Looking At Thailand

Like India, Thailand is an excellent investment option for FIIs. And the depressed economy is all the more reason for picking up bargains.

FIIs are forever faced with dilemmas as to which developing country to bet on. When these discussions come up, inevitably the focus is on the big two -- China vs India. Yet, while working out an Asian investment scenario, one should not just look at these two but at the others as well.

Take for instance, the case of Thailand. Today, Thailand is overwrought with doom and gloom. The economy is faced with shrinking earnings, asset deflation and a bad debt crisis. However, this appears to be the darkness before dawn and it could be just the right time to enter its stock market.

 

Attempts have been made to analyse India with respect to Thailand, but the economies are not strictly comparable. Thailand is more oriented towards the private sector, is heavily financed by foreign funding (the foreign debt: GDP ratio, at 50 per cent, is about twice the figure for India), has a much smaller population base and is primarily an export-led economy. One area where the countries are comparable is politics -- Thailand has had three elections in the last six years and is ruled by a coalition. The country is guided by the constitution of 1991, the document composed following the deposal of the incumbent government by the army.

Background:Thailand follows a five-year planning model, but the plans are promulgated more to serve as guiding hands to the private sector rather than to stand as sets of figures to be reached. Between 1992 and 1995, the Thai economy grew in line with the Seventh Plan at above eight per cent per annum.

Since 1995, the economy has been weighed down by structural problems, primarily a rise in private sector foreign liabilities and a drop in export competitiveness.

The Thai baht is freely convertible.The baht appreciated sharply (in REER terms) through 1996 contributing in part to the slowdown in Thai exports. The slowdown in exports put a brake on GDP growth and corporate earnings. This, in turn, cast a shadow over the sustainability of an eight per cent current account deficit and the servicing of foreign debt. Property and financial assets deflated, banks had increasing NPAs on their books and the Bank of Thailand was forced to defend the baht.

The defence of the baht sought to protect the serviceability of foreign debt, but has resulted in a domestic tight money situation, very much akin to that seen in India two years ago. It must be mentioned that debt service as a percentage of total FX receipts is still only at 17 per cent in Thailand, lower than India's 25.7 per cent. Front-line sectors in the economy such as property and export houses faced a cash crunch. This has resulted in a self-propagating cycle of poor performance and high NPAs for the banking system (very much akin to the Indian situation). However, even in the midst of crisis, NPAs are not expected to cross 20 pe cent; not too higher than the Indian average.

Capital market:The Securities and Exchange Commission, Thailand was set up in 1992, coinciding with SEBI being given statutory status in India. The SEC oversees the functioning of the Thai capital market where the SET (Stock Exchange of Thailand) was until recently, the only official exchange. In addition to the SET, there are now two OTC exchanges. Thailand has ownership restrictions for foreign holdings, generally 25 per cent for banks and 49 per cent for other companies.

Opportunities

There appears to be a strong case for investment in Thailand, albeit selectively, emerging from the morass of gloom. The SET Index has dropped to levels last seen in 1989. Market cap as a percentage of GDP has also been steadily sliding.

The defence of the baht, as mentioned earlier, has been done to protect the corporate sector which has over 1 trillion baht in debt, largely denominated in dollars. The Thai government is able to afford the battle as it has an accumulated fiscal surplus of 300 billion baht and foreign exchange reserves of $33 billion.

The Thai government has, of late, also been trying to moot domestic savings, which at 36 per cent, fall short of investments by about six per cent , leading to a reliance on overseas finding. The co-ordinated effort to help corporates repay offshore loans and increase domestic savings will result in a secular solution to the structural weakness. The export front problem -- i.e. appreciating baht, final market weakness and lower value-added product composition is under correction.

Exports and GDP growth in Thailand should stage a recovery, although only after taking a dip through 1997. In fact, select industries such as electronic components, chemicals and plastics and transport seem poised to post earnings growth in excess of 25 per cent over the next two years.

The finance ministry has formed the Property Loan Management Organisation (PLMO) to inject some much-needed liquidity into the system as well as to help mitigate the bad loans problem..

Even assuming a moderate pick up, the domestic mutual funds in Thailand are at attractive valuations. There are 66 such funds with a market capitalisation of around $2 billion which are currently trading at discounts of 10 per cent to 35 per cent of NAV. Many of them have redemption dates less than three years away and possess portfolios of bluechips.

Thailand is not to be written off. Empirical evidence has often shown that a great time to enter a market is when things look ugly. The time has come to take a serious look at the SET.