PUBLIC PAYMENT OF PRIVATE DEBT:
THE CASE THAILAND¹

Witness: Wipaphan Korkeatkachorn (THAILAND)

Basic Data

As a result of the financial crisis of 1997, Thailand's public debt increased almost four-fold within four years, from 690 billion baht in 1996 to just over 2.6 trillion baht by April 2002 which was 51.9 percent of GDP. ²

Consequently, debt servicing as a ratio of the annual budget went from 3.6% in 1997 to 8.32% in 2001.³

The Public Debt Management Office (PDMO), Ministry of Finance, reported that as of September 2001 the total amount of public debt stood at 2.93 trillion baht or US$ 65.84 billion, and that the proportion of public debt to GDP was then 57.58%⁴. Of the total, domestic debt outweighs external debt by more than 2:1. The breakdown of this official total can be found in the attached table.

Also in September 2001, the Thai government under the leadership of Thaksin Shinawatra announced that it would keep debt service costs, as a percentage of the annual budget, below 16% and the total public debt below 60% of GDP. It was then pointed out by a prominent economist, Ammar Siamwalla, of the Thailand Development Research Institute (TDRI), that if total losses incurred by the Financial Institutions Development Fund (FIDF) were included, public debt would already rise to 75% of the GDP.⁵

By January 2002, however, the Minister of Finance warned the public that the public debt ratio this year could in fact be as high as 65% of GDP due to the fact that actual GDP growth has been lower than forecast.⁶

Origin of the Debt

The bulk of domestic debt arose from the government's decision, under the guidance of the IMF, for the Financial Institutions Development Fund (FIDF) to take full responsibility for the losses incurred by the nationalization of six banks and 12 finance companies and the closing down of 56 non-viable finance companies. Government bonds of almost US$13 billion have already been issued for this purpose and also for private banks' recapitalization support.

In effect, the government has assumed a portion of the US$72 billion private sector debt, mostly short-term, that brought about the financial crisis in 1997. This process of public takeover of private debt is not yet over. As pointed out by many analysts, there are still losses from the sales of assets of the 56 closed finance companies estimated to amount to another US$29 billion, which, when realized, will eventually add to the public debt burden. So far no culprit in the mismanagement of the finance companies has been brought to justice.⁷

The Role of the IFIs

The IMF policy of raising interest rates to help stabilize the exchange rate and to entice foreign investment back into the country was a total failure as net capital outflow was even higher in 1998 than in 1997. At the same time it had a devastating impact on the domestic economy. Business firms collapsed under the sharp increase of costs, leading to massive lay-offs of workers in 1998.

After many months of negotiation with the IMF, the Thai government under the leadership of Chuan Leekpai was able to reverse the tight-money policies and started to implement measures to stimulate the economy with some positive results in 1999. The IMF stabilization measures have as a consequence been thoroughly discredited by the Thai experience.

Other IMF-led measures that remained are plans for the privatization of state enterprises and further liberalization of foreign investment including foreign ownership of land and buildings.

However the structural adjustment program loans from the World Bank and the Asian Development Bank (ADB) which were part of the IMF US$ 17.2 billion bailout package continue their course, though slowly. These include financial sector reform, public sector reform, reform of the educational system and agricultural sector reform. All are designed to increase private sector participation in the delivery of public goods and services.

Trends in Public Debt

The present government, which won the national election by a landslide in January 2001, has publicly announced that it is committed to running an annual budget deficit until the year 2006. Apart from maintaining public expenditures on health and education, the deficit spending is aimed at stimulating the economy, which has not yet recovered from the financial crisis. The current law allows deficit spending of up to 20 percent of the annual budget. Public debt in the form of government bonds can be expected to increase accordingly.

There are growing public concerns, however, over the way the government tends to rely on big spending to resolve immediate economic problems seemingly without regard to possible long-term consequences.

The One Million Baht Village Funds, for instance, are supposed to be a kind of transfer payment by the government to the disadvantaged sector of the population. Each village fund, however, is to provide loans to community members under the supervision of a village committee. One objective of the loans is to create jobs and income but a preliminary assessment of the loans reported that 80 percent of the US$158,000 disbursed so far was used by villagers to pay back old debts. It seems likely that funds will create more non-performing loans in the rural sector.

To deal with the problem of the high level of non-performing loans (NPLs) in the banking system, which are stifling economic recovery, the government has created a new state enterprise entitled the Thai Assets Management Corp (TAMC) to deal with the NPLs of commercial banks. This is aimed at helping to restructure problem loans of different types of private businesses in order to encourage banks to start lending again. So far, almost US$ 16 billion worth of NPLs has already been transferred to the TAMC. It is likely that there will be losses in the next five to eight years that eventually will also become a public burden.⁸ 

The government has also acted as guarantor for the US$ 236 million equity investment by the Civil Servants' Pension Fund in two nationalized banks. This amount has not appeared in the government's liabilities figures. This has led people to believe that there is an attempt to downplay the full extent of public burden in bailing out the private sector.

Moreover, there are questionable new projects involving foreign loans, such as the loan from the World Bank and Japanese Bank for International Cooperation for constructing eco-tourism facilities involving logging in 19 national parks. Others are energy projects involving major state enterprises like the coal-fired power plants supported by the Electricity Generating Authority of Thailand (EGAT) and the Thai-Malaysian Gas Pipeline of the Petroleum Authority of Thailand (PTT).

At a time when public sentiments are leaning toward prudent fiscal measures, the government doesn't seem to follow suit.

Proposed Solutions

There have been a number of proposals put forward by civic and academic groups and political parties. All of them advocated a debt moratorium; one group, the Democracy for the People Group, is the only one that indicated a moratorium time frame of 10 years. Their argument is that a debt moratorium is a necessary part of the solutions to the national crisis. None of the proposals, however, ever questioned the origin and the legitimacy of the main bulk of the current public debt.

The government, on the other hand, has rejected this public demand for a debt moratorium from the beginning. The reason given  is that it will encourage capital outflows while discouraging new foreign investment inflows, which the government deems the most essential factor for national economic salvation.

A People's Agenda Forum organized by the NGO Coordinating Committee on Development in December 2001, attended by about 1,000 people from academia as well as NGOs and grassroots organizations, deliberated on this issue and came out with the following statement:

"The basic principles underlying the people's proposal for the solutions to the current problem of public debt and for the prevention of the country from falling into a perpetual debt trap are as follows. The existing state of indebtedness must be rejected because of the fact that the debt was incurred by the creditors and the government in collusion with public officials and private businessmen who sought personal gains from the loans. Such is an illegitimate act in itself. Moreover, the debt has been paid back many times over by the decline in the natural resource base and social disparity suffered by ordinary people. Those who benefited from it should be the ones who pay back the debt including all the damages it has caused to the people and natural resources.

The construction of just and equitable economic, social and political structures will result in resources being fairly distributed for social and quality of life development without getting into debt. There is an urgent need to reorient national development towards equity, self-reliance, social sustainability and people's empowerment.."

¹  By Wipaphan Korkeatkachorn from the Thai Action on Globalization which monitors impacts of globalization on grassroots people and Chanida Chanyapate an associate staff of Focus on the Global South working on micro and macro linkage program - January 26, 2002

²  The IMF's Asian Legacy, Jacques-Chai Chomthongdi, in Prague 2000 - Why We Need to Decommission the IMF and the World Bank, page 16

³  People's Agenda on Public Debt, People's Agenda for Freedom Working Group, page 78

⁴ The PDMO's website (www.pdmo.mof.go.th) referred to NESDB's data.

⁵  Bangkok Post, September 28, 2001

⁶  Matichon Daily, January 8, 2002, page 20

⁷  Summarized from the IMF's Asian Legacy, from page 14 - 17.

⁸  Krungthep Thurakit Daily, January 14, 2002, page 1 and 3