Thailand: Emerging Asian Tiger Meows

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By Steven Barmazel
Special to The Street

BANGKOK -- The stock market in Thailand, an emerging Asian tiger, is behaving like a sick kitten. Since mid-1995 the benchmark

Stock Exchange of Thailand

(SET) index has lost half its value, the worst performance among major Asian indices. A full recovery is expected, but not before a period of shakiness -- and shakeouts.

Much of the SET's woes flow from a collapse of Thailand's export growth and a glut in developed real estate -- conditions created in part by the central bank's policy of binding the baht tightly to the dollar. Stable currency combined with interest rates far above U.S. dollar rates brought mixed blessings. Huge capital inflows promoted growth by financing a high rate of investment, about 40% of GDP.

But the flood of foreign money also fueled a bubble in asset prices and an excess of real estate development. Several finance companies, overextended with real estate loans, are in trouble. The property sector has suffered a cyclical slump, but not a crash, according to John Seel, a

Bear Stearns

economist based in Hong Kong.

"More problems will surface by June," predicts Lisa Wei, a manager for Bear Stearns' Thai operations. Payments to finance companies slowed last year, but the companies are allowed 12 months to report nonperforming loans, she explains.

The baht rose along with the dollar over the past two years, crimping exports and helping to increase the trade deficit to 8% of GDP, the region's largest. The current account deficit last year reached an estimated $14 billion.

A currency devaluation would ease such problems, but the cure would be worse than the ailment. Foreign investment has been the mother's milk of Thailand's economic expansion. "Thailand's economy has grown very fast, but it's fragile," observes Tweesak Viraprasert, a manager at

National Finance and Securities

. "At the sign of any trouble, foreign money will pull out. The

ensuing liquidity crunch could cause a collapse."

Trouble could include a downgraded credit rating for Thailand's sovereign debt or a cheapened baht, indications that Thailand would have more difficulty repaying its debt. Both are threatened.

Moody's Investors Service

announced in February that it was reviewing Thailand's long-term debt rating of A2 for a possible downgrade. So far the Bank of Thailand has resisted a currency devaluation. But George Soros, who orchestrated a notorious attack on sterling in 1992, is said to be betting against the baht.

In March the government announced several steps aimed at restoring confidence in the economy, and especially the battered financial sector. Budget cuts of $4.16 billion will reduce the current account deficit, and so ease pressure on the baht. And a new agency will sell $3.9 billion worth of government-backed bonds to help bail out cash-strapped finance companies. Even with this infusion, several finance companies will likely be forced out of business. The government started the consolidation by ordering one of the largest finance companies,

Finance One

, to merge with an allied bank.

Some of Thailand's problems flow from its own success. A rising standard of living, not just a rising baht, eroded its traditional advantage as a low-cost producer. Labor is cheaper in China and Vietnam, where per-capita GDP is "barely a tenth" of Thailand's, Seel says. In response, Thai manufacturers are turning to more capital-intensive goods, Viraprasert says. "Electronics is growing, and auto parts is just starting; we need to export more of these sorts of products."

Many regional observers predict that the Thai stock exchange's time on the critical list will be short. To some extent, Thailand has been the victim of international business trends. Demand for consumer and electronic goods, for example, was down worldwide, according to Seel. As demand for these items recovers, so will Thai exports, he says. And though GDP growth last year trailed the recent average by about 2%, it was still a respectable 6.8%.

"I don't think Thailand has lost its overall competitiveness," Seel says. "It's lost competitiveness in a couple of sectors, like garments." As Thailand's Indochinese neighbors stabilize, it will become more attractive to set up factories throughout the region.

Thailand's challenge is similar to Hong Kong's a decade ago, when labor-intensive manufacturing shifted to China, he says. "Though direct exports from there fell, overall trade did not suffer -- and the economy has been driven by the increased efficiency." Similarly, Seel noted, Thailand is positioning itself to be a gateway to Indochina.

Steven Barmazel is a former correspondent for

Asia Week

magazine and is now a freelance business writer based in Santa Rosa, Calif. He recently visited Thailand.