Thai Economy Shows Signs of Rebounding

The panic is gone -- those days when investors were frantically yanking their money out of Thailand and dumping its currency so quickly that the country's financial system appeared to be careening out of control.

"Everyone was so panicked last winter. It seemed like the whole banking system could collapse. Nobody knew how bad things would get," said Surasith Tiyavacharapong, president of a major Thai textile company, the Sampran group, and chairman of the Textile Federation of Thailand. "Now the picture is clearer. People don't think the banking system will go. My confidence is beginning to return."

Sixteen tumultuous months after Thailand devalued its currency, igniting the Asian economic crisis that eventually swept through global markets, many of Thailand's vital signs are beginning to show improvement. The currency has strengthened. Interest rates have fallen. Some Thai exports are flourishing. Tourism is booming. Some Thais, such as Surasith, are opening new factories.

More stunning are the hordes of foreign investors flowing back into Thailand, boosting room rates at top Bangkok hotels despite the recession. Foreign investors have gone on a $6.7 billion shopping spree this year, snapping up bargain-basement steel mills, securities companies, supermarket chains and other assets.

The Thai economy is expected to shrink by more than 7 percent this year. But Tim Condon, Asian strategist for Morgan Stanley Dean Witter, predicts that the contraction will halt during the winter. "I think Thailand will hit bottom sometime during the first three months of 1999 and then kind of grind along the bottom for most of next year," he said.

A marked slowdown in the United States, Thailand's biggest export market, could send the economy tumbling again. But while Thai companies and jobs continue to disappear, new ones are beginning to surface, helped by the foreign capital boom, a few robust export sectors and the surge in tourism.

"Maybe this is an indication of where all of Asia is going," said Daniel Fineman, Asian strategist with Jardine Fleming Securities Ltd., a leading Asia financial services group. "That's what makes Thailand so interesting right now."

In years past, the world largely ignored the economic ups and downs of Thailand, a steamy, sun-drenched country of gilded Buddhist temples, rice paddies, rubber plantations and tranquil beaches. This Southeast Asian country, once known as Siam, has long been a major player in such industries as rice, rubber, shrimp and textiles, but it has been barely a blip in the more high-profile industries that seemed to move world markets -- finance, technology, automobiles and heavy industries.

But Thailand's decision on July 2, 1997, to devalue its currency, the baht, triggered an unexpectedly virulent global financial crisis that revealed for world leaders the destructive side of free-flowing capital markets.

The devaluation sent global speculators and other investors rushing to pull their money first out of Asian stock and currency markets, then out of Russia and other emerging markets in Eastern Europe and Latin America. The subsequent economic dislocation has resulted in rising hunger, joblessness and bankruptcies in Asia; swept government leaders from office in Japan, Indonesia and Russia; and seriously destabilized U.S. credit markets, which have not entirely recovered.

Now the next chapter of this crisis has begun in Thailand, as confidence appears to be returning. Thailand is the only Asian country, outside of Japan, where foreign direct investment is booming, and thus "there is an excitement about what is happening in Thailand," Fineman said.

One reason is that the Thai government has become increasingly sure-footed, mapping out ambitious reform plans and staying largely on course despite strong, entrenched opposition, said an American acquisition expert who is examining possible deals in Bangkok.

Another reason is that "Thai companies have been in distress longer, so maybe they are further along the road in getting beyond the denial stage," said Fineman. "They are at the stage where they are thinking it's better to sell assets now than in six months, when they will be worth less." In many other countries, distressed companies still are holding out for better deals.

Surasith sits in a modest office in one of Sampran's seven factories, which produce textiles and bicycles for export. A window behind him looks out onto the textile factory floor, where rows of computer-controlled weaving machines are thwacking away, 24 hours a day, seven days a week to keep up with orders.

When the financial crisis developed in Southeast Asia last year, economists said exports would be the region's first line of defense, helped by the weaker currencies that would make the exports cheaper to foreign consumers.

Export volumes have surged, but not without problems. First, many companies find their products stacked high in Thai shipping warehouses instead of on their way overseas. The reason: A weak domestic economy means fewer imports. That means fewer shipping containers.

"People are fighting for container space," sighed Sutham Chitranukroh, executive director of United Thai Shipping Corp. and chairman of the Bangkok Shipowners and Agents Association. Exporters who don't want to wait weeks are forced to pay extra to have an empty container shipped to Thailand.

Another problem is that the revival strategy of every ailing nation around the world seems to depend on increased exports, which has driven down prices and profits. For instance, Thailand is the world's top rice exporter, and shipments may hit record levels this year, but dollar prices per ton have fallen because of fierce competition from Vietnam and other countries. Thai synthetic-textile companies are facing unprecedented challenges from Eastern Europe and Russia.

Surasith said his company has avoided these kinds of price wars by focusing on higher-quality textiles. Such fabrics require huge investments in expensive equipment and the development of more sophisticated processes, thus reducing competition from low-cost producers. He plans to make a similar shift to higher-quality alloy bikes, which are in demand by his European bicycle company customers.

Waving his hand toward an abandoned plastic-flower factory across the street, Surasith said he plans to open a new bicycle factory there in February. He recently paid $695,000 for the property and expects to hire 250 employees. But he can't get bankers to lend him money for the new equipment.

"Right now bankers are blurry-eyed. They can't separate between good credit risks and bad credit risks," Surasith said. He said he will get the loans from a government-backed financial development bank.

The reluctance of Thai banks to make loans is a predicament found throughout Asia these days. During the boom years of the early to mid-1990s, Asian banks lent money aggressively, sometimes recklessly. When the recession hit, many of those loans went bad. In Thailand, more than one-third of the loans may not be repaid. Short of capital, banks are holding on tight to the money they have, making it hard for even healthy companies to expand.

Take, for instance, Thai Union Frozen Products, Thailand's largest exporter of tuna and shrimp. Its business boomed this year, growing by more than 10 percent in dollar terms. Rising sales, especially to U.S. customers, prompted the company to hire 1,000 additional workers and expand a facility. Thai Union asked its bankers to extend more loans to fund the expansion, but the bankers were wary.

Frustrated, the company instead raised money by selling stock privately to foreign investors in April, said Thiraphong Chansiri, Thai Union's president. "Then banks were willing to give us more," Thiraphong said, shaking his head.

The Thai government has tried to eliminate the weakest part of the banking sector. It closed more than two-thirds of Thailand's finance companies and nationalized several ailing banks. Surviving banks benefited as depositors fled to stronger institutions. The government has also earmarked $8 billion for bank restructuring.

Banks so far have balked at taking the public funds because of the stringent requirements for restructuring and fears by majority shareholder families that they might lose control. Analysts said there are ways for banks to escape the most stringent rules, and they expect many banks to apply eventually for the money. But if they don't it could derail the recovery efforts.

Meanwhile, the government has mapped out debt-restructuring and foreclosure plans. The legislature is to consider new foreclosure laws next month that are expected to speed up the restructuring process. One American businessman said investors also were reassured by steps the government had taken to open up industries to foreign investors and by Thailand's ability to avoid the riots of Indonesia, the political unrest of Malaysia and the labor protests of South Korea.

The decision of the Thai government and Thai banks not to prop up Thai companies also has accelerated the restructuring process and helped foreigners close deals. For example, Charoen Pokphand, one of Thailand's largest business groups, sold its Lotus discount store chain to Britain's Tesco PLC and its share of a motorcycle plant and brewery in Shanghai to pay off creditors and protect its core agribusiness.

The newspapers these days carry a mixture of bad news and encouraging reports.

A few pages behind stories about layoffs and bankruptcies are large help-wanted ads run by multinational companies. General Electric Capital Corp., which increased its stake in Thailand this year through three major investments in financing and credit card companies, is seeking hundreds of experts in finance and accounting, according to one ad. Another said that Bank of Asia, acquired this year by the Dutch bank ABN Amro, is hiring in many job categories, including credit analysts and risk managers.

General Motors Corp. is recruiting aggressively for its massive new Thai car assembly plant, scheduled to open in two years. Last month, BMW AG said it planned to build a manufacturing plant in Thailand. The facility, which eventually would employ 500 people, is intended to serve as BMW's Asian hub, to produce vehicles for export to the rest of the region.

Meanwhile, American and European companies that make rubber gloves cited Thailand's political stability as the reason they are moving from Indonesia to consolidate operations here. More than 20 new rubber glove factories are slated to open in Thailand, which will create thousands of jobs in rural areas and make Thailand the world's largest manufacturer and exporter of rubber gloves.

"Thailand has in place the prerequisites for a recovery, including the revival of capital inflows, fairly low interest rates and a firm currency," said Fineman. "Now they have to get the banks back on their feet. Thailand is further along than other countries. But of course, it had a lot further to travel than most."