Yuanta Research Center

Nov 31, 2000

The choice became a little clearer after Thai Rak Thai Leader Taksin Shinawatra and Prime Minister and Democrat Leader Chuan Leekpai presented quite different solutions to Thailand’s economic/financial problems to a crowd of investors and brokers at the stock exchange yesterday. The Democrats are advocating fine-tuning their existing policies, while the Thai Rak Thai party is proposing radically new spending programs.

Thai Rak Thai party’s policies:

1. Increase the capitalization of the Thai stock market (currently at Bt1,335bn) to the same level as GDP (about Bt5,000bn) by listing large state enterprises.
2. Provide more assistance and incentives to businesses. The economy won’t improve until the real sector begins to pick up.
3. Run the government like a business. The country CEO should understand the major economic problems, push through remedies and be responsible for performance.
4. Focus government policy on the three key income-generating components – people, business and government – in order to achieve long-term economic growth and revenue.

• People: Over the last three years, the Thai people have suffered through many hardships with some not having enough money to cover living expenses. The government needs to find a way to put money back in people’s pockets. The emphasis should be on agriculture, which employs 45% of the labor force. Taksin sees the money injected in the agricultural sector as a social investment rather than just a short-term expenditure. His policy is to set up a three-year debt moratorium on farmers’ debt. He aims to invest Bt1mn in each village so that the villagers can use this money to improve the local economy. There are approximately 77,000 villages in Thailand, which means the program will cost at least Bt77,000mn. In addition, Taksin is encouraging villagers to produce the best product that they are capable of producing. He also intends to expand Internet connections to the rural areas to improve communication and information flows.

• Businesses:

• Support SMEs in order to create value-added agricultural products.
• Link all SMEs together via the Intranet.
• Solve the NPL problem by setting up a National Asset Management Company (NAMC). The NAMC will purchase bad debt from the private banks. Taksin aims to classify the bad debts by sectors so that an expert in a particular field can come in and deal with the problem more efficiently.

• Government: As the country cannot afford any more debt, Taksin is proposing a new ‘outside-in’ strategy. As part of this strategy, the government will need to carefully study problems and then come up with an appropriate policy. For example, state enterprises will need to work more efficiently and effectively. He also aims to privatize some of the larger state enterprises. Stock options will be offered to state enterprise workers after listing on the stock exchange. He believes that this strategy will increase the market’s total capitalization by approximately Bt3,000bn.

Democrat party’s policies:

At the presentation, the Democrats first reminded investors of the country’s severe economic problems before it formed the government at the end of 1997: 1) completely depleted foreign reserves, 2) high rate of inflation, 3) high interest rates, 4) low liquidity in the money market, 5) financial and banking crisis as depositors lost confidence and borrowers refused to repay debts, 6) high rate of unemployment, low income and low agricultural prices, 7) consumers’ lack of confidence. Due to these factors, GDP turned negative in 1997-1998.

The Democrats claim that they were able to successfully stabilize the economy from the very weakened position. However, there were many problems which came up during the life of the government which added to the already serious situation. The government’s main policy has been to build confidence in the financial system and to stimulate investments.

The main policies of the Democrats are outlined as follows:

1. Under fiscal policy, Chuan is proposing to reduce the personal income tax from 30% to 25% in order to increase purchasing power. To offset the lost tax revenue, Chuan proposes an increase in the excise tax. Democrats aim to run a budget deficit to boost economic activity. However, if the private sector starts to pick up, the government will go back to balancing the budget.
2. Under the monetary policy, Chuan still intends to keep interest rates low in order to stimulate economic activity. Chuan disagrees with the setting up of an NAMC, as Taksin proposes, due to difficulties in arranging and managing such an organization (examples being Malaysia and South Korea).
3. Under the state enterprise sector, Chuan aims to speed the process of privatization and then listed the state enterprises on the stock market.
4. Investment policy through BOI.
5. Emphasis on free trade. If Thailand opens its markets to imports, the country will have a much stronger negotiating power to open up new markets for Thai exports.
6. For the stock market, regulations need to be changed in order to make the market more attractive and simultaneously create alternative investments for investors.

Comment: Chances are that Taksin’s Thai Rak Thai party will win the most votes in the upcoming election on January 6 and will, therefore, get the first chance to form a coalition government. As a result, we think it’s important for investors to look closely at Taksin’s policies and the potential impact on the stock market and listed companies. By contrast, Chuan’s policies are largely a known quantity for the market.

We must say that we like some of Taksin’s proposals, especially his view that the prime minister should act like a corporate CEO and his call for improving the state sector’s efficiency. However, some of his other policies don’t appear to be either realistic or practical. He hasn’t given any details as to how these policies will be implemented or paid-for. We assume that the foreign investment community will be aghast at the thought of two of his primary proposals – the setting up of a NAMC and a three-year moratorium on farmers’ debt. We don’t expect any rash actions, however. Taksin may not be a career politician like Chuan, but he is still a politician. And, we are not so gullible as to take all of a politician’s campaign promises at face value.

The problem with the NAMC, as we have mentioned before, is the pricing of the bad debt. We believe it would take at least one year for negotiations to be completed on the pricing terms. During this time, debt restructuring would come to a standstill and asset quality would further deteriorate. We also have much more faith in the private sector solving the problem than the government sector, especially if the politicians have a hand in it. One only has to look at the bad debt levels of the nationalized banks versus the private banks. Furthermore, there is the general perception of debtors that the government would be much easier to negotiate with than the private banks. After all, it’s just taxpayers’ money.

The other controversial part of Thai Rak Thai’s policy is its promise of a three-year debt moratorium and the Bt77bn in subsidy funds given to every village in Thailand. The logic here is simple: the government bailed out the financial sector and now is the turn for the poor to get some relief. In essence, it’s just another form of vote-buying. We would much rather see the government concentrate on exports, as the Democrats propose, which would help lift the currently depressed agricultural commodity prices. Also, previous experience tells us that when farmers get out of debt, they immediately get back in by buying pick-up trucks and motorcycles.

We are much more intrigued by Taksin’s idea of expanding Internet connections to villages throughout Thailand. We only hope that it doesn’t go the same way as the failed plan five years ago to install computers in every school without budgeting for training, equipment repairs or software upgrades. Having a telecom tycoon prime minister may be just what Thailand needs, but it will certainly raise questions about side benefits to his numerous telecom companies. If we were to pick the possible beneficiaries of this policy, it would be SATTEL, JASMIN and TT&T.

We are, at least, a little comforted by Taksin’s admission that the government can’t take on much additional debt. However, if he can implement his programs and not increase the nation’s debt, we would really like to see. 

Analyst : Surachai P. (surachai.p@yuanta.co.th)