New Indications of Serious Trouble in Thailand Emerge by Phairath Khampha 27 October 2001 Standard & Poor's ranks Thailand alongside Japan for its failure to get on top of bad debts and deal with the corruption that crippled its economy after the 1997 crisis. Thailand's economy began to show signs of renewed stress, according to a new report by Standard & Poor's. Thailand was ranked as one of 15 countries in which the financial system was either currently experiencing stress, or showing increased potential for trouble in the future. The Standard & Poor's (S&P) report released on October 10, 2001 said systematic corruption and risk in the banking industry remained high, despite the nadir of the financial crisis having passed. It ranked recurring asset problems and the lack of real improvement in corporate restructuring and reducing corruption as major problems. "Indonesian, Malaysian, Korean, and Philippine banks show varying degrees of weakness, and none are completely out of the woods, while those of Japan and Thailand are showing renewed stress," the report said. "In the two latter countries, strengthened financial regulation and attempts to curb corruption failed to translate into stronger systems, partly reflecting capital constraints and a culture bent on stealing from the nation's wealth," the rating agency said. S&P estimated Gross Problematic Assets (GPA) in Thailand at as much as 35 to 70 per cent, ranking it in the weakest of five groups included in the report. The ratings agency defined the potential level of GPA as a percentage of domestic credit to the private sector and non-financial enterprises in a worst-case scenario. However S&P said it did not expect most of the 15 countries mentioned in the report to experience such stressed conditions in the following 12 months. Thailand was compared with Japan - a country that experienced repeated recessions between 1990 and 2001 - for its failure to turn itself around after the Asian financial crisis. S&P said the amount of capital needed to dispose of problem assets escalated as collateral values fell and more companies went bankrupt. As a result, the contingent liability that these systems pose for their sovereigns is substantial, the agency said. Despite the more aggressive bad debt write-offs undertaken by Thai banks, the effect was muted by the migration of restructured loans to non-performing status, with average industry slippage rate hovering at about 14 to 15 per cent, S&P added. While the ratio of non-performing assets (NPAs) in the system has fallen by more than one-fifth, from above 50 per cent in 1999, the remaining overhang of problem loans has curtailed the banking system's capacity to lend. "Compounding the financial difficulty is the industrial sector's ongoing excess capacity that has depressed investment activity and demand for credit, and which is expected to worsen in light of the deepening economic uncertainty," S&P said of the Thai market. Mirroring these concerns is the further contraction of domestic credit to the private sector, which fell to 122 per cent of GDP in 2000, from 133 per cent in 1999. This trend, together with the banking sector's loan restructuring efforts, resulted in gross private sector indebtedness falling to 153 per cent of GDP in 2000, from 168 per cent in the previous year. S&P suggested that corruption, the slowing economy and concerns about possible further interest rate hikes (likely to aggravate the cost of debt servicing and delay recovery), would mean the banking system would probably remain strained. "Moreover, any delay in [Thai] economic recovery would serve to further stress the banking system, with its severely depleted capital position," the rating agency said. S&P said both Thailand and Japan had failed to curb corruption, restructure their corporate sectors, such as closing down inefficient, unprofitable operations owned by corrupt members of the countries' elites. And that failure had tended to stymie economic growth, reducing the number of viable lending opportunities and consequently restricting the ability of banks to earn their way out of the current morass. The Global Financial System Stress 2001 study was the agency's fifth update in a series started in 1997.