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Slow-motion Reform
Why Bangkok's delay in selling part of Thai Airways is bad news

Travelers are accustomed to waiting for airlines. But when Thailand's national carrier announced a delay earlier this month, it signaled something a great deal more significant than stormy weather or a baggage-handling glitch. Indeed, the recent news that the partial privatization of nearly one-quarter of Thai Airways by the government had been delayed at least several months was taken by many as evidence that the nation's economic recovery is dangerously stalled. "There is no political will to reform," says Rob Collins, an analyst at Univenture, a chemical company in Bangkok. "Privatization is something that every government [is capable of doing]. Yet, despite a promise to the International Monetary Fund, what has happened? Nothing."

Thai Airways, according to its president, Thamnoon Wanglee, simply cannot afford to privatize until the Bangkok stock market rebounds. The exchange's benchmark SET index has fallen 36% since Jan. 1. A small portion of Thai Airways is publicly traded, and its stock price has closely tracked the SET index's descent. Analysts say much of the proceeds from the airline privatization is targeted toward retiring heavy corporate debt. The government owns 93% of its flag carrier. It plans to sell 23% of the company: 8% to the public, 5% to employees and 10% to a yet-to-be-selected strategic partner. "We have to wait until the stock price is better prior to arranging an international roadshow," says Thamnoon, who is scheduled to retire at the end of September.

Bangkok had loudly trumpeted the sale early this year as a sign that the government was serious about reforming the entire economy, starting with a high-profile divestment. The privatization also, as Collins noted, was meant to fulfill a pledge made by Bangkok to the IMF, which had lent the nation more than $14 billion after the baht crashed in the middle of 1997. The delay thus is seen by many as a step backwards -- not just for the airline but the entire economy. It is a chicken-egg situation: The airline doesn't want to privatize while the market is depressed. But the market is lackluster, at least in part, because investors aren't convinced government and business are committed to reform.

The lack of investor confidence both feeds and is fed by substantive economic problems. Says the economic adviser to an opposition politician: "Only Indonesia, among the Crisis countries, is performing more poorly than Thailand." The currency recently dropped to a 10-month low against the dollar -- 41 baht. As the stock market has faded and economic reforms stalled, overseas investors have fled. In the first six months of this year, foreigners withdrew more than $650 million from the market. And after rising much of 1999, private consumption has dropped steadily this year, according to the Bank of Thailand. "Don't put money in Thailand -- that's the message," says one foreign financial executive caught in the exodus.

On the ground, the economic backsliding has caught even strong players unaware. Kentucky Fried Chicken says it has 47% of Thailand's $244-million fast-food industry. But 2000 has not been kind. In the first half of the year, the company says it was "caught by surprise" when sales growth went flat. It had expected a 15% increase.

The overall problem seems to be less about what Thailand is doing wrong and more about what it is failing to do right. "The government has done very little in terms of proactive reform," says Collins. "They are tied up with the election process." A general election is widely expected later this year, perhaps as soon as October.

What amounts, then, to an economic strategy of benign neglect seems especially harmful to the nation's banks, which are in danger of falling into trouble again just when it seemed they were on the mend. According to official government figures, Thai banks have experienced a significant improvement in non-performing loans this year, from 45% of all loans at the start of 2000 to 35%. But one foreign analyst who asks not to be identified calls the reduction "a myth." He says the likelihood -- and widespread fear -- is that debt restructuring as currently practiced is mostly a matter of sweeping dirt under the carpet. Over half of bad debts that have been restructured since the Crisis hit, often through difficult negotiations between lending banks and borrowing companies, have fallen back into the NPL category. As an Indosuez W.I. Carr Securities analysis puts the Thai economy's performance so far this year: "Half-time report: Dismal."

"The government should urgently revive the credit system to help productive businesses stay afloat," suggests Somkiat Osothsapha, an economist at Chulalongkorn University. But for all the criticism it receives, the government of Prime Minister Chuan Leekpai is hamstrung. As in many of the worst-hit Crisis countries in Asia, the Thai government spent a lot of money it didn't have bailing out businesses and recapitalizing banks. "The national debt has gone from zero percent to 60% of GDP, and it will continue to rise as the government bails out the banking system," says Collins.

Not only are banks reluctant to lend, but small and medium-sized enterprises are now suffering from the collapse of the trade-credit system where retailers in effect borrowed inventory from wholesalers. Unless banks start opening their vaults to cash-starved companies, the economy will remain stagnant, analysts warn. Corporate debt restructuring may be underway, but it is painfully slow. Since 1997, the corporate sector has managed to shave only a paltry $13 billion from its $153 billion debt.

A lack of funding is not the only problem. Many of the individuals most responsible in Thailand for ruinous corporate borrowing in the first place are still employed by the very banks and companies that are now supposed to reform. They have not had to answer for their mistakes. Mismanagement, which has been a pox on Thai companies before, during and after the Crisis, continues to plague them. "[The government] really needs to keep the pressure on [to reform]," says Peter Brimble of the Brooker Group, a management consultancy in Bangkok. "If it does not, the country will be in for a real double-dip in five years or so."

The recent performance of Thai Airways has been strong -- profits of $129 million on revenue of $2.7 billion last year. Thamnoon says the privatization is not really that urgent for the airline's sake: "Thai Airways has no financial problem." But some of the airline's management may simply be reluctant to privatize. Most state enterprises view the impending privatization as an assault on their cozy alliances," says one former airline industry executive.

For now, the privatization of Thai Airways is planned for November. But company officials say that even if stakes are sold to the public and employees as scheduled, the process of finding a strategic partner could last well into 2001. The scaremongers surveying Asia's current recovery warn that complacency is the greatest danger and that a cyclical recovery doesn't make structural economic reforms any less necessary or important in Asia. Perhaps they had Thailand in mind.

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