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p. 6 of 17 BACK | NEXT Executive Summary Map I. Recent Economic Developments A. Growth, Employment, Saving, and Investment B. Fiscal Developments C. Monetary Development and Prices D. External Trade and Balance of Payments II. Short and Medium-Term Economic Prospects and Policy Issues III. Selected Policy Issues

Country Economic Review: Thailand : I. Recent Economic Developments

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C. Monetary Developments and Prices

1. Monetary Policy

18. In May 2000, the Bank of Thailand (BoT), the central bank, introduced an inflation targeting framework to guide monetary policy.⁸ Inflation targeting helps ensure the coherence of monetary policy by providing a nominal anchor. Adherence to inflation targeting precludes using monetary policy as a counter-cyclical demand management tool. It also suggests that there is less need to be concerned about protective levels of international reserves, since inflation targeting also implies abandonment of explicit exchange rate targets.⁹ The Monetary Policy Board (MPB) of the BoT is responsible for formulating and conducting monetary policy to attain price stability that is conducive to sustainable economic growth. MPB uses core inflation (calculated as the consumer price index excluding raw food and energy items) as its policy target with a range of 0–3.5 percent (quarterly average) for 2000-2002. The 14-day repurchase rate is used as MPB’s key policy variable to signal shifts in the monetary policy stance.¹⁰

2. Inflation

19. Inflation in 2000 was subdued, mainly due to weak domestic demand. The consumer price index increased by 1.6 percent in 2000, following historically low inflation of 0.3 percent in 1999 (Table 7). The core consumer price index grew by only 0.7 percent in 2000, down from 1.8 percent in 1999 and well within MPB’s inflation target range. Major factors contributing to mild acceleration of inflation included higher fuel costs caused by rising world oil prices and depreciation of the baht.

3. Monetary Developments

20. In 2000, overall liquidity conditions were supportive of economic recovery. The 14-day repurchase rate averaged 1.5 percent in 2000. Commercial interest rates, including minimum loan rate and time deposit rates, remained at a two-year low (Table 8). The overnight interbank lending rate averaged 1.7 percent in 2000. The prime (minimum lending) rate declined from 8.25–8.50 percent in December 1999 to 7.50–8.25 percent in December 2000. Similarly, the deposit rate (3–6 month fixed deposit) declined from 3.75 percent in December 1999 to 3.0 percent in December 2000. Low interest rates helped bank recapitalization by permitting wide lending margins, facilitated corporate sector debt restructuring and repayments, and encouraged the refinancing of foreign exchange obligations in domestic currency.

21. Despite low nominal interest rates, the growth of the money stock remained modest. The average annual growth rate of the money supply (M2) in 2000 increased modestly to 3.7 percent, compared with 2.1 percent in 1999 (Table 9). On the liability side, demand deposits grew significantly at 15.8 percent year-on-year, indicating improved confidence in the banking system.

22. From the asset side, net domestic credit declined by 7.4 percent in 2000. Credit to the private sector dropped by 8.4 percent. This was the third year of domestic credit contraction, reflecting weak domestic demand. On the supply side too, commercial banks were unwilling to lend to all but the most credit-worthy borrowers. In a context of high level of nonperforming loans (NPLs) and slow progress on corporate restructuring, banks preferred to place their funds in safe assets such as Treasury bills and bonds offering competitive yields and low risks. On the demand side, credit demand from the corporate sector remained sluggish as many businesses were still restructuring their debt with financial institutions.

4. Capital Market

23. In 2000, Thailand’s equity market transactions were subdued. Turnover at the Stock Exchange of Thailand was very low. Daily trade volume fell from B6.57 billion in 1999 to B3.74 billion in 2000. Since July 1997, only three companies have listed and about 50 companies have been suspended or delisted.¹¹ The corporate sector has not only lost share value but is experiencing increasing difficulty in mobilizing resources for working capital and investment purposes. The reasons underlying this trend reflect weak investor confidence and corporate balance sheets. As domestic banks account for about 25 percent of the composite of the Stock Exchange of Thailand Index, equity prices have been held in check by the slow pace of the banking sector’s return to profitability.

24. In contrast to the equity market, the bond market became an important source of government (including state enterprises) and corporate financing in 2000. The secondary bond market has been very active since 1998 as it offers competitive yields with low risks. The most active bonds were the "Loan Bond" series issued by the Ministry of Finance (MOF).¹² These make up about 46 percent of the total market value and 76 percent of trading volume. These bonds are regarded as "benchmark", and their yields are used to draw the yield curve. The government-guaranteed state enterprise bonds are less liquid and their yields are usually higher than the benchmark bonds. At end-December 2000, the government- and government-guaranteed state enterprise bonds accounted for about B1,000 billion, or 73 percent of the total bonds listed at the Thai Bond Dealing Center. Nonguaranteed state enterprise bonds accounted for B62 billion, or 5 percent. Corporate bonds accounted for B210 billion, or 17 percent of total bonds.¹³ After large issuance in early 2000 by Thai corporations, a credit rating requirement was introduced in April 2000. ¹⁴

5. Financial Sector Developments

25. Credit expansion is constrained because the financial sector is still plagued by a large share of NPLs, defined as loans for which payment is at least three months overdue. This could hamper economic growth. The Government has encouraged banks to set up their own asset management companies to speed up debt restructuring.¹⁵ Some progress has been made in reducing the proportion of NPLs, which declined from a peak of 47.7 percent of total outstanding loans in 1999 to about 18 percent at B858 billion (about $20 billion) in December 2000. However, the resolution of the NPL problem is incomplete and remains a significant challenge to the Government.

26. First, the sharp decline in NPLs was partly the result of debt restructuring, but in large measure due to the transfer of NPLs to AMCs. The NPL ratio as of end-2000 had declined significantly to 18 percent. Without the effective NPL transfer to AMCs, the ratio may have been higher at around 30 percent (Figure 4 and Appendix Table A8). Moreover, as of December 2000, state-owned commercial banks and finance companies had higher NPLs than private commercial banks, averaging around 22 and 25 percent, respectively.

27. Second, as economic growth slows, some restructured loans may resurface as reentry NPLs. In voluntary resolution processes, many commercial banks were reluctant to accept the losses associated with writing off bad loans and tended to simply reschedule payments, in the hope that debt circumstances will improve. In 2000, reentry NPLs amounted to about B200 billion, reflecting the inability of companies to meet the new repayment schedules on loans restructured in 1999 and early 2000. Furthermore, despite the overall improvement of the economy, new NPLs have continued to occur, especially in the real estate and construction sectors.

28. To promote efficient management of NPLs and enhance corporate restructuring, the Government established the centralized Thai Asset Management Corporation (TAMC) in June 2001. Debt restructuring is expected to be accelerated and NPLs to be further reduced by the effective operation of the TAMC. Corporate debt restructuring is discussed in paras. 64–78.

29. Considerable progress was made in 2000 in meeting capital adequacy ratios and provisioning standards. Since 1998, domestic commercial banks have raised a total of B902 billion to strengthen their capital and meet provisioning requirements, while private banks have raised some B440 billion. The Government has injected about B454 billion in new capital into state banks.¹⁶ Large bank spreads (lending rate over deposit rate) also helped to support bank profits and capital reserves. Thailand’s banks have also met tightened prudential requirements set by the Government. Under the guidance set by the BoT, banks were supposed to have provisioned for at least 60 percent of doubtful loans by the end of 1999 and provisioned completely by end of 2000. According to the International Monetary Fund, all banks met these requirements.¹⁷ The average risk-weighted assets ratio for Thai commercial banks was 11.6 percent in 2000, higher than the 8.5 percent required by the BoT (Table 10). The increased capital strength of Thailand’s banking system would help to safeguard against the relatively high level of nonperforming assets and promote corporate debt restructuring. However if new or reentry NPLs continue to increase as economic growth slows, the banks’ capital would again be eroded.

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