Thailand: The Long Road Towards Recovery * After recording 1.9% GDP growth during 1H2001, the Thai economy is heading
into a recession despite 1.9%-point of GDP of government stimulus measures
slated for FY2001 and FY2002 in each fiscal year.

* The growth slowdown will lead to a further deepening of Thailand's
negative output gap. As domestic and corporate debt levels have not been
whittled down to any great extent since the Asian crisis, risks remain for
the economy to suffer from a deflationary debt overhang. Rising debt levels,
thereby, provide less leeway for the government to provide further stimulus
in the years ahead.

* Inadequate NPL restructuring and falling capacity utilisation rates also
point to a poor reallocation of production capacity since the Asian crisis
and low future recovery values on NPLs. This should keep bank profitability
and capital bases under pressure besides adding to government debt-GDP
ratio's medium term.

* Although the new TAMC will speed up the restructuring of NPLs, the TAMC
will not spur any major pick-up in bank lending or reduction in private bank
NPLs if there is a continued absence of creditor-friendly bankruptcy and
collateral foreclosure laws. Moreover, given the high levels of (quasi-)
NPLs among private banks, TAMC may have to provide additional public
subsidies to the private banks with a further nationalisation of private
sector debt a worst case outcome.

* Against this backdrop, we believe that Thailand should move towards a
neutral fiscal/looser monetary policy mix with the 14-day repo rate cut by
100bp to zero in real terms.

* Thailand's balance of payments would also benefit from a weaker THB as
this would help stem the decline in its current account surplus, while
attracting even more FDI inflows. In this respect, a floating exchange rate
would prevent a too large erosion of FX reserves due to continued heavy
foreign debt repayments. 

* The public sector, for instance, is set to repay USD10.2bn in IMF loans
over the next two years. Given current tight spread levels, we believe that
the new supply will lead to a repricing of the sovereign curve. A tighter
fiscal policy stance will, on the other hand, lead to a flattening of the
local yield curve, which provides one of the most attractive roll-down
opportunities within the Asian region.

