 billion from those 16 companies, want their loans guaranteed as well, according to David Proctor, a Bank of America executive and chairman of the Foreign Banks’ Assn. in Thailand.

Proctor said the foreign banks aren’t even sure yet exactly how much exposure they have to Thailand’s debt problem because they haven’t received complete information from borrowers and banks.

Bank of America, one of 150 foreign banks operating in Thailand, has about $1 billion worth of exposure in the country. Japan is by far the largest lender, followed by France, Germany and the United States.

Thailand’s crash landing was a painful reminder that promises made in an era of double-digit growth and plentiful cash are fragile. And Proctor said foreign lenders burned one time too many are no longer willing to base their financial commitments on government promises and misleading information.

In the future, the governments of Thailand and its neighbors can expect much closer scrutiny of such critical data as the size of foreign reserves and the level of delinquent loans.

“I think one element of this [Southeast Asian] contagion is that bankers generally are assessing how much of their lending is dependent on the assurances of central banks and governments throughout the region,” said Proctor, who is B of A’s country manager in Thailand.

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Meanwhile, Thailand’s wealthy are in a “state of denial” about the sudden collapse in the value of their holdings, according to Kongkiat Opaswongkarn, president and chief executive of Bangkok-based Asset Plus Securities Co. He has negotiated half a dozen deals with foreign investors that are stalled because the Thai sellers aren’t willing to drop their prices far enough.

“There are a number of vulture funds from overseas looking for cheap assets, but they want a 50% reduction,” he said. “Right now, the best we can get is 30%.”