Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. P-7240-TH

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ONA

PROPOSED ECONOMIC AND FINANCIAL ADJUSTMENT LOAN

IN THE AMOUNT OF US$400 MILLION

TO THE

KINGDOM OF THAILAND

June 16, 1998

Poverty Reduction and Economic Management UnitEast Asia and Pacific Region

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.

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CURRENCY EQUIVALENTS(as of June 4, 1998)

Currency Unit = Baht (B)US$1.00 = B 42.32B 1.00 = US$0.0236

ABBREVIATIONS

ADB - Asian Development BankAMC - Asset Management CompanyBIBF - Bangkok International Banking FacilitiesBOT - Bank of ThailandCAS - Country Assistance StrategyCCC - Civil and Commercial CodeCCP - Civil and Commercial ProceduresCGD - Comptroller General's DepartmentE]GAT - Electricity Generating Authority of ThailandE`GCO - Electricity Generating CompanyElXIM - Thai Export-Import BankFC - Finance CompanyF l - Financial InstitutionFCRL - Finance Companies Restructuring LoanFIDF - Financial Institutions Development FundFMRP - Financial Market Reform ProgramFRA - Financial Sector Restructuring AuthorityFSIA - Financial Sector Implementation Assistance ProjectFTC - Closed Finance CompaniesF Y - Fiscal YearIBRD - International Bank for Reconstruction and DevelopmentICAAT - Institute of Certified Accountants and AuditorsIFC - International Finance CorporationIIAT - Institute of Internal Auditors of ThailandIMF - International Monetary Fund

Vice President: Jean-Michel Severino, EAPVPCountry Director: Jayasankar Shivakumar, EACTFSector Manager: Masahiro Kawai, EASPRTask Manager: Ijaz Nabi, Lead Economist, EASPR

FOR OFFICIAL USE ONLY

JEXIM - Export-Import Bank of JapanJTI - Judicial Training InstituteKTB - Krung Thai BankKTT - Krungthai Thanakit Public Co., Ltd.MIS - Management Information SystemMOC - Ministry of CommerceMOF - Ministry of FinanceMOU - Memoranda of UnderstandingNESDB - National Economic and Social Development BoardNPL - Nonperforming LoanOECF - Overseas Economic Cooperation Fund (Japan)PLMO - Property Loan Management OrganizationRAB - Radhanasin BankSBA - Stand By ArrangementSCL - Single Currency LoanSEC - Securities and Exchange CommissionSEPC - State Enterprise Policy CommissionSET - Stock Exchange of ThailandSFI - Specialized Financial IntermediariesSIP - Social Investment ProjectSOE - State-Owned EnterpriseUCABE - Unidad Coordinadora para el Acuerdo Bancario Empresarial (the

Coordinating Unit for Bank-Enterprise Agreement in Mexico)

KINGDOM OF THAILAND - FISCAL YEAR

October 1 - September 30

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.

KINGDOM OF THAILAND

ECONOMIC AND FINANCIAL ADJUSTMENT LOAN

LOAN AND PROGRAM SUMMARY

Borrower: Kingdom of Thailand.

Amount and terms: $400 million-Single Currency Loan (SCL) in US Dollars,with a 15-year maturity, including a 3-year grace period, atthe Bank's standard fixed US Dollar SCL interest rate.

Description: The proposed loan is part of a two-year program ofstructural adjustment of the economy supported by foursingle-tranche balance of payments support loans. The firstloan in the series, the Finance Companies RestructuringLoan (FCRL) approved by the Board in December 1997,supported measures toward the resolution of the suspendedfinance companies and committed the Government tocomprehensive reform of the financial sector over the nexttwo years. The proposed loan, while further deepening therestructuring of the financial sector, supports measures tostrengthen the corporate sector. It paves the way for twomore adjustment loans that will continue to track reform ofthe financial and the corporate sectors but with a sharperfocus on strengthening the competitive foundations of theeconomy.

The proposed adjustment lending program is a flexibleresponse to the Thai crisis. It allows a closer tracking of theevolving crisis to commit the Government to remedialmeasures, while remaining focused on the neededfundamental restructuring of the economy. The program isbeing coordinated with the IMF, ADB and bilateral lenders.It is consistent with the objectives of the Country AssistanceStrategy.

The Government has taken a number of actions infulfillment of the loan conditions in the areas of themacroeconomic framework, corporate restructuring,financial sector, insolvency regime and secured lending,corporate governance and financial disclosure, andprivatization. The specific actions are listed in the Letter ofDevelopment Policy (Schedule I) and the Policy Matrix(Schedule II).

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Benefits and risks: The loan will help meet critical foreign exchange needs ofthe Government of Thailand to strengthen the capitalaccount. This will boost confidence and lend stability to theexchange rate. The loan supports the ongoing reform of thefinancial sector. Orderly resolution of the closed financecompanies, restructuring and capitalization of otherfinancial institutions and strengthening of supervision willmake for healthy bank balance sheets and a sound capitalbase to resume lending to the corporate sector. Several ofthe reform measures supported by the loan will facilitatecorporate restructuring and thus will strengthen thecorporate sector to resume economic growth. Reform ofbankruptcy and foreclosure laws and corporate governance,and a sound strategy for privatization and reform of stateenterprises, supported by the loan will restore confidenceand bring investors back to ThailandL. The proposedstructural reform will strengthen and will help modernizethe business environment in Thailand to support futuregrowth.

The greatest risk lies in misreading the current marketrebound as a sign of complete recovery. Although themarket is less pessimistic now than it was six months ago,capital inflows are still small, mainly equity in selectedbanks and corporations with proven track record. Creditors,by and large, are still wary. The wrong response to themarket's "wait and see attitude" would be to declare victoryand leave unfinished the reform of financial institutions.This might well start another round of confidence loss. Inparticular, slow progress in reforming the legal andinstitutional framework for bankruptcy and foreclosurecould undermine the imminent sale of assets of the closedfinance companies and would affect market confidenceadversely. Another risk lies in heavy-handed intervention inthe ongoing restructuring of financial institutions orcorporations that might crowd out market-led workouts andresult in a large fiscal cost. Among the external risks, furtherinstability due to regional contagion now seems less likely,although external demand remains anemic because of theslowdown in Japan. Finally, the fragile coalition currently inpower, whose economic team enjoys credibility, might notlast long enough to complete the reform agenda. This wouldlead to another round of political and economic uncertainty.

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Fortunately, recent political and economic developmentssuggest that the risks outlined above are small. TheGovernment survived a no-confidence motion in March,which has dispelled fears of a sudden change. The economicleadership is aware of the risk of declaring victoryprematurely and is managing expectations accordingly.Financial sector reform remains a top priority and progressis satisfactory. The Government is avoiding quick-fixremedies and is committed to modernizing the legal andcorporate governance framework for strengthening theoverall environment for doing business in Thailand.

Poverty Category: N.A.

Estimated Disbursements: The loan would be disbursed in a single tranche uponeffectiveness.

Project ID Number: TH-PE-54801

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CONTENTS

1. INTRODUCTION ......................................... 1

2. BACKGROUND AND RATIONALE ........................................ 1lA. The Status of the Economic Crisis ........................................ 1lB. Macroeconomic Prospects ......................................... 5

3. THE PROGRAM FOR ECONOMIC RECOVERY ......................................... 5A. A Less Contractionary Fiscal Policy ......................................... 6B. Protecting the poor ................................. 6C. Structural Reform ............................... 7

4. BANK GROUP STRATEGY .............................. 20A. The Bank .............................. 20B. IFC .............................. 22C. Coordination with IMF ............................... 22D. Cooperation with ADB ............................... 23

5. THE PROPOSED LOAN ............................... 23A. Loan Size and Features .............................. 23B. Conditions for Board Presentation .............................. 24C. Benefits and Risks ............................... 24

6. R ECOMME NDATION ............................... 26

TABLES

Table 1: Thailand: Macroeconomic Framework, 1996-98 .29Table 2: Thailand: Summary of Public Sector Operations, 1994/95-1997/98 .30Table 3: Thailand: Monetary Program, 1996-98 .31Table 4: Thailand: Balance of Payments and Financing Need, 1996-98 .32Table 5: Thailand: Short-Term Debt by Borrower Type, 1996-98 .33Table 6: Thailand: Outstanding Forward and Swap Obligations, 1996-98 .34Table 7: Thailand: Interest Rates, 1996-97 .35Table 8: Thailand: Program Monitoring, July 31, 1997 - May 8, 1998 .36Table 9: Thailand: Relations with the World Bank Group .............................................. 37Table 10: Thailand: Net Capital Flows, 1992-96 ....................................... 38Table 11: Thailand: Relations with the Asian Development Bank . . 39Table 12: Thailand: Medium-Term Scenario, 1997-2003 . ................................................ 40Table 13: Thailand: Interest Coverage Ratios of Nonfinancial Private Corporations,

1995-97 ........................................................... 41Table 14: Thailand: Existing Official Financing Package . ................................................ 42

The task team includes Ijaz Nabi (Task Manager), Michel Cardona (FSD), Stefan Koeberle (EASPR),Behdad Nowroozi (EAPCO), Eric Haythome (LEGPS), Teresa Genta-Fons (LEGEA), Marina Moretti(MNSPF), Jacques Bussieres, William Mako (PSDPS), Olivier Fremond (PSDPS), Pedro Alba (PRMEP)and Alma Kanani (FSD).

KINGDOM OF THAILAND

ECONOMIC AND FINANCLAL ADJUSTMENT LOAN

1. INTRODUCTION

1. I submit for your approval the following report and reconmmendation on aproposed Economic and Financial Adjustment Loan for Thailand.

2. The Government's commitment to the stabilization program is beginning to bearfruit. The exchange rate is stabilizing, interest rates are gradually coming down andmarket-led capitalization of financial institutions is taking place. This stability, however,has not yet stimulated economic recovery. The economy is in recession and the highlyleveraged corporate sector is mired in balance sheet losses.

3. The proposed adjustment operation is part of the Bank's contribution to the $17.2billion pledge made at Tokyo by the international community in response to Thailand'seconomic and financial crisis. The Bank's adjustment operations began with the FinanceCompanies Restructuring Loan ($350 million) approved by the Board in December 1997.This loan supported the orderly resolution of troubled finance companies and helpedstrengthen supervision and regulatory framework for the remainder. Together with theInternational Monetary Fund's (IMF) policy framework for commercial banks, the loancommitted the Government to establishing resilient financial institutions strong enough toprevent similar crises in the future. The Government's current reform efforts, which theproposed loan supports, aim to restore growth by deepening structural reform in thefinancial sector and facilitating corporate revival. Reviving the corporate sector willrequire removing impediments to restructuring, balancing creditor and debtor interests inbankruptcy and foreclosure to create incentives for informal workouts, expeditingadoption of international standards for corporate governance, and consolidating reform ofpublic enterprises, including privatization.

2. BACKGROUND AND RATIONALE

A. THE STATUS OF THE ECONOMIC CRisIs

4. Since July 1997, the Government has taken tough fiscal and monetary measures toconsolidate macroeconomic stability, and structural reforms-particularly in the financialsector.

5. Monetary policy has aimed to curtail the expansion of domestic credit to helpstabilize the exchange rate and maintain the stability of the payments system. Throughthe Financial Institutions Development Fund (FIDF), the Bank of Thailand (BOT) hashad to provide B 300 billion [6 percent of gross domestic product (GDP)] in liquidity

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support to weak commercial banks and open finance companies to keep the system afloat.BOT has mopped up excess liquidity from the large banks, but at a high interest cost. Inaddition, these banks are reluctant to lend in an uncertain environment. As a result,private credit expansion has slowed down to under 5 percent a year, and has contributedto the liquidity crunch faced by many companies.

6. The program has brought signs of incipient stability. Since January 1998, thebaht-dollar exchange rate has appreciated to around 40 from a low of 53, and dailyvolatility has declined. The market responded favorably when the authorities decided tounify the onshore and offshore exchange markets by lifting the exchange and capitalcontrols imposed in mid-1997. Meanwhile the Stock Exchange of Thailand (SET) indexpartially recovered in the first quarter of 1998, but fell back to a low of 314 in early June.

7. Domestic interest rates rose sharply following the float of the baht, the increase incountry risk and the tight credit and monetary program that followed. The repo rate roseto the 20-25 percent range compared to 10-15 percent before the crisis, but is nowmoderating. Deposit rates did not increase by as much because the rise in the short-termmoney market rate was perceived to be temporary. Large banks had little incentive toincrease rates since most of the money was coming their way from consumers who wereshifting deposits out of the weaker banks.

8. There has been modest inflationary pressure despite the steep depreciation, due tofalling domestic demand, reduced wages and the small share of consumer goods in totalimports. While the baht has depreciated 40 percent since June 1997, the consumer priceindex (CPI) has increased more slowly from 4.4 percent in June to 10.1 percent in April1998.

9. Untfortunately these improvements have come at the cost of driving the economyinto a recession. Private consumption has been dramatically curtailed and retail saleshave plummeted. Some adjustment in private investment was necessary following theexcesses aLssociated with the investment boom, especially in the property sector.However, the financial crisis has driven the baht so low and interest rates so high thateven manufacturing firms are now curtailing their activities. The index of manufacturingproduction has fallen precipitously in the last two quarters. People are losing their jobs;their real irncomes are declining.

10. Unemployment has risen to nearly 6-7 percent. Retrenchment is particularly acutein the financial sector where up to 80,000 workers have been laid off, and in theconstruction industry, where the collapse of the real estate markets has sharply contractedthe number of jobs. This labor market burden is likely to fall mainly on young, ruralworkers and on unskilled construction workers. The projected slump in GDP growthsuggests that overall job creation would drop significantly, making it harder to absorb400,000 fresh graduates. Total unemployment could rise to 2 million or higher in 1998.

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11. The current account balance has undergone a faster-than-expected adjustmentdue to the slowdown in economic activity. The current account has recorded a surplus of$2.2 billion in the second half of 1997 (compared to a deficit in 1996), but the rapidadjustment has come mostly from a collapse of imports (-17.3 percent in US dollar terms)rather than a recovery of exports (only 7.7 percent in US dollar terms, see Box 1).

Box 1: EXPORT PERFORMANCE

Data released by the Bank of Thailand show that calendar 1997 was not a good year for exports.In the first half of the year, the monthly average export growth was only 1 percent in US dollar terms. Inthe second half, monthly average exports rose to 7.1 percent. This coincided with exchange rateadjustments that started after the Baht was floated in July. The underlying structure of exports shows thatlabor-intensive exports (garments, footwear, toys, etc.) continued to decline despite the exchange rateadjustment while technology-intensive products (computer parts, electrical appliances, integrated circuitsetc.) performed much better. In 1998 export data for the first three months shows a mixed picture. Exportgrowth was negative 7.9 percent in January, positive 3.2 percent in February, and negative 3.5 percent inMarch.

Export growth, though improving, still remains substantially below Thailand's outstandingperformance up to 1995. One reason for this is the reduction in intraregional trade including the slowrecovery of the Japanese economy. In addition, there may also be a volume versus value effect. As othereconomies in the region increase exports of competing products, unit values may be on the decline,offsetting the volume effect of the exchange rate correction.

12. The Government has taken several tough measures in the financial sector (see Box2). Following the decision to close down 56 finance companies, impressive progress hasbeen made in the sale of assets. The prudential and regulatory framework for theremaining financial institutions is being strengthened. Tougher loan classificationstandards have been adopted and provisioning rules are being tightened. The program forstrengthening supervision is being finalized. BOT has recently intervened in several weakcommercial banks and finance companies, removing managers and directors, wiping outexisting shareholders and converting FIDF claims into equity. The market-ledrecapitalization has begun and foreign investors are concluding transactions with severalcommercial banks.

13. However, much remains to be done to complete the restructuring of financialinstitutions. The institutional design and operating rules for the resolution of closedfinance companies is at a critical stage and the market looks to a transparent and rapidsale of assets estimated at B 900 billion. The remaining financial institutions need to bestrengthened to reduce their dependence on liquidity support from the FIDF. Directintervention by BOT in some open finance compamies and the smaller commercial banksunderscores the weak asset base of many financial institutions. These uncertaintiescontinue to fuel depositors' flight to quality, exacerbating liquidity problems.

Box 2: LIST OF FINANCIAL SECTOR ACTIONS TAKEN SINCE DECEMBER 1997

1. Resolution of Closed Finance Companies* Classification by the Financial Sector Restructuring Authority (FRA) of assets of closed finance

companies completed in February 1998 and creditors of each company provided with "statement ofaffairs."' Details on loan portfolios will be provided to qualified bidders during the auction process.

* Forms of payments required from bidders defined by FRA in February 1998.* Final decision by creditors of the 40 finance companies, whether to choose the note exchange program

or to participate in the FRA auction process, taken in March 1998.* Appointment of key Asset Management Company (AMC) staff at an advanced stage.* Plans for adequate recapitalization of financing for AMC and timetable for the disbursement to AMC

being inplemented* The operating rules and guidelines for AMC partially completed by end-March.* Rules, guidelines and procedures for the Radhanasin Bank for bidding for high-value assets completed

by end- March.* Sales of finance company movable assets (cars, computers, works of art, etc.) begun in late February.

2. Handling Weakest Institutions:* FIDF/BOT has intervened in 4 commercial banks and 7 fnance companies. Managers and directors

were rernoved, existing shareholders wiped out and FIDF claims were converted into equity.

3. Recapitalization Process:* Stricter loan classification and provisioning rules implemented, end-December 1997.* Memoranda of understanding (MOUs) signed by BOT with 11 commercial banks in order to achieve

recapitalization plan by March 1998.* MOUs signed with 16 finance companies to achieve recapitalization plan by March 1998.* New loan classification and provisioning rules (in line with best intemational practices) issued,

March 31, 1998.

4. Assessment of Financial Institutions:* Terms of reference (TOR) for diagnostic review of finance company drafted in January 1998* Diagnostic review test in one finance company undertaken in February 1998* Program and schedule for diagnostic reviews of 24 finance companies completed.

5. Licensing:* Circular issued by BOT in December 1997 requesting specific information to conduct a more credible

and accurate assessment of the "fit and proper" condition of new executives and directors of FCs.

6. The Supervisory Regime:* Investigation Commission for BOT set up by the Government in December 1997, to investigate how

BOT has managed foreign currency reserves, granted its liquidity support and supervised banks andfinance companies. The Commission will decide whether supervision will remain with BOT.

14. Loan performance and bank balance sheets are unlikely to improve significantlyas long as the highly leveraged Thai corporations (average debt equity ratios of over 3)remain distressed (nearly a third of the corporations are unable to meet interest expenses).Poor investment decisions are undoubtedly the primary cause of corporate difficulties butthe steep exchange rate depreciation since July 1997, high interest rates and the currentcredit crunch have further weakened corporate balance sheets. The projected shrinkage inaggregate demand associated with the decline of 4 to 5.5 percent of GDP in 1998 has

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clouded the prospects for many firms. Continued corporate fragility is likely to increasenonperforming loans, impede recovery of the financial sector and could well prolong therecession.

B. MACROECONOMIC PROSPECTS

15. The short-term economic outlook remains precarious. Real GDP is expected toshrink by 4 to 5.5 percent during 1998. The Thai authorities, the IMF and Thai researchinstitutes predict that the economy will bottom out at end- 1998 and recovery will begin in1999. However, this depends crucially on whether confidence returns.

16. Economic contraction and real depreciation of the exchange rate will result in alarge surplus in the current account. The major brunt of adjustment will be borne byimports, but exports (textiles, garments and electrical products) are expected to pick up.The current account for 1998 is expected to register a surplus of 6.9 percent of GDP.Prospects for the capital account are mixed. Regional pessimism and downgrading ofsovereign risk would lower the rollover rate, as would the exercise of put option attachedto bonds and loans and the unwinding of forward and swap obligations. However, foreigninvestment in financial institutions is picking up and would offset these factors.

17. Thailand's economic prospects are intrinsically linked to those of the whole East-Asian region. Intraregional trade comprised some 40 percent of Thailand's trade prior tothe crisis and recovery would be smoother if the regional economy recovers. If Japan'snow anemic recovery gathers momentum (say 2.0 percent in 1999), Thailand's recoveryprospects would brighten; even so, exports to the United States, Europe and LatinAmerica would have to increase, and more so should the region's economies continue tofalter. The US and European economies continue to be robust, and since Thailand has asmall market share, the potential for growth is large.

18. Even under this relatively conservative but positive scenario, Thailand wouldneed substantial capital to build reserves lost during 1997. Reserves fell by $11.7 billionin 1997, and are projected to increase by $1 billion in 1998. Thailand's gross financingrequirement is projected to be almost $20 billion in 1998. Disbursements from the $17.2billion financing package and additional financing such as $1 billion cofinancing by theAsian Development Bank (ADB) and $600 million cofinancing from the Export-ImportBank of Japan, and sovereign bond issues will provide $6.4 billion. The current accountis expected to register a surplus of $8.5 billion, while the rest of the financingrequirement will be met by net foreign direct investment, and net portfolio flows, netother private capital. For 1998, Thailand will maintain reserves at about $28 billionequivalent to 6.7 months of merchandise imports.

3. THE PROGRAM FOR ECONOMIC RECOVERY

19. The strategy for economic recovery, designed with multilateral assistance, hasthree broad elements. The first, building on the faster-than-expected adjustment in the

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current account, consists of a less contractionary fiscal policy to avert collapse ofaggregate demand. The second, designed in close coordination with the Bank and ADB,protects the vulnerable during the crisis. The third, supported by the Bank, IMF, ADBand the Government of Japan, addresses the short- and medium-term problems of thefinancial sector and Thai corporations and lies at the heart of the recovery program.

A. A LESS CONTRACTIONARY FIscAL POLICY

20. A key issue for Thailand's recovery program is the stance of fiscal policy, inparticular, the extent to which automatic stabilizers should be allowed to take theircourse. During the third review of the IMF's Stand-By Arrangement, the authoritiesconcluded that the fiscal outlook had deteriorated as a result of sharp decline in therevenue base and the impact on expenditures of the Baht depreciation. Several factorsneeded to be taken into account in developing an appropriate fiscal stance:

* External accounts have adjusted rapidly, and the current account balance for 1997/98was revised from a deficit of 2 percent of GDP to a surplus of 6.9 percent of GDP. Thisturnaround in the external balance implies a much larger adjustment in the privatesavings/investment balance than anticipated. Thus, there is more room forcountercyclical fiscal policy to minimize the economic and social impact of thedownturn.

. Indeed, fiscal tightening may be counterproductive, since it would deepen therecession, worsen corporations' ability to service debt and exacerbate the crisis in thefinancial sector. On the other hand, fiscal policy needs to take into account the largefiscal costs of financial sector restructuring that have not yet been estimated.

* Taking these factors into account, the authorities decided to take some additionalmeasures to limit the public sector consolidated deficit to about 3 percent of GDP in1997/9'3. At this level of deficit, the underlying fiscal stance is noncontractionary ascompared to the previous year. The expenditure stance indicates a tightening ascompared to 1996/97, but the revenue stance is loosening, and the net effect leaves theoverall fiscal stance unchanged.

* In the coming months, the authorities will review the fiscal stance in light of changes ineconormic conditions. Any further deepening of the recession may require strongercountercyclical measures but that decision will be informed by the cost of financialrestructuring, which will become clear as the FRA sales proceed.

B. PROTECTING THE POOR

21. Thailand's rapid economic growth in the recent past reduced the incidence ofpoverty to 14 percent but the crisis has increased the vulnerability of the poor. Whenincomes were rising rapidly, the poor, located mostly in rural areas, had developed formaland informal channels of support such as government programs plus remittances fromfamily members employed in Bangkok and other urban centers. These supports are now

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threatened by the steep reduction in public expenditures, the projected recession with itsassociated decline in income, and rising unemployment. The incidence of poverty islikely to increase.

22. The less well-off are also directly affected by the crisis. The deepening of therecession is leading to increased layoffs and reduced incomes. The Government has threemain initiatives in response to the challenges of rising unemployment and increasedhardship for the poor. One is to increase its own capacity to systematically analyze theevidence of poverty so it can more accurately monitor and target remedial measures. TheBank is assisting the Government's efforts through a two-year program to strengthenpoverty analysis and institutional design. The second initiative seeks finds frommultilateral sources to maintain public expenditures that support the poor. ADB's fast-disbursing Social Sector Loan ($500 million) bolsters government expenditure in health(maternal and child health care), education (scholarship programs, teacher training) andsocial security for laid-off workers. The third initiative consists of direct interventions tosupport poverty programs that had to be curtailed because of the crisis. The Bank's SocialInvestment Project ($400 million), being presented to the Board concurrently with thisoperation, is part of this effort. The project has two channels: Channel I (approximately$220 million) will identify government investment programs and increase the productivecapacity of the poor (village roads, small irrigation, public health, rural occupationaltraining, AIDS care, school renovation, etc.). Channel II is a fund that, by workingclosely with local communities, supports small employment-generation programs (Annex1 provides detail on interventions to strengthen the social safety net).

C. STRUCTURAL REFORM

The Financial Sector

23. In view of the financial sector's continued fragility, the Bank, in closecoordination with the Fund, has expanded its program to include support for restructuringthe financial sector, strengthening supervision, upgrading the legal and regulatoryframework and improving market discipline.

Financial Sector Restructuring

24. Financial institutions need a healthy balance sheet and a sound capital base toresume lending to the corporate sector. Increased liquidity would also help to bring downinterest rates, which would reduce production costs and restore viability to Thaicorporations. The restructuring program builds upon the policy framework supported bythe previous Bank operation; it has three main components: to complete financecompanies resolution, to restructure remaining financial institutions, and to develop astrategy for the future provision of financial services in Thailand.

25. Orderly Resolution of the 56 Closed Finance Companies. There has beensubstantial progress in the resolution process. The Financial Sector RestructuringAuthority (FRA) is responsible for overseeing the orderly liquidation of the 56 finance

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companies and its work is proceeding on track. FRA has (a) classified core assetsaccording to type, size and quality and the information is ready for release to qualifiedbidders; (b) finalized preparations to sell core assets; and (c) launched the core assetssales process in late April by announcing the first portfolio tranche auction. Auctions ofnoncore assets (vehicles, artwork, etc.) of the 56 companies began in February (seeAnnex 2 for further details including a description of FRA auction principles andprocedures). FRA aims to sell all core financial assets by December 31, 1998.

26. The Asset Management Company (AMC) is an important component of theresolution process. It will acquire impaired assets auctioned by FRA for which noacceptable private sector bid is received; manage, restructure, and collect on these assets;and eventually resell them. AMC is required to maximize asset values and enhancemarket confidence; therefore, it must be adequately funded and well managed. Theproposed loan supports actions to accelerate AMC's progress. First, it supports anincrease iin AMC's authorized capital, from the current B 1 billion to B 10 billion. TheGovernment has prepared and announced plans for adequate funding for AMC with atimetable for disbursement, and first payment by the Ministry of Finance (MOF) inFebruary this year. Second, the loan supports the development of AMC's internal policesand procedures; bidding procedures consistent with AMC's role as bidder of last resort,and agreeable to FRA; and an appropriate Management Information System (MIS) forasset management and disposition. By August 31, 1998, AMC's operational plan andMIS will be reviewed and endorsed by external experts selected by MOF.

27. As part of the resolution process, the Government has also created the RadhanasinBank (RAB) a state-owned commercial bank expected to bid for the highest-qualityassets. RAB will have a market-oriented role in the auction process, as defined in its rulesand procedures for asset valuation and bidding. RAB is seeking a foreign strategicpartner, which will be necessary to instill market discipline, ensure good governance, andbring in the extra capital necessary to participate in the FRA auctions with a view tostrengthening the banking system.

28. Riestructuring and Recapitalization of Other Financial Institutions. Thaibanks face massive recapitalization needs because past credit policies were irresponsibleand the recently introduced loan classification and provisioning rules are much morestrict. BOT has already taken over four critically undercapitalized banks (Bangkok Bankof Commerce, First Bangkok City Bank, Siam City Bank and Bangkok MetropolitanBank), written down existing shareholders' capital, and converted part of the FIDFliquidity support to new capital. The Government (via FIDF) does not intend to holdthese banks for long and is seeking private sector-led solutions, including privatizationand liquidation. BOT has also intervened in seven finance companies.

29. BOT is committed to a tough policy of recapitalization of financial institutions. Anew set of loan classification and provisioning rules, in line with the best internationalpractices, was issued on March 31, 1998. New Memoranda of Understanding (MOUs)will be signed with banks and finance companies by August 15, 1998; umder these newMOUs, recapitalization will be phased in to comply with the new classification and

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provisioning set of rules at the latest by 2000. In parallel, BOT will conduct enhancedonsite examinations in all nonintervened domestic commercial banks with expertassistance.

30. The authorities expect that the increased transparency of financial institutions willattract new investors, both domestic and foreign. Since the beginning of the year, severalinstitutions have been able to raise capital, although it is too early to judge whethermarket-driven recapitalization will be sufficient. Therefore, MOF may consider anaccelerated recapitalization scheme for some of the nonintervened banks, based on theprinciples of no bailout of the existing shareholders and accelerated provisioning of badloans. Government support may include either parallel investments with the private sectoror a government guarantee to new investors to cover further unexpected losses onexisting loans, or both. A similar strategy will be developed to support therecapitalization (and consolidation) of the finance company sector.

31. A Strategy for the Future of Financial Services in Thailand. MOF is selectingthe elements of a strategy for the future of the Thai financial sector. What will be the roleof commercial banks (restricted banks vs. universal banks), finance companies (comparedto banks), and specialized financial institutions? How can debt and equity markets in thefinancial system be enhanced? How will the roles of securities companies and banksdiffer (securities trading, fund management, investment banking, etc.)? Should theGovernment support financial conglomerates? How should relationships between lendinginstitutions and insurance companies be defined (in terms of ownership and provision offinancial products)? The findings of this study will shape the next phase of financialsector reform.

Strengthening Supervision

32. In Thailand, financial institutions are currently supervised by different agencies:BOT supervises commercial banks, finance companies and credit fonciers; MOF overseesstate-owned specialized financial institutions; the Securities and Exchange Commission(SEC) supervises securities companies; the Ministry of Commerce (MOC) overseesinsurance companies; and the Ministry of Agriculture (MOA) supervises agriculturalcooperative institutions. Fair competition among different financial institutions requiresharmonized prudential regulations to promote the soundness of the sector.

33. A Comprehensive Supervision Framework. The Government, with the Bank'sassistance, intends to review its supervisory system with the aim of developing acomprehensive framework for the supervision of financial institutions. In working outthis strategy, the authorities will compare options such as: (a) market discipline versusdetailed supervision/regulation models, (b) a single supervisory authority versus severalspecialized supervisory authorities (for deposit taking institutions, security firms,insurance companies, investment and pension funds etc.); (c) how to develop consistentprudential regulations for all financial institutions to create a level playing field; and (d)which are the best legal and regulatory grounds to consolidate supervision of financial

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groups. They will also review where the supervisory authorities should be located: MOF,BOT or independent agency(ies). A comprehensive supervision framework will requireamendments to legal provisions and prudential regulations, which will be carried out in1998 with assistance from the World Bank and IMF. By December 31, 1998, MOF willhave developed a comprehensive framework for supervision of financial institutions.

34. Strengthen the Supervision Capacity of the Supervisory Agencies.Supervisory agencies must be able to get a fast and accurate assessment of financialinstitutions; i.e., calculate meaningful capital adequacy ratios by applying strict loanclassification and provisioning rules. Regardless of where supervision functions arelocated it is urgent that the existing supervisory capacity is strengthened. In particular,BOT and MOF must develop their capacity to use supervisory powers (by conductingadequate offsite and onsite examinations) and enforce prudential rules. BOT has alreadyadopted a time-bound program to develop its institutional capacity to supervise banks andfinance companies. By July 31, 1998, MOF will conduct an assessment of the supervisioncapacity of BOT's and MOF's capacity to supervise Specialized Financial Institutions(SFIs). Based on this assessment, MOF will develop an Institutional Development Planfor strengthening supervision capacity of SFIs by September 30, 1998.

Incr easing Market Discipline

35. Corporate Governance. To prevent financial institutions from taking excessiverisks and accumulating nonperforming assets, it is critical that market discipline isstrengthened through improved corporate governance and the application of stricteraccounting and auditing standards and disclosure requirements. For this purpose, BOTand MOF will conduct a review of current accounting, auditing and disclosuresrequirements for financial institutions and propose amendments in these areas bySeptember 30, 1998. New specific rules on accounting, external auditing, financialdisclosure for banks, finance companies and SFIs will be proposed by December 31,1998.

36. Clealr Exit Rules. To address the moral hazard issue that has undermined thefinancial sector discipline, a clear exit policy will be defined for financial institutions,backed up by bankruptcy provisions. The Government will make clear to managers thatin the event: of capital insolvency, institutions carrying out high-risk operations will beallowed to fail and shareholders will bear the financial consequences of their strategy. Tobe credible, such a policy must to be grounded in Prompt Corrective Actions proceduresto ensure shareholders that further supervisory forbearance will not occur. Overallcredibility will also depend on a legal framework adequate for smoothly liquidating failedfinancial institutions. Jointly the IMF and the Bank will provide assistance ito develop anappropriate legal framework.

37. An Explicit and Restricted Deposit Protection Scheme. The Government iscommitted to a transition: from the general blanket guarantee given in August 1997 toavoid a systemic crisis to a more restricted deposit protection scheme. To ensure a

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smooth transition, a partial deposit protection scheme, planned with assistance from theBank and the IMF, will be implemented.

Revival of the Corporate Sector

Difflculties in the Corporate Sector

38. Thailand's Corporate Sector is in Crisis. Burdened with excess capacity and alarge debt, many corporations are unable to meet their debt service payments and aredefaulting on both domestic and foreign loans. At the end of the third quarter of 1997, thecash flow of some 32 percent of nonfinancial firms listed on the Stock Exchange ofThailand (SET) was insufficient to meet interest payments. While debt servicingdifficulties are widespread across the corporate sector, they seem particularly severe inreal estate, building and retail, and in the manufacturing sector among constructionmaterials and petrochemicals firms. If anything, the financial position of the corporatesector has worsened since end-September as a result of the deepening recession, exposureto foreign exchange losses, and continuing high interest rates. For example, many of the50 largest firms (ranked by market cap) listed on the SET were in severe financial distressat end-1997, and some had debt/equity ratio over 9.

39. The depreciation of the Baht has hurt balance sheets and income statements of thecorporate nonfinancial sector. The Thai corporate sector has large debt obligationsdenominated in foreign exchange (about $49 billion at end-1997 or 33 percent of GDP),much of it unhedged. The direct external obligations of the nonfinancial private sectoramount to some $21.5 billion (some 15 percent of GDP). Almost 75 percent of thisexternal debt is held in the form of loans, originates from Japan (42 percent), and isconcentrated among large corporations (and multinational companies and joint ventures)in manufacturing-particularly automotive and energy-real estate, andtelecommunications. In addition, Thai corporations have borrowed heavily from BangkokInternational Banking Facility (BIBF) banks in foreign exchange. Total outstanding bankcredit to the nonfinancial private sector at end-1997 amounted to some B 5.5 trillion, ofwhich some B 1.3 trillion (about 25 percent, or 18 percent of GDP) are denominated inforeign currency. By economic sector, about 52 percent of this lending was concentratedin manufacturing, followed by trade and commerce.

40. Both cost and availability of funds constrain the corporate sector in Thailand. Asdescribed above, interest rates have risen sharply since the onset of the crisis.Corporations in good credit standing, including exporters, report increased collateralrequirements, severe cuts in maturities, and decline in supplier credits; even the largefirms seem affected. For example, the average quick ratios and inventories of the largest50 listed firms have declined in 1997, because companies delay payments and reduceinventories to increase liquidity.

41. The Roots of the Current Problems. While the financial crisis has exacerbatedthe economic downturn in Thailand, capacity utilization was already declining in 1996and the first half of 1997, suggesting that the roots of the current problems are long-

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standing. Export performance has been erratic since 1995. In the first six months of 1997,manufactured exports in baht declined by 2.9 percent compared to the last half of 1996,with 14 of the leading 20 manufactured exports experiencing a decline. The reasons forthis decline are related at least in part to inadequacies in skills, slow upgrading oftechnology and infrastructure bottlenecks.

42. The problems faced by the corporate sector result from misguided investment, andhow it was financed. Excessive and unproductive investment, particularly, in real estate,and to expand capacity in goods and services destined primarily for the domestic market,reduced corporate profitability and increased vulnerability to cyclical conditions.Corporations invested in risky ventures wvith inflated project costs and optimistic revenueprojections. A symptom of this overexpansion is that in many SET sectors, growth inassets ouistripped sales and profit growth; for example, in the property sector assets grewby 115 percent during 1993-96 but profits declined by 69 percent. Similarly, in the paperand pulp sector, assets expanded by 126 percent during this period but profits turned intolosses. Somewhat blinded by the positive productivity shock of the 1980s and early1990s, market discipline was weak because of lack of due diligence among domestic andforeign lenders, and poor disclosure and corporate governance. At the end of 1996,Thailand had one of the largest capital-output ratios among middle-income countries.

43. On the financing side, despite the increased activity in the SET during the 1990suntil the onset of the crisis, much of the investment was financed through debt,denominated in Baht, and foreign currencies. The average debt/equity ratios fornonfinancial firms listed on the SET increased from 145 percent at end-1994 to 279percent at end-September 1997. Factors that contributed to excessive borrowing, inparticular foreign and short-term borrowing, are the macroeconomic policy mix (fixedexchange rate combined with tight monetary policy), cyclical conditions in industrialcountries, and the domestic institutional framework (tax advantages that encouragedborrowing through the BIBF, restrictions on foreign ownership, the desire of largeshareholders to maintain control, and the absence of a domestic market for long-termdebt).

A Strategy For Revival of the Corporate Sector

44. Restoring health to the corporate sector will require long-term and short-termmeasures plus improving the incentives for prudent decision-making among the creditors,owners and managers who comprise the corporate culture in Thailand. The structuralreform measures now being implemented are aimed to accomplish this.

45. In the short term, the corporate sector's systemic debt servicing problems suggestthat corporate restructuring will be the heart of recovery efforts, including efforts topromote voluntary workouts and readiness to push nonviable corporations toward court-supervised reorganization or bankruptcy. Government actions to alleviate liquidityconstraints are described in Box 3. Other key reform areas with short- and medium-termelements include: further efforts to restructure the financial sector (presented above) to

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reduce the liquidity constraints faced by corporations,judicial and legal reform, primarilybankruptcy and legal reform to facilitate corporate restructuring; improvements incorporate governance and disclosure to improve investor confidence, and privatization.

Box 3: EXPORT RECOVERY AND THE CREDIT CRUNCH

Many Thai corporations, including exporters, report being constrained by the credit crunch.Exporters are experiencing credit problems such as cuts in maturities and insufficient credit facilities. Someexporters report that credit lines are held constant in local currency terms creating a significant real creditreduction if they rely on imnported inputs. And even exporters who do not rely on imported inputs, will beunable to increase exports without credit expansion. Exporters also report that domestic inputs sources areless reliable because suppliers without adequate credit cannot maintain production.

Exporters' constraints will be difficult to correct since they are caused primarily by changes in thepatterns of credit availability (in turn resulting from the restructuring of fnancial intermediaries) and bybanks' unwillingness to extend credit in the face of generalized economic uncertainty. While overallliquidity is tight, to maintain high interest rates to stabilize the exchange rate, it is not the primary cause forthe recent decline in credit growth.

Liquidity is now highly skewed in favor of large Thai and foreign banks, while finance companiesand small commercial banks are either suspended or face liquidity constraints. Hence, commercial bankclients face reduced credit lines and cannot easily find new banks in current conditions.

Banks with adequate liquidity are reluctant to increase lending because the crisis has sharplyincreased credit risk as more corporations move into financial distress. Firms that comprised a significantproportion of Thailand's export capacity were also serving the domestic market, and are now suffering asevere downturn in demand or they may have already defaulted on their debts. Second, banks are changingtheir asset composition to benefit from the high interbank and repo rates by lending to the FIDF. Similarly,they are increasing liquid assets because of declining market confidence (including lower credit ratings)and against the possibility that foreign short-termn credit lines will not be renewed. Third, banks areimproving their capital position to meet new capital adequacy, loan classification, and provisioningstandards.

However there are measures that can ease the liquidity crunch and some of these have alreadybeen implemented. First, the Government is using the tax system to inject some liquidity into the corporatesector. It has changed tax regulations regarding foreign exchange losses. The tax authorities could considerother measures including ways to accelerate VAT refunds without compromising antifraud controls.

The authorities have facilitated loans to creditworthy exporters. For example, they have reducedthe risk weight of preshipment L/C export credits, and other non-L/C credits guaranteed by foreign banks,and increased the refnancing ratio for packing credits. The authorities have also negotiated large foreigncredit lines and domestic credit lines for EXIM Bank from ADB, JEXIM and other bilaterals. Exporters,however, report that EXIM bank processes credit requests slowly and procedures are complex. Finally, theauthorities are reviewing BIBF regulations, including reducing the minimum BIBF loan amount from $2million to $0.5 million and allowing BIBF banks to buy export bills from Thai residents and guaranteeexport credits.

The authorities are implementing measures with broader objectives that will help alleviateliquidity pressures on banks and corporations. They intend to phase in the recapitalization portion of thenew loan classification and provisioning rules, and will negotiate an MOU to this end with banks andfinance companies. Because most export capacity is in frms with severe debt problems, the acceleratinginformal and formal corporate workouts is critical for banks to increase lending to exporters.

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Corporate Restructuring

46. Restructuring has begun slowly. Some corporations appear to have madesignificant progress in restructuring their directforeign debt, which consists of bank loansrather than bonds, easing the coordination problem among foreign creditors.

47. Progress with domestic debt has been much slower. Large and small, secured andunsecured, creditors have different interests and little history or experience in corporaterestructuring. To help resolve these coordination problems, MOF has created a workinggroup, including creditors, corporations and public officials, to identify corporatecandidates for debt restructuring, and facilitate restructuring efforts. In addition, theauthorities, assisted by Bank staff, will organize a seminar on international experienceand best ]practice on corporate restructuring. Some of these experiences illustrate howgovernment can reduce coordination problems (e.g., Mexico UCABE program).

48. Thai corporations' ability to implement voluntary restructuring is limited by legal/regulatory constraints and domestic liquidity. As confidence improves, foreign investorswill be more willing to increase their investments in Thailand, but legal and regulatoryrestrictions on foreign purchases of Thai assets, both real estate and operating assets, maybecome binding. However, despite political and social concerns, foreign purchases arebeing allowed on a case-by-case basis, and we expect the liberalization process to bewidened.

49. Tax Impediments and Distortions. Current tax laws discourage debtrescheduling, cash-free asset transfers or acquiring shares through debt and equityrestructuring. Also, the tax regime impedes securitization industry development inThailand; it is almost nonexistent. The authorities are reviewing the tax regime toeliminate these impediments, in particular:

Promoting Debt Restructuring. Currently, a creditor cannot deduct discharged debtbut forgiven debt is considered to be taxable income for the debtor. MOF will reviewthe tax regulations in 1998 to promote debt restructuring in selected cases so thatcorporations that do not need it or are simply not viable do not benefit from this taxtreatment. In particular, the Ministry will change the tax treatment of debt relief forboth debtors and creditors in the context of restructuring a corporation in financialdistress.

Promoting Mergers. Currently, asset transfers and noncash acquisitions of sharesduring corporate reorganizations and mergers are considered taxable events. Toalleviate these impediments a draft regulation to allow deferral of taxes on cash-freeasset transfers, share acquisitions and mergers will be submitted to MOF this year.

* Promoting Securitization. The Government will review the tax regulations in 1998and eliminate any tax disadvantages to the securitization business in setting upspecial-purpose vehicles.

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50. In the longer term, the Government will also review the tax treatment of debtversus equity, and other incentives to excessive borrowing, including foreign borrowing.In particular, the Government will consider limiting the ability to deduct interest expensesfrom corporate income taxes. One option being considered is to develop a "thincapitalization" rule, which would phase out interest expense deductions on debt above aspecified threshold, e.g., a debt/equity ratio of 200 percent. This measure must considerthe different characteristics of businesses (e.g., cyclicality) and their ability to servicedebt.

Reform of Insolvency and Foreclosure

51. Thailand has lacked an adequate legal framework for corporate bankruptcies andfor enterprise reorganization and workout. Collateral foreclosure is impeded by lengthyprocedures that hamper creditors' ability to foreclose on mortgages against defaultingcorporate mortgagors. Trials of such cases typically take three years. These impedimentsthreaten the ongoing sale of closed finance company assets under the auspices of theFinancial Restructuring Authority. The Government recognizes that this discouragespotential creditors from returning to Thailand to assist in the economic recovery and so itis initiating a comprehensive reform program (see Box 4).

Box 4: PROPOSED AMENDMENTS TO THE BANKRUPTCY ACT

Once enacted, the proposed amendments will, among other things:

* protect creditors who provide funding to companies in financial distress, regardless of when the debt wasincurred, thereby encouraging new financing to insolvent debtors attempting to reorganize informally;

* repeal the requirement that foreign-denominated debt must be converted into Thai Baht for all purposesin reorganization proceedings;

* require the court at the outset of a reorganization to determine whether reasonable likelihood exists ofcreditors obtaining more through reorganization than a bankruptcy;

* require voting on reorganization plans by classes of creditors;

. provide explicit rules to confirm a reorganization plan by the court;

*provide more comprehensive rules for executory contracts and leases in both reorganization andbankruptcy proceedings; and

* unify reorganization and bankruptcy rules so that a failed corporate reorganization will resultautomatically in bankruptcy proceedings.

52. Enterprise Reorganization. Significant progress was made in early April 1998when the Bankruptcy Act B.E.2483 (1940) was amended to provide a conducivelegislative regime for corporate reorganizations. The Bankruptcy Act still requiresvarious refinements to remove remaining impediments to formal and informal corporateworkouts. The Cabinet has already approved further revisions to the amended BankruptcyAct to facilitate corporate bankruptcies and liquidations. By July 31, 1998, theGovernment will have submitted these amendments to Parliament for enactment.

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53. In fact, improving the legislative framework is just the beginning because there isalso a strong cultural bias against bankruptcies and a dearth of experienced bankruptcypractitioners and judges. The Government is moving to remedy this. In January 1998, itestablished a Company Reorganization Office within the Legal Execution Departmnent ofthe Ministry of Justice to oversee the work of official receivers in formal corporatereorganization proceedings. By October 31, 1998, the Government, with technicalassistance from the Bank, will have designed and begun to implement a program ofcapacity-lbuilding within this Office. The Government has initiated a program to retrainjudges and official receivers in business and economics at the Judicial Training Institute(JTI) of the Ministry of Justice; and it has committed to an action plan that will beadopted by October 31, 1998 to improve institutional procedures for bankruptcy.

54. Foreclosing on Collateral. Thailand still lacks a modem regime for creatingsecured interests in personal property and for noncourt authority for creditor enforcement.For the purpose of expediting the process of foreclosure on collateral, by July 31, 1998,the Government will have: (a) submitted to Parliament, for enactment, amendments to theCivil and Commercial Procedures (CCP); and (b) prepared adjustments to the existingprocedural frameworks. By October 31, 1998, the Government will have endeavored tohave these amendments approved by Parliament. Also, the existing provisions on pledgesand mortgages in Book III of the Civil and Commercial Code (CCC) need to be amendedso that creditors' rights are more certain. Based on a diagnostic analysis of Book III of theCCC and the requirements of a registry system of secured interests, by December 31,1998, the Government will propose steps for: (a) an amended, comprehensive, legislativeregime for secured lending; and (b) an automated, centralized, registry system for securedinterests.

55. Imaproving Enforcement of Commercial Contracts and Legislation. Judicialprocedures of corporate and commercial cases and the process of enforcing judicialdecisions once made are too slow and inefficient. To improve enforcement of commercialcontracts and legislation, the Government will: (a) undertake a thorough assessment ofthe obstacles to the development of a more efficient system of judicial procedures for theresolution of commercial disputes, including the enforcement of judgments; and (b)recommend legislative proposals and institutional changes.

Financial Accountability and Corporate Governance

56. Poor corporate governance has shielded banks, finance companies, andcorporations from market discipline. Ineffective boards of directors, weak internalcontrol, umreliable financial reporting and poor audits led to risky irnvestments withunhedged foreign currency exposure and all of these contributed to the current crisis.

57. The authorities have begun to implement policies to improve corporategovernance, particularly for listed companies. The SET-issued regulations in January1998 require that all companies applying for a listing to have an audit committee for theBoards olf Directors. Companies already listed will be required to set up audit committees

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by December 31, 1999. Guidelines have been issued on the functions and responsibilitiesof listed company directors. The Government is now rationalizing the institutionalframework for setting accounting standards, encouraging private professionals to take thelead to revamp the accounting profession, improve the quality of financial informationand strengthen enforcement and accountability.

Setting Accounting Standards

58. The authorities recognize that the current institutional framework for settingaccounting standards and regulations is cumbersome and outdated. Too manygovernment agencies regulate, supervise, and define reporting requirements; these includethe Ministry of Commerce (Commercial Registration division), Revenue Department,Bank of Thailand, Stock Exchange of Thailand, and Securities and ExchangeCommission. To streamline this, the Government has adopted a time-bound program toestablish an independent organization responsible for setting accounting standardsconsistent with international best practices, by December 31, 1998.

59. By September 30, 1998, the Government will ensure that the Institute of CertifiedAccountants and Auditors of Thailand (ICAAT) takes the lead in conducting acomprehensive review of standard-setting and the regulation framework of the accountingand auditing profession; it will then propose amendments to applicable laws andregulations by December 31, 1998.

Strengthening ICAA T

60. ICAAT is weak and does not lead in developing and promulgating auditingstandards or ensuring compliance. The Government has announced that, consistent withinternational best practice, ICAAT will become an independent self-regulatoryprofessional body by December 31, 1998. The Government will ensure that byDecember 31, 1998, ICAAT will take the lead in strengthening the accounting professionand the regulatory and auditing practices. Its mandate will include certification ofaccountants, assurance of quality and enforcement of the code of ethics for the profession.

Improving the Quality and Reliability of Financial Information

61. Recently, the Government has announced further improvements to ensure thatfinancial statements of listed companies, nonlisted public companies, banks, and otherfinancial institutions with assets in excess of B 1 billion will be prepared and auditedaccording to international practices beginning in 1999. To accomplish this, accountingstandards must be revised for financial statement disclosures (i.e., loans and deposits,pension information, risks and uncertainties, and capital requirements), assetclassification, marketable securities, and loss recognition.

62. By September 30, 1998, ICAAT, SET and SEC will prepare a plan to improve thequality of audit reports for listed and nonlisted public companies, banks and financialinstitutions. ICAAT will issue revised accounting standards for 1998 for financial

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disclosures and loss recognition; it will also develop new standards for debt restructuringand assets impairment, and phase out the burdensome statutory and mandatory auditrequirements for about 300,000 partnerships and inactive limited companies.

Accountability and Enforcement

63. The Government is committed to improving enforcement of accounting standardsand accountability of corporate officers for their financial disclosures. To that end, thefollowing targets are set:

* By December 31, 1998, SET and SEC will recommend changes to protect minorityshareholder rights after reviewing duties of corporate officers and directors.

* By September 30, 1998, the Government will review the roles of SET, SEC, MOC,BOT and MOF under terms of reference (TORs) with the Bank, in enforcement oflaws and regulations related to public companies to ensure sanction against breach ofduty by corporate officers.

Public Enterprise Reform/Privatization

64. Reviving the private sector and increasing the effectiveness of public investmentrequires leveraging private management and resources. Thailand has about 60 state-owned. enterprises (SOEs) ranging across the economy-industry, agriculture, power-even a national pawnshop and cold storage facility. These enterprises undertake abouthalf of the public investments. They generally record profits on sales and since theseprofits finance only three-quarters of their investment, their borrowing adds to the stockof sovereign debt. To gain economic efficiency, increase capital revenues and widen thefuture tax base, the Government plans to cede many of these activities to the privatesector. Divestitures will be complemented by a regulatory framework so that sectors suchas energy, transport and communications can provide competitive services. Creating acoherent legal framework-including the Corporatization Law-is an important step tospeed up privatization. The Government will also reform those SOEs that will remain inpublic ownership to enhance their performance.

Principles for Public Enterprise Reform

65. Only those public activities that are best left to the private sector will be targetedfor divestiture. Raising capital revenues is important, but secondary to gaining economicefficiency. The public sector will withdraw from commercial activities such aswarehouses, cold storage, and even some of the large public utilities.

66. In pursuing this program, the Government will:

establish clear regulatory mechanisms to guide asset sales; select efficient solutionsover quick cash generation;

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* rely, where possible, on competition to discipline corporate behavior in the newlyprivatized sectors; rely on regulation only in areas where competition (e.g., capitalmarkets) cannot be fully effective;

* conduct the process of divestiture and private sector participation in a transparent andcompetitive manner; and

* clearly separate the authority and responsibility of policy, regulatory and operationalfunctions to avoid conflict of interests and unnecessary interference.

67. A few SOEs will be deemed of strategic importance and will remain in the publicdomain. For these the authorities will separate the three functions of line ministries thatpresently overlap: those of policymaker, regulator and operator of the public enterprise.At the end of the reform process, responsibility will be clearly delineated; the ministrywill make policy, the state enterprise will operate autonomously and an independentauthority will regulate.

Reform Program

68. The Government is implementing the following key steps toward acomprehensive privatization program.

69. The Government will streamline the institutional framework for privatization.Currently, the responsibility for privatization, SOE reform and private participation ininfrastructure services is fragmented among the Comptroller General's Department(CGD), Fiscal Policy Office, and National Economic and Social Development Board(NESDB). The Government is establishing a Department of State Enterprises withinMOF to support the State Enterprise Policy Commission and to oversee the privatizationprogram. The staff will have technical skills and seniority for effective decision-making.

70. Privatizing individual SOEs that have not been corporatized leads to delaysbecause it requires complex case-by-case approvals by Parliament. The Cabinet hasapproved the draft Corporatization Law to enable SOEs to convert into corporatizedcompanies. The law will permit corporatization of SOEs so that these may be wholly orpartly divested to private owners, and also includes measures to set up effectiveregulatory oversight. By July 31, 1998, the Government will submit Corporatization Lawto Parliament.

71. A Master Plan for State Enterprise Reform will set out the Government'smedium-term strategy for privatization and SOE restructuring. It will state thecommitment to privatization, the priorities for divestiture of key enterprises, and publicconcession agreements in those enterprises [including Thai Airways, Barnchak,telecommunications, railways, water and the Electricity Generating Authority of Thailand(EGAT)] and lay out the divestiture strategy. By August 31, the Department will submitto the cabinet the Master Plan for the privatization strategy and SOE restructuring overthe next two years. The Master Plan will:

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* state objectives, organizational arrangements, privatization strategy and the futurerole of the State;

* specify timetables and sequence for corporatization and divestiture of key SOEs(including energy, telecommunications, water, EGAT);

* outline choice of the divestiture strategy (liquidation, full or partial privatizationthrough joint ventures, private placements or public offers) linked to sectorobjectives;

* estalblish regulatory framework for transport, water, energy, and telecommunications;and

* improve monitoring of state enterprises remaining in public ownership.

72. To lend credibility to the privatization program, the authorities propose to divestgovernment holdings on a fast-track program. The progress on this is reported in Box 5.

Box 5: RECENT ACTIONS ON PRIVATIZATION

* ESSO: the Cabinet has approved the sale of the Government's 12.5 percent share and is now discussingvaluation of these shares.

* Electricity Generating Company (EGCO): the Govermnent has issued a request for cost and technicalproposals for its 15 percent share. It has received 14 responses, from which it has qualified 12. ByApril 8, due diligence will begin on the selected 4-6. Transaction is expected to be closed by June 30.

* The Textile Company: the Cabinet has decided to liquidate it.

* The Glass Company: the Government is discussing a joint venture with a potential investor who wouldlike to retain 2-3 years' monopoly privileges currently planned for the state-owned glass company.

* The Battery Company: the Cabinet has decided to contribute its assets to a joint venture that will beowned 30 percent by the Government and 70 percent by a private investor.

* The Canning Company: the Cabinet has decided to liquidate it.

* The Cold Storage Company: the Cabinet has decided to liquidate it and look into the value of the realestate.

* The Plywood Company: the Cabinet has decided to sell it.

4. BANK GROUP STRATEGY

A. THE BANK

73. The Thailand Country Assistance Strategy of the Bank (CAS) is being presentedto the Board concurrently with this operation. In addition to supporting the Government'sdiligent implementation of the macroeconomic program, the Bank's strategy will focuson the following.

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74. Renewing Competitiveness. The Government must foster renewedcompetitiveness in the private sector because it is the key to returning to high growth.Private savings must be channeled into efficient investment, capital markets must bedeveloped, and new options for savings, such as funded pension programs, must becreated. This requires a sound and stabilized financial sector, and increased governmentcapacity to set the rules for the market where it serves the country's economic interests. Italso requires a restructured corporate sector operating under a modern legal frameworkand financial accounting system to improve market discipline. Thailand must improve thequality of its workforce so that it can produce higher value, more technologicallysophisticated exports; it must also remove export infrastructure bottlenecks and providean effective framework for corporate restructuring.

75. Improving Governance. Thailand must ensure that its public sector supports-not distorts-development. It needs to strengthen macroeconomic management, improvepublic financial management and administration, strengthen the legal framework tofacilitate business revival, and create an efficient public production apparatus.

76. Sharing Growth and Ensuring Quality of Life. Thailand must ensure thateconomic benefits of development are shared among all segments of society, especiallythe poor and the vulnerable. Finally, sustainable economic recovery requires diligentattention to protect the environment to ensure present and future quality of life for allcitizens. This requires better public expenditure allocations and environmentalmanagement.

77. The Government of Thailand is committed to this agenda and has been takingactions toward major political, bureaucratic, legal, and institutional reforms. But movingfrom a fragile stability to sustained economic recovery requires adequate external financeto support the country while it undertakes reforms during a period when it is unable toattract private capital. Thailand has therefore requested a program of substantial resourcetransfers, and of strategic policy, institutional and legal advice based on the Bank'sinternational experience.

78. A base lending program in the range of $2.9 billion over the three fiscal yearsFY98-00. This level of financing will stimulate capital inflows to help the country restoresustains economic growth. In addition, partial credit guarantees of around $500 millionwould enable selected public sector enterprises to mobilize foreign investment forsectoral programs to foster economic recovery and improve prospects for eventualprivatization. Lending would comprise: capacity-building operations to strengtheninstitutions that implement economic, financial and sectoral reforms; structuraladjustment lending to revitalize the financial sector, improve the macroeconomicframework and strengthen sectoral performance by increasing competitiveness andrestructuring industry; public sector reform loans buttressed by policy and institutionalreforms and reinforced by reforming public administration and civil service to improvegovernance; and investment projects to ensure that economic benefits are shared among

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all segments of society, especially the poor and vulnerable; and[ to protect theenvirornent to ensure present and future citizens a better quality of life.

79. Nonlending services would comprise two to three formal analytical reports peryear, inf:ormal policy notes, a program of international knowledge exchange, and seminarand workshop series. The Bank's role as a knowledge institution would be to provideaccess to international best practice.

B. IFC

80. The International Finance Corporation (IFC) seeks to work closely with the Bankfor ways to contribute to the Bank's program for financial sector reforms andrestructuring of Thai industries for long-term competitiveness. In past discussions, theThai Government has expressed appreciation for IFC's investment and advisory activitiesin Thailand. In recent years, IFC's investment activities have focused mainly oninfrastructure, petrochemicals and capital markets. IFC has played a critical role indeveloping Thailand's petrochemicals industry by arranging nearly $1 billion dollars infinancing for six petrochemical projects. In social infrastructure, IFC approved apioneering project in financing a private hospital in Bangkok in FY93, and is pursuingadditional opportunities in this area. Private investors are interested in IFC support inother social infrastructure projects such as private technical schools and universities.IFC's cufrent priority is to play a role in the financial restructuring process in which it hasan interest.

C. COORDINATION WITH IMF

81. On August 20 1997, the IMF's Executive Board approved a 34-month Stand-ByArrangement (SBA) for Thailand for an amount equivalent to SDR 2,900 million (505percent of quota). SDR 1,200 million (209.1 percent of quota) was disbursed upon Boardapprovad. Access under the SBA exceeds normal limits considering Thailand'sexceptionally large balance of payments needs, and it is heavily frontloaded to ensure thatthe external financing essential to restore confidence is available as early as possible. InMay 1998, the IMF completed the third review of the program and to date has extended$2.8 billion of the total committed funds under the SBA.

82. The Bank has been working closely with IMF in Thailand. Since the onset of thefinancial crisis, the Bank and Fund have jointly assisted the Governnent to design thecomprehensive financial sector restructuring program that is currently beingimplemented. IMF has paid special attention to issues related to commercial banks, whilethe Bank has focused on the resolution framework for finance companies and onstrengthening the supervision and regulatory framework for the entire system. As thereform program is widened, cooperation between the two institutions continues andincludes corporate restructuring and reform of the legal framework and corporategovernance.

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D. COOPERATION WITH ADB

83. The Asian Development Bank (ADB) pledged $1.2 billion at the August 1997Tokyo Pledge meeting on Thailand. This amount represents disbursements from ADBover the period 1997-99. One-half of the disbursements would be from ongoing projectsand other project loans that are expected to be approved by ADB over the same period.The other half would be disbursements from two proposed program loans that are beingproposed-the Capital Markets Development Program Loan and the Social SectorProgram Loan. These program loans are new and represent additionally over the average$250-300 million that the ADB extends to Thailand annually on a commitment basis.Disbursements are projected to average $150-200 million per year from 1997 to 1999,excluding the two proposed program loans.

5. THE PROPOSED LOAN

84. The proposed loan is part of a two-year program of structural adjustment of theeconomy supported by four single-tranche balance of payments support loans. The firstloan in the series, the Finance Companies Restructuring Loan (FCRL) approved by theBoard in December 1997, supported measures toward the resolution of the suspendedfinance companies and committed the Government to comprehensive reform of thefinancial sector over the next two years. The proposed loan, while further deepening therestructuring of the financial sector, supports measures to strengthen the corporate sector.It paves the way for two more adjustment loans that will continue to track reform of thefinancial and the corporate sectors but with a sharper focus on strengthening thecompetitive foundations of the economy.

85. The proposed adjustment lending program is a flexible response to the Thai crisis.It allows a closer tracking of the evolving crisis to commit the Government to remedialmeasures, while remaining focused on the needed fundamental restructuring of theeconomy. The program is being coordinated with IMF, ADB and bilateral lenders. It isconsistent with the objectives of the CAS.

86. The Government has taken a number of actions in fulfillment of the loanconditions in the areas of the macroeconomic framework, corporate restructuring,financial sector, insolvency regime and secured lending, corporate governance andfinancial disclosure, and privatization. The specific actions are listed in the Letter ofDevelopment Policy (Schedule I) and the Policy Matrix (Schedule II).

A. LOAN SIZE AND FEATURES

87. Loan Size. A single-tranche loan of $400 million is proposed to be madeavailable upon loan effectiveness, anticipated for July 1998. The Closing Date of the loanwould be December 31, 1998.

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B. CONDITIONS FOR BOARD PRESENTATION

88. Terms and Conditions. At the request of the Government, and consistent withthe country's external debt management policy, the proposed loan, in the amount of $400million, would be a Single Currency Loan (SCL) in US Dollars, with a 15-year maturity,including a 3-year grace period, at the Bank's standard fixed US Dollar SCL interest rate.

89. D)isbursement and Procurement. The proposed loan would support theeconomiic and financial restructuring program of the Govermment described in the Letterof Development Policy, except for items specified in Schedule 1 of the Loan Agreement.The Government will open and maintain a deposit account with BOT. Upon effectivenessand tranche release, the Government will submit a simplified withdrawal application tothe Banlc, against which the Bank will disburse the loan proceeds in one tranche into theDeposit Account. Disbursements will not be linked to specific purchases, and supportingevidence for disbursements is therefore not required. If after deposit is made in theDeposit Account the proceeds of the loan and any part thereof is used for ineligiblepurposes as defined in the Loan Agreement, the Bank will require the borrower to either(a) return the amount to the Deposit Account for use for eligible purposes, or (b) refundthe amount directly to the Bank, in which case the Bank will cancel an equivalentundisbursed amount of the loan.

90. Accounts and Audit. BOT, on behalf of the Government, will maintain theaccounts for this loan in accordance with sound accounting practices. The accounts anddisbursements under the program will be audited within four months after the close of thefiscal year.

91. Monitoring Arrangement. MC)F and BOT will be responsible for monitoring theimplementation of the restructuring program with the help of the Letter of DevelopmentPolicy, through regular reviews, as well as in the context of the preparation andsupervision of other projects. MOF and BOT will prepare a final report on the progress ofthe program within six months after the closing date of the loan, and submit the report tothe Bank.

92. Environmental Assessment Requirements. In accordance with the Bank'sOperational Directive on Environmental Assessment (OD 4.00, Annex A), the proposedoperation has been placed in Category "U" and will not require em environmentalassessment.

C. BENEFITS AND RISKS

93. Benefits. The loan will help meet critical foreign exchange needs of theGovernment of Thailand to strengthen the capital account. This will boost confidence andlend stalbility to the exchange rate. The loan supports the ongoing reform of the financialsector. Orderly resolution of the closed finance companies, restructuring andcapitalization of other financial institutions and strengthening of supervision will makefor healthy bank balance sheets and a sound capital base to resume lending to the

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corporate sector. Several of the reform measures supported by the loan will facilitatecorporate restructuring and thus will strengthen the corporate sector to resume economicgrowth. Reform of bankruptcy and foreclosure laws and corporate governance, and asound strategy for privatization and reform of state enterprises, supported by the loan willrestore confidence and bring investors back to Thailand. The proposed structural reformwill strengthen and will help modernize the business environment in Thailand to supportfuture growth.

94. Risks. The greatest risk lies in misreading the current market rebound as a sign ofcomplete recovery. Although the market is less pessimistic now than it was six monthsago, capital inflows are still small, mainly equity in selected banks and corporations withproven track record. Creditors, by and large, are still wary. The wrong response to themarket's "wait and see" attitude would be to declare victory and leave unfinished thereform of financial institutions. This might well start another round of confidence loss. Inparticular, slow progress in reforming the legal and institutional framework forbankruptcy and foreclosure could undermine the imminent sale of assets of the closedfinance companies and would affect market confidence adversely. Another risk lies inheavy-handed intervention in the ongoing restructuring of financial institutions orcorporations that might crowd out market-led workouts and result in a large fiscal cost.Among the external risks, further instability due to regional contagion now seems lesslikely, although external demand remains anemic because of the slow down in Japan.Finally, the fragile coalition currently in power, whose economic team enjoys credibility,might not last long enough to complete the reform agenda. This would lead to anotherround of political and economic uncertainty.

95. Fortunately, recent political and economic developments suggest that the risksoutlined above are small. The Government survived a no-confidence motion in March,which has dispelled fears of a sudden change. The economic leadership is aware of therisk of declaring victory prematurely and is managing expectations accordingly. Financialsector reform remains a top priority and progress is satisfactory. The Government isavoiding quick-fix remedies and is committed to modernizing the legal and corporategovernance framework for strengthening the overall environment for doing business inThailand.

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6. RECOMMENDATION

96. I am satisfied that the proposed loan complies with the Articles of Agreement ofthe Bank and I recommend that the Executive Directors approve it.

James D. WolfensohnPresident

by Sven Sandstr6m

Washington, D.C.June 16, 1998

Attachments

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THAILAND: KEY PROGRAM INDICATORS

Nominal Exchange Rate (end of Ratio of Credit to GDP, 1987-1996period) and Interbank Interest Rate

(average) 1.460- 1.3-

so 1.240 ~~~~~~~~~~~~~~~~~~~~1.1

40 I X 1 . I l l l l l l I301 0.9

20. 0.8.0.7-

10. ~~~~~~~~~~~~~~~~0.6

0 - .~ ~ 00 0 0 % 0% 0 % 0o~~~~~~~~~~~~~~~~r ono a,o

BOT _ Exchange Rate (Baht/US$) Source: IMF

Source: BOT - Interbank Rate (average)

THAILAND: OVERVIEW OF KEY FINANCIAL SECTOR INSTITUTIONS

Figures for banks and finance companies as Commercial Finance Specialized Financial Totalof December 1996, SFIs as of March 1996 Banks Companies Intermediaries (see Note)

Number of Institutions 29 91 6 4,870Of which Foreign 14 0 0 N/A

Total Assets (million Baht) 5,627 1,812 842 9,030Share of Financial System Assets (%) 62 20 9 100Total Funds from Households (Deposits) 2,643 661 321 3,948Share of Financial System Deposits (%) 67 17 8 100

Note: Total includes Credit Foncier, mutual fund management and insurance companies, agricultural andsavings cooperatives (estimated at end-1995), and provident funds

Source: Bank of Thailand.

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THAILAND: EXTERNAL FINANCING OUTLOOK(In billions of US dollars)

Actual Est. Prog./a Projected1996 1997 1998 1999 2000

Uses

Current Account Balance -14.4 -3.0 8.5 5.5 2.3Repayments on LT Debt -4.3 -6.4 -8.6 -7.1 -7.2Other Capital Flows 3.6 -22.1 -18.3 0.0 0.0

Swaps and Forwards 0.0 -9.8 -8.9 0.0 0.0Outflow of ST and other capital 0.0 -12.3 -9.4 0.0 0.0

Change in International Reserves -2.2 11.8 -1.0 -8.0 -6.0(- = accumulation)Financing Requirement -17.3 -19.7 -19.4 -9.6 -10.9

Sources

Foreign Direct Investment 1.6 2.3 2.7 3.0 3.3Portfolio Investment 1.1 0.0 0.6 0.7 1.1Multilateral 0.3 1.2 1.8 1.6 1.3IBREI 0.1 0.5 1.0 1.0 1.0ADB 0.1 0.6 0.6 0.4 0.3

Bilateral 1.3 6.2 2.9 1.6 1.3IMF 0.0 2.4 0.7 0.5 0.4Net Other and Unidentified Capital /b 13.0 7.7 10.8 2.2 3.4

/a Projections from the IMF program./b These include new rollover of short-term credits, new private flows and rescheduling

of private debt.

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TABLE 1: THAILAND: MACROECONOMIC FRAMEWORK, 1996-98

1996 1997 1998Revised First Second Estimate First Second Third

Review Review Review Review Review

Real GDP growth (%) 5.5 0.6 -0.4 -0.4 0-1 -3 to -3.5 -4 to -5.5Consumption 6.7 0.5 0.1 0.1 -1.1 -5.0 -8.0Gross fixed investment 6.0 -13.3 -16.0 -16.0 -6.5 -21.0 -24.0

CPI inflation (end period, %) 4.8 10.0 7.7 7.7 6.0 10.6 10.0CPI inflation (period average, %) 5.9 6.0 5.6 5.6 10.0 11.6 10.5

Saving and Investment (% of GDP)Gross domestic investment 41.7 35.8 35.0 35.0 34.3 29.1 28.2Private, including stocks 31.5 25.3 23.5 23.5 24.7 17.6 16.4Public 10.2 10.5 11.5 11.5 9.6 11.5 11.8

Gross national saving 33.7 31.8 32.9 32.9 32.5 33.0 35.0Private, including statistical discrepancy 20.6 21.3 22.2 22.2 21.7 23.0 25.6Public 13.1 10.6 10.7 10.7 10.8 10.0 9.5

Foreign saving 7.9 3.9 2.2 2.0 1.8 -3.9 -6.9

Fiscal accounts (percent of GDP) /aCentral government balance 2.4 -0.9 -1.0 -1.0 1.0 -1.6 -2.4

Revenue and grants 19.4 17.6 18.1 18.1 16.6 15.8 15.5Expenditure and net lending 17.0 18.5 19.1 19.1 15.6 17.4 17.9

Overall public sector balance 2.7 -1.5 -1.5 -2.1 1.0 -2.0 -3.0

Monetary accounts (end period, I%)M2A growth 12.7 1.5 3.1 2.1 6.8 5.1 9.0Reserve money growth 12.0 4.4 4.7 4.7 6.8 6.6 8.5

Balance of payments ($ billions)Exports, f.o.b. 54.7 56.4 56.6 56.7 60.9 60.1 57.5Growth rate (in dollar terms) -1.9 3.2 3.5 3.8 7.9 6.2 1.4Growth rate (in volume terms) -5.1 8.3 6.4 9.2 7.7 10.6 8.8

Imports, c.i.f. 70.8 64.2 61.5 61.3 64.3 56.8 50.5Growth rate (in dollar terms) 0.6 -9.3 -13.1 -13.4 0.2 -7.7 -17.7Growth rate (in volume terms) -4.0 -8.4 -9.8 -11.8 -6.2 -5.2 -13.6

Current account balance -14.4 -6.4 -3.3 -3.0 -2.5 4.4 8.5(% of GDP) -7.9 -3.9 -2.2 -2.0 -1.8 3.9 6.9

Capital account balance 13.9 -17.9 -18.0 -15.8 0.3 -12 to -14 -14 to -16Medium- and long-term 11.0 6.5 6.8 6.3 8.5 2-3 4-6Short-term /b 2.9 -24.4 -24.8 -22.1 -8.2 -15 to -16 -18 to -20

Overall balance 2.2 -24.6 -19.8 -18.6 -2.2 -8 to -10 -6 to -8Identified financing (net) 0.0 8.9 5.9 8.0 3.9 5.9 6.4Gross official reserves (end year) 38.7 23.0 27.0 27.0 24.8 23-25 26-28(Months of imports) 6.6 4.3 5.3 5.3 4.6 4.9-5.3 6.2-6.7(Percent of short-term external debt) 103 75 93 90.1 87 109-118 117-126

Forward position of BOT (end-year) /c -4.9 -18.0 -18.0 -18.0 -9.0 -9.0 -9.0

External debt (percent of GDP) 49.9 58.6 59.9 59.9 76.4 76.3 72.5Total debt (billions of US$)/d 90.5 94.9 91.7 91.8 102.5 85.9 89.7

Public sector 16.8 27.8 24.9 24.5 35.4 31.7 32.3Private sector 73.7 67.1 66.8 67.3 67.1 54.2 57.4Medium- and long-term 1 36.2 38.0 38.2 37.4 39.0 33.6 34.5Short-term 37.6 29.1 28.6 29.9 28.1 20.6 22.8

Debtserviceratio_/ 12.3 15.0 15.2 16.2 16.8 18.8 19.5

/a On a fiscal year basis.lb Including outflows associated with the closing of swap and forward contracts by the Bank of Thailand./c Consistent with the elimination of al BOT offshore forward and swap obligations by end-1998./d Excludes loans (estimated at around $4 billion at end-1997), proceeds of which were not brought by Thai corporations intoThailand./e Percent of exports of goods and services.

Source: IMF.

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TABLE 2: THAILAND: SUMMARY OF PUBLIC SECTOR OPERATIONS, 1994195-1997/98 /a

1994/95 1995196 1996/97 1997/98First Second Third

Review Review Review

(In billions of baht)Central governmentRevenue and grants 763 872 866 895 S08 778

Of which: VAT 142 ... 145 209 199 195CIT 159 ... 163 III 81 60Excises 154 ... 180 194 160 160

Expenditure and net lending 659 765 912 839 891 899Current expenditure 438 483 516 460 497 505Capital expenditure 217 273 380 370 382 382Net lending /b 4 10 15 9 12 12

Overall balance 104 107 -46 56 -83 -121

Local govermmentOverall balance 3 6 1 2 2 2

Nonfinancial public sector operationsRetained income 132 153 146 133 159 134Capital expenditure 148 149 178 133 181 166Overall balance -16 4 -32 0 -22 -32

Net lending to nonfinancial public sector enterprises 10 6 6 2 2 2

Consolidated public sector balance 101 122 -71 60 -101 -151

Financing -101 -122 71 -60 101 151External 17 11 17 27 52 40Domestic -117 -133 54 -87 50 IIIBanking system /c -122 -145 133 -87 48 117Other 5 11 -79 0 2 -6

(In percent of fiscal year GDP)Central governmentRevenue anid grants 18.8 19.1 18.1 16.6 15.8 15.5Expenditureandnetlending 16.3 16.8 19.1 15.6 17.4 17.9

Current expenditure 10.8 10.6 10.8 8.5 9.7 10.0Capital expenditure 5.4 6.0 8.0 6.9 7.4 7.6

Overall balance 2.6 2.3 -1.0 1.0 -1.6 -2.4

Local governmentOverall balance 0.1 0.1 0.0 0.0 0.0 0.0

Nonfinancial public sector operationsRetained income 3.3 3.4 3.1 2.5 3.1 2.7Capital expenditure 3.6 3.3 3.7 2.5 3.5 3.3Overall balance -0.4 0.1 -0.7 0.0 -0.4 -0.6

Consolidated public sector balance Id 2.5 2.7 -1.5 1.1 -2.0 -3.0

Financing -2.5 -2.7 1.5 -1.1 2.0 3.0External 0.4 0.2 0.4 0.5 1.0 0.8Domestic -2.9 -2.9 1.1 -1.6 1.0 2.2

Banking system /c -3.0 -3.2 2.8 -1.6 0.9 2.3Other 0.1 0.2 -1.7 0.0 0.0 -0.1

(In billions of baht, except as indicated)Memorandum items:Fiscal year GDP 4,055 4,566 4,770 5,378 5,130 5,028Revenue, treasury accounts basis 761 850 844 872 785 755Expenditure, treasury accounts basis le 643 750 889 802 835 872Cash balance, treasury accounts basis /e 118 100 -44 70 -50 -117Cost of financial sector restructuring (percent of FY GDP) /f 1.3 3.0 2.7Central aovernment debt (Percent of FY GDP) 4.8 3.8 4.6 5.1 5.4 5.4

/a The fiscal year is October I to September 30. Second and Third reviews include fiscal measures./b Excludes B 60 billion in 1997/98 for recapitalization of specialized government institutions (EXIM Bank, Government Housing Bank, Bank of

Agricultural Cooperatives and the Industrial Finance Corporation of Thailand.)AD Including, in 1996/97, a drawdown of deposits (amounting to 3 57 billion) to capitalize the Government Pension Fund, which is offset in domestic

nonbank financing./d The deficit of state enterprises, and the overall public deficit in 1996/97, has been revised upward by 0.6 percent of GDP. The revision does not result

in the violation of any performance criteria for September 1997./e The treasury accounts do not incorporate foreign-financed expenditures.If Estimate based on the imputed interest cost of servicing total financial assistance operations. (This definition has been expanded to become more

comprehensive.) These costs are not included in the public sector accounts.

Source: IMF.

TABLE 3: THAILAND: MONETARY PROGRAM, 1996-98

1996 1997Dec Mar Jun Sep Dec Jan Feb Mar Jun Sep Dec

Actua Actua Actual Actual Actual Actual Actual Prog. Actual /d Prog. Rev. Prog. Rev. Prog. Rev.

(In billions of baht, end period)

Reserve Money 453 462 514 434 474 471 465 480 448 464 468 469 471 505 515Net foreign assets /a 991 987 833 804 628 596 578 446 586 433 485 418 474 403 474Netdomestic assets -538 -525 -319 -370 -154 -125 -112 34 -138 31 -17 51 -2 103 40Net credit to public sector -290 -240 -255 -191 -180 -161 -149 -158 -156 -158 -129 -107 -86 -80 -60Creditto financial institutions 62 18 261 213 319 272 154 450 118 408 170 360 125 368 125FIDF credit/b 28 145 311 554 676 722 626 726 619 731 605 736 600 741 600Indirect instruments -5 -164 -90 -380 -397 -492 -517 -315 -548 -362 -481 -416 -521 -412 -522Other 40 38 40 39 40 42 46 40 47 40 47 40 47 40 47

Other items, net -310 -304 -326 -393 -293 -235 -118 -259 -100 -219 -59 -203 -42 -185 -25

Memorandum items:Reserve money growth (percent) 12.0 12.4 29.8 7.4 4.7 2.6 1.7 3.8 -3.2 -9.8 -9.1 8.1 8.7 6.6 8.5Money multiplier (seasonally adjusted) 10.6 10.4 9.1 10.5 10.5 10.9 10.9 10.4 11.0 10.4 10.5 10.3 10.4 10.4 10.5M2A (billions of baht)L/c 4,725 4,721 4,721 4,682 4,825 4,893 4,896 4,860 4,863 4,892 4,938 4,912 5,016 5,118 5,259Growth rate (percent) 12.7 7.3 4.6 3.0 2.1 3.6 3.8 2.9 3.0 3.6 4.6 4.9 7.1 5.1 9.0Velocity (Dec. 1996 = 100, seas. adj.) 100 101 102 103 103 102 102 105 104 106 103 107 103 107 103

Total FIDF Support ... 145 311 554 676 722 626 726 706 731 692 736 687 741 687Credit ... 145 311 554 676 722 626 726 619 731 605 736 600 741 600Equity ... 0 0 0 0 0 0 0 87 0 87 0 87 0 87

/a Including expected reserve losses, owing to swap and forward transactions of the bank of Thailand, consistent with the balance of payments; at the program exchange rate./b Includes credit extended, and not FIDF equity holdings. In February 1998, a debt-equity conversion of B 87 billion occurred; earlier program projections did not incorporate the conversion./c M2A consists of currncy in circulation and the deposits of banks and finance companies./d For Mach, M2A and its veocity are projectons.

S50es: Do.

TABLE 4: THAiLAND: BALANCE OF PAYMENTS AND FINANCING NEED, 1996-98

1996 1997 1998 1998Actual First Actual Second Revised First Half Second Half

Review Review Second Review Revised Second Review Revised

(in billions of US dollars)

1. Current account balance -14.4 -3.3 -3.0 4.4 8.5 2.7 5.6 1.7 2.9Trade balance -16.1 -4.9 -4.6 3.3 7.1 2.1 4.6 1.2 2.5

Exports, f.o.b. 54.7 56.6 56.7 60.1 57.5 29.2 27.1 30.9 30.4Imports, c.i.f 70.8 61.5 61.3 56.8 50.5 27.1 22.5 29.7 28.0

Services and transfers 1.S 1.6 1.6 1.1 1.5 0.6 1.0 0.5 0.5

2. Capital account balance 13.9 -18.0 -15.8 -14.3 -13.6 -11.1 -9.2 -3.2 -4.5Medium- and long-term capital 11.0 6.8 6.3 2.4 4.7 /a 0.2 3.1 2.2 1.5 /aShort-term capital 0.0 -7.3 -7.3 -8.0 -7.1 -6.0 -5.0 -2.0 -2.1Other capital /b 2.9 -6.0 -5.0 0.3 -2.3 -0.1 -2.8 0.4 0.5Forwards/Swaps 0.0 -11.5 -9.8 -8.9 -8.9 -5.2 4.4 -3.7 -4.5

3. Errors and omissions 2.6 1.6 0.3 0.0 -0.2 0.0 -0.2 0.0 0.0

4. Net balance = 1+2+3 2.2 -19.8 -18.6 -9.9 -5.3 -8.4 -3.7 -1.5 -1.6

5. Changes in official reserves (increase-) - .7 1 .8 10.6 4.0 -1.0 4.0 0.0 0.0 -1.0

6. Financing need = -4-5 0.5 8.0 8.0 5.9 6.4 4.4 3.8 1.5 2.6

7. Available financing = 8 + 9 0.5 8.0 8.0 5.9 6.4 4.4 3.8 1.5 2.6

8. Existing Financing package ... 8.0 8.0 4.3 4.8 2.8 2.8 1.5 2.0Fund ... 2.4 2.4 0.7 0.7 0.4 0.4 0.3 0.3Othae/c ... 5.6 5.6 3.6 4.1 2.4 2.4 1.2 1.7

9. Identified new financing /d ... 0.0 0.0 1.6 1.6 1.6 1.0 0.0 0.6

(In percent; unless otherwise specified)Memorandum items:

Current account balance/GDP -7.9 -2.2 -2.0 3.9 6.9 2.4 4.5 1.5 2.4Export growth -1.9 3.5 3.8 6.2 1.4 6.6 -0.8 5.8 3.4Export volume growth -5.1 6.4 9.2 10.6 8.8 ... ... ... ...Import growth 1.8 -13.1 -13.4 -7.7 -17.7 -19.3 -33.0 6.3 0.7Import volume growth -2.9 -9.8 -1 1.8 -5.2 -13.6 ... ... ...Gross official reserves 38.7 27.0 27.0 23.0 28.0 23.0 27.0 23.0 28.0(in months of imports) 6.6 5.3 5.3 4.9 6.7 5.1 7.2 4.9 6.0(In percent of stock of short-term debt) 103.0 92.6 90.1 108.8 122.5 92.4 108.3 108.8 122.5

/a Includes sovereign bond issues in the third quarter. The proceeds of the bonds are assumed to be deposited with the Bank of Thailand. If the proceeds are deposited with commercial banks, thecorresponding rise in the banks' assets is recorded as outflows in the balance of payments.

/b Consists mostly of unidentified portfolio flows./c Consistent with the agreed financing package and assuming that bilateral creditors disburse proportionally with the Fund./d Includes export financing facilities arranged by ADB ($1 billion) and the JEXIM ($0.6 billion).

Sowce: IMF.

TABLE 5: THAILAND: SHORT-TERM DEBT BY BORROWER TYPE, 1996-98 /a(In billions of US dollars at end of period)

1996 1997 1998Dec Jun Aug Oct Dec Feb Dec

Actual Actual Actual Actual Actual Prelim. Sec. Rev. Revised

Private sector 37.7 36.9 34.6 32.0 29.9 28.2 21.1 22.9

Banks/b 28.9 30.1 28.0 31.3 25.4 24.9 17.9 20.4Foreign banks 18.5 20.4 18.4 18.5 ... ... ... ...Thai banks 10.4 9.7 9.6 12.8 ... ... ... ...

Nonbank 8.8 6.8 6.6 5.2 4.5 3.2 3.2 2.5Trade credits 3.8 3.9 3.8 4.0 ... ... ...Other 5.0 2.9 2.8 1.2 ... ... ... ...Finance companies ... 2.0 ... ... ... ... ... ...Other ... 0.9 ... ... ... ... ... ...

Public sector 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total 37.8 36.9 34.6 32.0 29.9 28.2 21.1 22.9

/a Debt with original maturity of one year and less./b Includes offshore Bangkok International Banking Facilities (BIBFs), and the Thai Export-Import Bank's debt that is not

guaranteed by the Government. The latter was previously included in the public sector debt.

Source: MF.

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TABLE 6: ITAILAND: OUTSTANDING FORWARD AND SWAP OBLIGATIONS, 1996-98(In billions of US dollars)

1996 1997 1998Dec Dec Mar Jun Dec

Actual Actual Second Actual Second Revised Second RevisedReview Review Review

Onshore 3.9 9.2 9.1 9.7 9.1 10.2 9.0 9.0Foreign banks 2.9 6.7 7.0 7.2 7.0 7.4 6.9 6.9Thaibankts 1.0 2.5 2.1 2.5 2.1 2.8 2.1 2.1

Offshore 1.0 8.8 5.7 6.0 3.8 1.9 0.0 0.0Hedge funds 0.4 2.5 0.7 0.9 0.0 0.0 0.0 0.0Other 0.6 6.3 5.0 5.1 3.8 1.9 0.0 0.0

Total 4.9 18.0 14.8 15.7 12.9 12.1 9.0 9.0

Source: IMFI.

TABLE 7: THAILAND: INTEREST RATES, 1996-97(In percent a year, end of period)

1996 1997 1998

Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr

Bank of ThailandBank rate 10.5 10.5 10.5 10.5 10.5 10.5 10.5 12.5 12.5 12.5 12.5 12.5 12.5 12.5 12.5 12.5 12.5

FIDF lending (average) 14.3 14.2 14.5 14.9 14.9 13.1 13.2 16.0 16.8 18.5 16.2 19.2 21.3 19.9 19.7 19.1 18.3

Market-determinedRepurchase /a

One-day 12.0 13.5 9.0 9.8 8.4 11.0 17.0 16.5 20.0 20.8 16.3 20.5 24.0 20.5 21.0 19.8 18.0

One-month 11.3 13.0 11.5 10.0 9.0 13.1 14.8 13.9 20.3 20.0 16.5 18.5 24.5 22.4 21.8 21.6 18.1

Interbank (ovemight) /bLowest (most creditworthy) 12.5 11.0 8.5 5.8 6.5 10.0 13.5 9.5 19.8 16.3 14.8 14.8 16.0 16.5 15.5 15.0 16.0

Highest (least creditworthy) 15.5 18.0 10.6 9.5 8.5 13.0 21.0 20.0 22.0 29.0 25.5 26.0 29.8 24.5 26.3 23.3 19.0

Interfinance (overnight) /bLowest (most creditworthy) 14.8 12.8 11.3 7.0 7.9 11.4 13.5 20.0 18.0 18.0 11.5 15.5 18.0 16.0 16.0 16.0 16.0

Highest (least creditworthy) 17.8 19.0 19.0 15.6 15.0 23.0 35.0 35.0 30.0 33.0 28.0 31.5 37.5 34.5 26.5 25.0 27.0

Deposit satesCommercial banks /c

Savings deposits 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0

3-monthstime deposits Id 9.3 9.3 9.3 9.3 9.1 8.8 8.8 10.8 10.8 10.8 10.8 10.8 10.8 10.8 11.1 11.1 11.1

12-monthstimedeposits/d 8.9 8.9 8.9 8.9 8.8 8.4 8.4 10.8 10.8 10.8 10.8 10.8 11.5 10.8 11.1 11.1 11.1

Finance companies3-monthstime promissory notes/d 10.9 11.0 11.0 11.3 11.3 11.8 11.6 14.0 13.3 14.1 13.0 13.0 13.9 13.9 12.9 13.3 ...

Government Savings BankSavings deposits Id 4.9 4.9 4.9 4.9 4.9 4.9 4.9 4.9 4.9 4.9 4.9 4.9 4.9 4.9 4.9 4.9

6-monthstime deposits /d 9.1 9.1 9.1 9.1 9.1 8.6 8.6 9.1 9.1 9.1 10.5 10.5 10.8 10.9 11.3 11.3 ...

Lending ratesCommercial banks

Minimum lending rate /c/d 13.1 13.1 13.1 13.1 13.0 12.8 12.8 13.8 13.8 14.3 14.8 14.8 15.3 15.3 15.4 15.4 15.4

Minimumoverdraftrate" c/d 13.4 13.4 13.4 13.4 13.4 13.4 13.4 14.4 14.4 14.9 15.4 15.4 15.9 15.9 16.0 16.0 16.0

Minimum retailratelcld 13.3 13.3 13.3 13.3 13.3 13.3 13.3 14.3 14.3 14.8 15.3 15.3 15.8 15.8 15.9 15.9 15.9

Finance companiesMinimum loan rate (average) 13.7 13.6 14.0 14.2 14.2 13.9 13.8 15.3 15.4 16.2 16.3 16.3 17.3 17.4 17.6 17.6 ...

/a Collateralized by govenmment securities.lb Uncollateralized./c As offered by the four largest commercial banks.Td Midpoint of range.

Source: Bank of Thailand.

-36 -

TABLE 8: THAILAND: PROGRAM MONITORING, JuLY 31,1997 - MAY 8,1998

Jul-31 Aug-29 Sep-30 Oct-3

13 Nov-28 Deo-33 Jan-30 Feb-27 Mar-31 Apr-30 May-6 May-7 May-3

(In bakt per US dollar)Spot exchange rate

Onshore .31.7 34.2 36.4 41.1 40.2 4g.0 52.5 43.2 38.9 38.6 38.7 38.7 38.7Offshore/la 31.9 34.3 35.9 40.6 40.3 46.9 ... ... ... ... .. .. ..

NEER (increase denotes baht appreciation) 83.4 77.6 73.6 65.4 68.6 39.0 54.9 65.9 72.7 73.6 72.5 73.1

Forward exchange rate, one-month /hOnshore 31.9 34.5 36.6 41.3 40.5 48.3 53.0 43.4 39.2 39.0 39.1 39.1 39.1Offshore /a 32.1 35.0 36.2 40.9 40.7 47.3 ... ... ... ... .. .. ..

Swap premium, oine-month (in percent) AbOnshore 6.0 13.0 7.2 8.3 9.5 8.6 12.0 8.2 9.5 11.6 11.4 12.1 12.3offshore /a 9.6 27.5 8.0 10.2 10.9 10.7 ... ... ... ... .. .. ..

(In billions of US dollaus)

Cufrent accDunt balance, end-month -0.4 -0.4 0.1 0.7 1.0 1.2 1.2 1.2 ... ... .. .. ..Exports (12-month percent change) 7.9 2.2 1 1.5 11.7 0.8 7.8 -7.9 5.4 ... ... .. .. ..

Net intemnational ieserves 1.3 0.8 4.6 5.2 6.3 6.6 6.2 7.4 9.2 11.2 11.4 11.3 11.4Foreign asset 30.5 25.9 29.6 31.2 26.2 27.0 26.4 26.2 27.6 29.5 30.4 30.3 30.2Foreign liabilities 0.0 1.6 4.5 5.1 5.5 7.3 8.1 8.1 9.4 9.4 9.4 9.4 9.4Of which: IMF . 1.6 1.6 1.6 1.6 2.4 2.4 2.4 2.7 2.7 2.7 2.7 2.7

Swaps and forwardls,notastock -29.2 -23.6 -23.4 -24.4 -18.3 -18.0 -17.8 -16.3 -15.7 -15.6 -16.3 -16.3 -16:1Onshore -10.1 -7.9 -8.2 -10.2 -9.4 -9.2 -9.3 -9.1 -9.7 -30.2 -10.5 -10.6 -30.9Offshore /a -19.1 -15.6 -15.2 -14.2 -8.9 -8.8 -8.5 -7.2 -6 -5.4 -5.8 -5.7 -5.2

Percent

Jul Aug Sep Oct NOV Dec Jan Feb Mar AprExtemal debt rolloverrate /c .. .. .. 91 73 73 63 75 ... ... .. .. ..

Thai banks (excludingliBEEF) .. .. .. 63 38 60 58 110 86 IIINonbanks .. .. .. 67 49 33 19 44 66 68

Interet ratesOne-day repurchiase 16.5 20.0 20.8 16.3 20.5 24.0 20.5 21.0 19.8 18.0 17.8 37.8 17.8Overmight interbank (median) 13.8 20.9 22.6 16.0 21.5 24.8 21.3 22.1 20.4 17.5 16.0 15.0 36.5

Lowest (most creditworthy) 9.5 19.8 16.3 lt.0 14.8 16.0 16.5 15.5 15.0 16.0 8.0 11.0 33.0Hfighest (least creditworthy) 20.0 22.0 29.0 25.5 26.0 29.8 24.5 26.3 23.3 19.0 18.3 18.0 37.8

(in billions of baht)

FIDF support,totsivalue 423 512 554 591 630 676 fl2 713 706 696 694 693 693Banks 47 128 168 206 227 292 332 320 309 298 295 293 293

Of which: deht-equity swaps ... ... ... ... ... ... ... 87 87 87 87 87 87Thirty-three finance companies 8 16 21 25 25 29 37 39 44 45 46 46 46Fifty-eight finance companies 368 368 364 360 358 355 354 354 353 353 353 353 353

Balance sheet ofdthe BOTReserve money 469 436 434 444 442 473 471 465 448 456Net foreign assets /d 973 778 804 838 665 630 596 578 586 645Net domestic aswets -505 -343 -370 -395 -224 -157 -325 -112 -t238 -189

(SET index)

Stock market index 666 502 545 447 395 373 495 528 459 432 393 394 386

/a Capital and exclhange restrictions were lifted on January 30, 1998, and the onshore and offshore markets are unified./b The forward rare is computer from the swap premiium and the spot (closing) quote. The swap premnium is equivalent to a baht-dollar interes rafte differential./c The rollover rate is calculated as (1-(Ioan repayments - new cradits/asnortization due)* 100.Td At programn exchange rates.

Sourc: Bank of Tbailand and IMF.

- 37 -

TABLE 9: THAILAND: RELATIONS WITH THE WORLD BANK GROUP(As of May 12, 1998)

(In millions of US dollars)

IBRD IDA Total

Total lendingAgriculture/rural development 1,094.6 37.5 1,132.1Education 384.3 54.5 438.8Urban development 185.9 0.0 185.9Industry 69.5 0.0 69.5Transportation 1,129.1 0.0 1,129.1Telecommunications 303.6 0.0 303.6Power and energy 2,512.6 0.0 2,512.6Population 0.0 33.1 33.1Public administration 32.0 0.0 32.0Structural adjustment 675.5 0.0 675.5Financial sector technical assistance 15.0 0.0 15.0Finance companies restructuring 350.0 0.0 350.0Economic management implementation 15.0 0.0 15.0

Total /a 6,767.1 125.1 6,892.2

Commitments for FY 1998 350.0 0.0 350.0

/a Of which $5,215 million has been disbursed.

- 38 -

TABLE 10: THAILAND: NET CAPITAL FLOWS, 1992-96 /a

1992 1993 1994 1995 1996

(US$ million)Net Capiltal Flows 9,652 10,515 12,183 21,921 18,031

Medium and long term 4,263 7,396 4,606 9,332 12,242Private Sector 3,972 6,647 4,628 8,140 10,964

Direct investment (equity) 1,548 1,232 813 1,129 1,602Loans and credit 1,745 1,847 3,161 3,915 8,243Portfolio and other /b 679 3,568 654 3,096 1,119

Public Sector 291 749 -22 1,192 1,278Public enterprises 501 622 192 810 828Central government -210 127 -214 382 450

Short-term capital 5,389 3,119 7,577 12,589 5,789

(as % of total)Net Capilal Flows (as % of total) 100.0 100.0 100.0 100.0 100.0

Medium and long term 44.2 70.3 37.8 42.6 67.9Private Sector 41.2 63.2 38.0 37.1 60.8

Direct investment (equity) 16.0 11.7 6.7 5.2 8.9Loans and credit 18.1 17.6 25.9 17.9 45.7Portfolio and other /b 7.0 33.9 5.4 14.1 6.2

Public Sector 3.0 7.1 -0.2 5.4 7.1Public enterprises 5.2 5.9 1.6 3.7 4.6Central government -2.2 1.2 -1.8 1.7 2.5

Short-term capital 55.8 29.7 62.2 57.4 32.1

/a These capital flows do not include any movements in monetary capital such asmonetary gold or net balances in IMF accounts.

/b Including debt securities.

Source: IMF.

- 39 -

TABLE 11: THAILAND: RELATIONS WITH THE ASIAN DEVELOPMENT BANK(As of April 30, 1998)

(In millions of US dollars)

Total lendingEnergy 1,632.2Transport and communications 1,214.5Social infrastructure 569.4Agriculture and natural resources 409.1Financial sector 440.0Industry and nonfuel minerals 39.0

Total /a 4,304.3

Commitments for FY 1998 850.0

/a Of which $2,729.4 million has been disbursed.

Source: Prepared by ADB staff.

- 40 -

TABLE 12: THAILAND: MEDIUM-TERM SCENARIO, 1997-2003

1997 1998 1999 2000 2001 2002 2003

Real GDPI growth (percent) -0.4 -5.0 2.0 4.5 6.0 6.0 6.0Consumption 0.1 -8.0 1.2 3.1 5.5 6.8 6.2Gross fixed investment -16.0 -24.0 6.5 13.0 12.0 6.5 6.5

CPI inflalion (period average, percent) 5.6 10.5 7.0 5.0 s.0 4.0 4.0

Savings and investment (percent of GDP)Gross domestic investment 35.0 28.2 29.6 32.4 34.2 34.3 34.5Gross national saving 32.9 35.0 33.8 34.3 34.0 32.8 32.2Foreign saving 2.0 -6.9 -4.1 -1.9 01.2 1.6 2.3

Fiscal accounts (percent of GDP) /aOverall public sector balance -2.1 -3.0 -1.5 0.0 0.0 0.0 0.0

Balance of payments ($ billions)Exports, f.o.b. 56.7 57.5 61.7 66.7 72.0 77.5 83.3Imports, c.i.f. 61.3 50.5 58.0 66.5 75.1 82.9 90.1Trade balance -4.6 7.1 3.7 0.2 -3.0 -5.4 -6.9Current account balance -3.0 8.5 5.5 2.6 -0.3 -2.6 -4.1

(percent of GDP) -2.0 6.9 4.1 1.9 -0.2 -1.6 -2.3Capitalaccountbalance/b -15.6 -13.8 -0.1 2.5 4.6 4.6 4.5Overall balance -18.6 -5.3 5.4 5.1 4.3 2.0 0.4Gross official reserves (end-year) 27.0 28.0 36.0 41.6 41.6 38.6 36.4

(Months of imports) 5.3 6.7 7.4 7.5 6.7 5.6 4.8(Percent of short-term external debt) 90 122 201 280 312 312 320

External debt (percent of GDP) 59.6 72.5 64.4 58.3 49.5 41.0 34.4Debt service ratio /c 16.2 19.5 19.2 18.4 19.5 20.1 17.8

Debt service to the FundIn percent of exports of goods and 0.0 0.2 0.2 0.5 1.7 1.6 0.6

nonfactor servicesIn percent of total debt service 0.1 0.9 1.0 2.4 8.3 7.7 3.5

/a On a fiscal basis./b Including errors and omissions./c Percent of exports of goods and services.

Source: IMIF.

- 41 -

TABLE 13: THAILAND: INTEREST COVERAGE RATIOS OF NONFINANCIAL PRIVATECORPORATIONS, 1995-97 /a

1995 1996 1997

All nonfinancial corporations /b 3.7 2.5 1.1

Agribusiness 3.6 3.2 2.5

Building and furnishing materials 2.1 1.8 1.2

Chemicals 2.8 1.9 0.7

Commerce 6.0 7.0 4.8

Communication 5.5 3.2 1.4

Electrical products, computer, and electronic parts 4.6 3.1 2.1

Health care services 3.8 2.3 0.5

Property development 7.3 4.1 -0.3

Textiles, clothing and footwear 2.6 0.2 0.4

Other 2.7 2.0 1.2

(In percent)

Memorandum items:

Growth in earnings before interest and tax payments

All nonfinancial corporations 2/ ... -4.2 -26.9Growth in interest obligations (in percent)

All nonfinancial corporations 2/ ... 43.3 67.7

/a Interest coverage ratio is defined as the ratio of earnings before interest and taxes

(EBIT) to interest obligations.

/b Consisting of 65 corporations, which account for about one-fourth of the nonfinancial

private corporate sector's external debt.

Source: Based on information provided by Stock Exchange of Thailand.

TABLE 14: THAILAND: EXISTING OFFICIAL FINANCING PACKAGE(In billions of US dollars)

Signing Date Loan Amount Original Disbursement First Review Second Review Total Third ReviewDate Amount Date Amount Date Amount Disbursement Projected

to date to date

Total financing package /a /b 17.20 6.34 2.97 0.98 10.29 0.47

IMF 20-Aug-97 4.00 25-Aug-97 1.62 11-Dec-97 0.81 9-Mar-98 0.27 2.70 0.14ADB/c 19-Dec-97 1.20 23-Dec-97 0.30 17-Mar-98 0.30 ... ... 0.60 0.00IBRDl/d 12-Dec-97 1.50 29-Dec-97 0.35 ... ... ... ... 0.35 0.42Bilateral creditors 10.50 4.07 1.86 ... 0.71 5.93 0.33Japan /e 1-Sep-97 4.00 10-Sep-97 1.67 6-Jan-98 0.76 23-Mar-98 0.27 2.70 0.14Australia 9-Sep-97 1.00 12-Sep-97 0.40 17-Dec-97 0.20 13-Mar-98 0.08 0.68 0.04Brunei Darusalam 16-Nov-97 0.50 4-Mar-98 0.20 4-Mar-98 0.10 25-Mar-98 0.04 0.34 0.02China 29-Oct-97 1.00 10-Nov-97 0.40 17-Dec-97 0.20 13-Mar-98 0.08 0.68 0.04Korea /f 11-Oct-97 0.50 22-Oct-97 0.20 ... ... ... ... 0.20 0.00Hong Kong, China 21-Sep-97 1.00 8-Oct-97 0.40 17-Dec-97 0.20 13-Mar-98 0.08 0.68 0.04Indonesia /f Not signed 0.50 ... ... ... ... ... ... 0.00 0.00Malaysia 15-Sep-97 1.00 25-Sep-97 0.40 17-Dec-97 0.20 13-Mar-98 0.08 0.68 0.04Singapore 6-Sep-97 1.00 11-Sep-97 0.40 17-Dec-97 0.20 13-Mar-98 0.08 0.68 0.04'

Memorandum items:Total package after shortfall g 16.40 ... ... ... ... ... ... ...Possible contribution from Canada Not yet signed 0.50 ... ... ... ... ... ... 0.36

/a The original program assumed disbursements of $14 billion for 1997-98, although final commitments were $17.2 billion./b Excludes Canada's possible contribution./c The $1.2 billion comprises the financial Markets Reform Program (FMRP) Loan ($300 million) approved in December 1997; a social sector program loan ($500 million to be disbursed in two tranches:$300 million in March and $200 million in December); and project loans (totaling $400 million), including some existing projects. ADB has arranged $950 million commercial cofinancing of a $50 millionexport sector loan./d The World Bank approved the Financial Sector Adjustment Loan of $350 million in December 1997./e The loan amount is Y 480 billion, equivalent to about $4 billion. Actual disbursements in US dollars may vary with the yen-dollar exchange rate./f In light of difficult conditions in these countries, no further drawings are envisaged.2S From Korea and Indonesia.

Source: IMF.

-43 - SCHEDULE I

SCHEDULE 1: LETTER OF DEVELOPMENT POLICY(English Translation of the Original Document in Thai)

[Date]Mr. James D. WolfensohnPresidentInternational Bank for Reconstruction and Development1818 H St. N.W.Washington, D.C.

Subject: Proposed Economic and Financial Adjustment LoanLetter of Development Policy

The economy is showing signs of stability in response to the macroeconomicframework designed with assistance of the International Monetary Fund. The baht-dollarexchange rate has appreciated and daily volatility has declined. Domestic interest ratesthat rose sharply following the float of the Baht have started to moderate. The inflationarypressure has been modest and the current account, undergoing a faster-than-expectedadjustment, will record a large surplus in 1998.

To fundamentally achieve financial sector restructuring and recover confidencefor the financial sector in general, we have taken several important measures in thefinancial sector. Following the decision to close down 56 finance companies, satisfactoryprogress was made toward the sale of assets. The prudential and regulatory framework forthe remaining financial institutions is being strengthened. International loan classificationstandards have been adopted and provisioning rules are being tightened. The program forstrengthening supervision is being finalized. The Bank of Thailand has recentlyintervened in several weak commercial banks and finance companies, removing managersand directors, wiping out existing shareholders and converting FIDF claims into equity.The market-led recapitalization has begun and foreign investors are concludingtransactions with several large commercial banks.

However, the economy is contracting more than previously anticipated due tocontinuous regional turmoil and drastic domestic demand drop. Some adjustment inprivate investment was necessary following the excesses associated with the investmentboom, especially in the property sector. But devaluation of the Baht and liquidityshortages have caused firms across a broad spectrum of economic activity to curtail theiractivities. Continued corporate fragility will likely increase nonperforming loans, impederecovery of the financial sector and perhaps prolong the contraction phase.

- 44 - SCHEDULE I

Macroeconomic stability and consolidation of financial sector restructuring willremain top priority in the next phase of structural reform. The stable economicenvironment now permits a more flexible fiscal and monetary stance to stimulateaggregate demand and lower the cost of capital. In corporate restructuring, we areencouragiing dialogue between creditors and debtors and we are reforning the bankruptcyand foreclosure regime to provide a range of workout options. We are also improving theinvestment climate and promoting market discipline through reliable financialinformation and strengthened corporate governance. The enabling environment forprivate investment will be further strengthened by our programs for privatization andpublic enterprise reform.

While maintaining the pace of structural reform for corporate and economicrecovery, we are committed to cushioning the impact of the crisis on the more vulnerablesegments of the population. With assistance from the World Bank, the OECF (SocialInvestment Project, B 21.6 billion) and the Asian Development Bank (Social SectorProgram Loan, B 20 billion), we are strengthening the social safety net by creatingemployment, providing training, and easing access to health and education services. Weshall maintain crucial rural development programs and promote community participationin their design. We are strengthening our capacity to monitor poverty incidence forimproved targeting. The price-based support programs that we have designed includemaintaining subsidized urban bus and rail fares and increasing severance pay to workerswith more than 10 years of work experience.

Macroeconomic and Fiscal Program

We recognize that macroeconomic stability is fundamental to the return ofconfidence and corporate recovery. Following the successful completion of IMF's thirdreview, we are further modifying the macroeconomic framework. Recently the currencyhas strengthened and the recession has deepened, creating room for monetary expansionto meet the economy's liquidity needs, and lower interest rates. Consequently, reservemoney growth for 1998 is now revised upward to about 8.5 percent (compared to 6.6percent set in March) to be met largely from the improved foreign reserves. As a resultspecialized banks can alleviate the credit crunch arising from the commercial banks'reluctance to lend, and can add to the trade finance facilities provided by the Japan EXIMBank ($600 million) and ADB under the cofinancing facility ($1 billion). We shall retainflexibility in the monetary program design and will tailor it to support economicrecovery.

Fiscal tightening was an appropriate signal to the market of our resolve to bringdown the current account deficit. However, maintaining a tight fiscal stance duringeconomic contraction and reduced revenue collections will exacerbate the decline inaggregate demand and may delay economic and corporate recovery. Therefore, we havedecided to revise the targeted 1998 overall public sector balance from minus 2 percent ofGDP to minus 3 percent of GDP. This will create the fiscal room for foreign financing ofsocial expenditures. We will watch economic developments closely and will retain

-45 - SCHEDULE I

flexibility in the fiscal stance to meet the cost of financial restructuring and, if needed, tostimulate aggregate demand.

Financial Sector Restructuring

The progress made in financial sector reform is encouraging but we recognize thatmuch remains to be done. The institutional design and operating rules to resolve closedfinance companies are at a critical stage and the market anticipates a transparent and rapidsale of assets estimated at B 900 billion. The remaining financial institutions need to bestrengthened to reduce their dependence on liquidity support from the FinancialInstitutions Development Fund. Recent direct intervention by the Bank of Thailand insome open finance companies, plus the smaller commercial banks, underscores the weakasset base of many financial institutions. These uncertainties continue to fuel depositors'flight to quality, exacerbating liquidity problems. We are committed to taking steps toaddress these concerns and to further consolidate reform and rebuild confidence in thefinancial sector.

The program for the successful resolution of the closedfinance companies is ontarget. The Financial Sector Restructuring Authority (FRA) has adopted and begunimplementation of a program to sell the portfolio of core financial assets pertaining tofinance companies taken over by FRA. FRA aims to complete the disposal of all assetsby December 31, 1998. We are now ensuring that the Asset management Company(AMC) is adequately funded and helps the resolution process to succeed. We have takenseveral steps to maximize the value of assets to be sold by the FRA, including: (a)approving an increase to the authorized capital of AMC; (b) approving internal policiesand procedures; (c) setting up a Management Information System (MIS) assetmanagement and disposition; and (d) approving bidding methodology and asset valuationprocedures for the resolution of assets pertaining to finance companies taken over byFRA. The operational plan and MIS will be reviewed and endorsed by external expertsselected by Ministry of Finance by end-August, 1998. This will ensure that the AMC willefficiently manage, restructure, and collect on assets acquired through the FRA process.Furthermore, AMC will eventually resell all assets.

We have created the Radhanasin Bank (RAB), a state-owned commercial bankexpected to bid for the highest quality assets. We will ensure that RAB (a) plays amarket-oriented role in the auction process, and (b) bids only for the highest qualityassets. We will ensure that the RAB acquires a strategic foreign partner with a viewtoward acquisition of existing Thai bank(s) to strengthen the banking system.

To ensure the safety and soundness of the financial sector, we are taking strictactions against the weakest financial institutions, and speeding up the recapitalization andrestructuring process of the whole financial industry. BOT is assessing the financecompanies using diagnostic reviews conducted under specific TORs and with assistanceof foreign experts. It is monitoring recapitalization of all financial institutions byprogressively implementing loan classification and provisioning standards in line with

-46 - SCHEDULE I

best international practices; carrying out special audits and developing a strategy for thefour intervened banks, and also for the remaining weak institutions, particularly anyfinance company unable to recapitalize under the MOUs signed in 1997.

To restructure and strengthen the core financial institutions, the Bank of Thailandhas launched a due diligence program to assess the financial condition of four intervenedbanks. We will take the following steps: (a) develop a restructuring and privatizationstrategy for the 4 intervened banks bty July 31, 1998; (b) complete all scheduleddiagnostic reviews by December 31, 1998; (c) conduct enhanced onsite examinations inall nonintervened domestic commercial banks with expert assistance; (d) sign new MOUswith banks and finance companies by August 15, 1998; under these new MOUs,recapitalization will be phased in to comply with the new classification and provisioningrules by thie year 2000, at the latest.

In addition, we intend to develop a strategy for a more sound and efficientfinancial sector in Thailand over the next several years. MOF has been assigned theresponsibility for doing this. It will explore efficient ways to provide financial services tovarious economic players. In particular, MOF will review the roles of commercial banks,finance companies, security companies and other specialized financial institutions, anddetermine how they will operate in the future. MOF, BOT and SEC will study futureoptions for the structure of the financial sector and will make recommendations to theGovernment by November 30, 1998.

We will develop a comprehensive framework for supervision of all financialinstitutions by December 31, 1998. By October 31, 1998 BOT will review the legal andregulatory framework for supervision of commercial banks and finance companies. Basedon this review, by December 31, 1998, MOF and BOT will present to the cabinet legalamendments to the Banking Act and the Finance Companies Act. By December 31, 1998,BOT will begin to revise existing regulations and will issue new prudential rules forcommercial banks and finance companies, including regulations on insider lending andforeign exchange exposure. By July 31, 1 998, MOF will review the legal and regulatoryframework for supervision of the Specialized Financial Institutions. Based on this review,by December 31, 1998, MOF will revise existing regulations and issue new ones.

Regardless of where the supervisory functions are located, we will begin to buildup supervision capacity in existing agencies. BOT has adopted a time-bound program todevelop its institutional capacity to supervise commercial banking institutions. ByJuly 31, 1.998, MOF will assess MOF's/BOT's capacity to supervise SpecializedFinancial Institutions; based on this assessment, MOF will develop by September 30,1998, an Institutional Development Plan to strengthen supervision capacity.

The lack of transparency in financial institutions has undermined the timelyassessment of the weaknesses of financial institutions and risks borne by investors.Therefore, we will improve transparency by developing accounting, external auditing anddisclosure standards in line with best international practices so that shareholders,

-47 - SCHEDULE I

supervisors and market participants will be provided with accurate and meaningfulinformation on activities carried out and risks borne. By September 30, 1998 a review ofcurrent accounting, auditing and disclosures requirements for financial institutions will beconducted by MOF and BOT and amendments proposed in these areas. New specificrules on accounting, external auditing, and financial disclosure for banks, financecompanies and SFIs will be proposed by December 31, 1998.

To promote market discipline once financial markets have stabilized, we willmove away from the blanket guarantee set in August 1997 and toward a limited depositprotection scheme. By December 31, 1998 we will define the scope of the new depositprotection and clarify the status of quasi-deposits in the new scheme. We will set up aninstitutional framework to manage the scheme and develop an adequate fundingmechanism.

Revival of the Corporate Sector

The corporate sector is now facing the brunt of economic and financial adjustmentto the crisis. Corporate balance sheets are rapidly deteriorating due to falling domesticdemand, high cost of capital, difficulties in accessing credit and lackluster exportperformance. This, in turn, is increasing nonperforming loans and retarding financialsector recovery. Thus corporate recovery is the priority in the next phase of our reformagenda.

Our strategy for restoring corporate viability requires both long-term and short-term measures to strengthen the incentives for prudent decisions by creditors, owners andmanagers who comprise Thai corporate culture. In the short run, besides ensuringadequate liquidity especially to exporting firms, corporate restructuring will be at theheart of recovery. This will include efforts to promote voluntary workouts throughadoption of NPL Exit Procedures and tax incentives, plus a readiness to push nonviablecorporations toward court-supervised reorganization or bankruptcy. Other short- andmedium-term reforms for the corporate sector include: efforts to restructure the financialsector (discussed above) to reduce the liquidity constraints faced by corporations, judicialand legal reform, primarily bankruptcy and legal reform to facilitate corporaterestructuring; improvements in corporate governance and disclosure to bolster investorconfidence and privatization.

Corporate restructuring has begun slowly. Some corporations have progressed inrestructuring their direct foreign debt but this is because such debt consists mostly ofbank loans rather than bonds, which eases coordination among foreign creditors. Progresson restructuring domestic debt has been much slower. Large and small creditors, securedand unsecured creditors have different interests and lack experience in corporaterestructuring. To remove and/or reduce the impediments and facilitate debt and equityrestructuring, a working group, set up by MOF on May 15, 1998, will look into mattersincluding identification of corporate candidates for debt restructuring. The measures areconsidered to be temporary in nature. The three organizations (Thai Bankers'

-48 - SCHEDULE I

Association, the Federation of Thai Industries and the Board of Trade of Thailand) willalso be consulted. In addition, we will offer a seminar (with assistance from the WorldBank) on international experience and best practice in corporate restructuring. We willthen develop our own framework using others' experience, to reduce coordinationproblems among debtors and creditors.

Corporations' ability to implement voluntary restructuring is limited bylegal/regulatory constraints and domestic liquidity. As confidence rises, foreign investorswill be mnore willing to increase their investments in Thailand, but legal and regulatoryrestrictions on foreign purchases of Thai assets, both real estate and operating assets, maybecome binding. However, foreign purchases are being allowed on a case by case basis,and we expect the liberalization process to be widened.

Currently, our tax laws favor debt over equity, do not promote debt rescheduling,and discourage cash-free asset transfers, share acquisitions, and mergers as methods ofcorporate restructuring. A draft proposal to allow tax deferral on cash free asset transfer,share acquisitions, and mergers, for the purpose of encouraging mergers and acquisitionsin suppoit of corporate reorganization, will be submitted to MOF for consideration byJuly 15, 1998. Also, by September 30, 1998, we will review the Revenue Code to removeand/or reduce impediments to corporate debt and equity restructuring. We will look intodebt restructuring in selected cases and also encourage mergers and acquisitions insupport of corporate reorganization.

The securitization industry has remained underdeveloped. This has preventedbanks from improving balance sheets, so they can resume lending to the corporate sector.We are reviewing the tax regime to eliminate any tax disadvantages to the securitizationbusiness iin setting up special-purpose vehicles.

Reform of the Insolvency Regime and Secured Transactions

We recognize that Thailand's legal framework has been unable to handlecorporate bankruptcies and secured lending. The law is inadequate and court proceduresare lengthy and cumbersome. The lack of statutory support for the continuing financingof companies in financial distress has prevented efficient informal workouts of insolventcorporations with financial problems vvhich may be temporary. The legal regime forsecured lending is also in urgent need of reform. Collateral foreclosure involves lengthyprocedures, which make it difficult for creditors to foreclose on mortgages againstdefaulting corporate mortgagors. The Civil and Commercial Code (CC'C) needs to bereviewed to secure creditor rights and to expand the range of collaterable assets. We alsoneed to establish and operate a modern, automated and centralized registry for securedlending. We recognize that the credibility of the Financial Restructuring Authorityfcreclosure regime is essential to the successful sale of closed finance companies' assets.

Several amendments were passed by the parliament to the Bankruptcy Act B.E.2483 (1940) (the Bankruptcy Act) in March 1998. We are now addressing some of theremaining shortcomings to help ensure that any company in financial distress is either

-49 - SCHEDULE I

efficiently reorganized or is efficiently liquidated. The Cabinet has already approvedfurther revisions to the amended Bankruptcy Act to facilitate corporate bankruptcies andliquidations. By July 31, 1998, we will submit these amendments to the Bankruptcy Actto the parliament for enactment. Furthermore, by October 31, 1998, we will have: (a)endeavored to have these amendments approved by Parliament; (b) designed and begunto implement capacity-building within the Reorganization Office of the Ministry ofJustice; and (c), on the basis of a diagnostic assessment of the requirements to implementthe insolvency law, adopted an action plan which identifies the procedural, institutionaland budgetary elements of an efficient system of corporate insolvencies. We willcontinue to provide training for judges and receivers in aspects of corporate bankruptciesand formal corporate reorganizations and expand training to trustees-in-bankruptcies,company managers, lawyers, accountants and others.

We are establishing a credible regime for secured lending. Based on anassessment of delays in the process of foreclosing on collateral, we have adopted acomprehensive action plan for legislative and institutional changes necessary toaccelerate the process of foreclosing on collateral. By July 31, 1998, we will have: (a)submitted to Parliament, amendments to the Civil and Commercial Procedures (CCP);and (b) adjusted the procedural frameworks. By October 31, 1998, we will endeavor tohave CCP amendments approved by Parliament. Based on a diagnostic analysis of BookIII of the Civil and Commercial Code (CCC) and the requirements of a registry systemfor secured interests, by December 31, 1998, we will propose steps for: (a) an amended,comprehensive, legislative regime for secured lending; and (b) an automated, centralized,registry system for secured interests.

We will endeavor to improve judicial system procedures to settle corporate andcommercial disputes and to enforce court judgments. To that end, we will assess theobstacles to developing an efficient system and recommend legislative proposals andinstitutional changes.

Financial Accountability and Corporate Governance

Poor corporate governance has shielded banks, finance companies, andcorporations from market discipline. Ineffective boards of directors, weak internalcontrols and unreliable financial reporting have promoted imprudent business practices.This led to risky investments, highly leveraged balance sheets and unhedged foreigncurrency exposure, which lie at the heart of the current crisis. Recognizing theseshortcomings, we are embarking on a series of measures to improve corporategovernance, particularly for listed companies. SET issued regulations in January 1998that require all companies applying to be listed to have an audit committee of the Boardsof Directors. Companies already listed will be required to set up an audit committee byDecember 31, 1999. Guidelines have been issued on the functions and responsibilities ofdirectors and the code of best practice of the listed companies. We are now rationalizingthe institutional framework for setting accounting standards, encouraging private

- 50 - SCHEDULE I

professionals to upgrade the accounting profession, improve the quality of financialinformation, and strengthen enforcement and accountability.

We recognize that the currenit institutional framework for setting accountingstandards and regulations is cumbersome and ineffective. Too many governmentagencies regulate, supervise, and define reporting requirements-including the Ministryof Commerce (Commercial Registration Division), Revenue Department, Bank ofThailand, Stock Exchange of Thailand, and Securities and Exchange Commission. Weintend to streamline this. We have adopted a time-bound program to establish anindependent organization responsible for setting accounting standards consistent withinternational best practices, by Decernber 31, 1998. By September 30, 1998, we willensure that the Institute of Certified Accountants and Auditors of Thailand (ICAAT)takes t]he lead in conducting a cornprehensive review of standard-setting and theregulation framework of the accounting and auditing profession; it will then proposeamendments to applicable laws and regulations by December 31, 1998.

ICAAT is not fully independent and is not currently the primary private sectorsource for developing and promulgating auditing standards and ensuring compliance. Wehave adopted a time-bound program to review, by December 31, 1998, the role andfunctions of ICAAT to become an, independent self-regulating professional body,consistent with international best practices. It will certify accountants, assure quality andenforce the professional code of ethics.

We recognize that the quali& of financial information has been less thansatisfactory, and financial statement disclosures, loss recognition, asset classification,marketable securities, debt restructuring and impairment of assets, and audit reports, arenot consistent with international best practices. We are committed to upgradingaccounting and auditing standards to, the level of international best practices, and torevising the laws and regulations so that beginning in 1999, public companies' financialstatements must be prepared and audited according to these standards. We have alreadyannounced that, beginning in 1999, financial statements of listed and nonlisted publiccompanies (with assets in excess of B 1 billion) will be prepared and audited using thesestandards.

In addition, ICAAT, BOT, SET and SEC will, by December 31, 1998, prepare aplan to improve the quality of audit reports for listed and nonlisted public companies andbanks and financial institutions. We also plan to remove the burdensome statutory auditreporting requirement for partnerships and inactive limited companies, and to revise theformat for the 1998 financial year. I'CAAT will issue, by December 31, 1998, revisedaccounting standards for financial disclosures and loss recognition, and develop newstandards for debt restructuring and assets impairment. By September 30, 1998, MOF andBOT will conduct a review of current accounting practices and disclosure rules andrequirements for all financial institutions. New rules will be proposed by December 31,1998.

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We are committed to enforcing laws and regulations and making corporateofficers and board members of public companies accountable. To that end, we will: (a)by September 30, 1998, review the roles of SET, SEC, MOC, BOT and MOF inenforcing laws and regulations for public companies to ensure that there are sanctionsagainst breach of duty by corporate officers and directors; (b) by December 31, 1998,ensure that SET and SEC review the duties of corporate officers and directors and thatthey recommend changes to protect minority shareholder rights; and (c) by December 31,1998, review requirements and timing for establishing audit committees of the Board ofDirectors of public companies.

Public Enterprise Reform/Privatization

We have begun to implement a privatization program as part of the broaderagenda to reform the state-owned enterprises (SOEs). We believe that reform will be acatalyst to improve the quality of infrastructure services. This, in turn, will strengthen thecompetitive foundations of the economy and help restore international investorconfidence. In pursuing the reform programn, we are guided by the following principles:

* raising revenue will be an important objective of privatization, but secondary to theefficiency objectives.

* asset sales will be guided by clear regulatory mechanisms; efficient solutions will bepreferred over quick generation of cash;

* where possible, competition will discipline corporate behavior in the newly privatizedsectors; regulation will be relied upon only where competition (e.g., capital markets)cannot be fully effective;

* divestiture and private sector participation will be transparent and competitive; and

* the authority and responsibility for policy, regulatory and operational functions willbe clearly demarcated to avoid conflicts of interest and unnecessary interference.

Those few SOEs deemed of strategic importance will remain in the publicdomain; we will separate three functions-policymaker, regulator and operator-thatpresently overlap. The reform process will delineate responsibility; the ministry willmake policy, the state enterprise will operate autonomously and an independentauthority will regulate.

We have already launched the divestiture program with Cabinet recentlyapproving the sale of several commercial state enterprises. These enterprises wereconducting diverse activities such as canning, cold storage, Plywood manufacturing andtextile production. We have decided to substantially reduce state ownership in EGCO,ESSO and the Battery organization.

The institutionalframework for privatization is being streamlined. Currently,the responsibility for privatization, state enterprise reform and private participation ininfrastructure services is fragmented among the Comptroller General's Department,

-52- SCHEDULE I

Fiscal Policy Office, and NESDB. We are establishing an Office of State Enterpriseswithin MOF to support the State Enterprise Policy Commission and work with otheragencies in coordinating the country's overall program for privatization and privatesector participation in infrastructure. The staff will have technical skills and seniorityfor effective decision-making.

PFrivatization of individual state enterprises that have not been corporatizedrequires complex case by case approvals by parliament which leads to delays. By July 31,1998, we expect to submit the Corporatization Law to Parliament. This law willconstitute umbrella legislation to enable state enterprises to convert to public companiesunder Thailand's Civil and Commercial Code. The law includes provisions to transformstate enterprises into corporatized companies. The Cabinet has already approved the draftCorporatization Law to enable State-Owned Enterprises to convert into corporatizedcompanies.

We are also working on a Master Plan for State Enterprise Reform to set out themedium term strategy for privatization. It will spell out our commitment to privatization,state the priorities for divestiture of, and public concession agreements in, key enterprises(including Thai Airways, Barnchak, telecommunications, water and EGAT) and lay outthe divestiture strategy. By August 31, 1998, the Department will submit to the Cabinetfor its approval the Master Plan setting out the strategy for privatization and SOErestructuring over the next two years, which will include:

- objectives, organizational arrangements, strategy of privatization and the future roleof the state;

- timetables and sequence for corporatization and divestiture of key state enterprises(including telecommunications, water and EGAT);

* choice of the divestiture strategy (liquidation, full or partial privatization throughjoint ventures, private placements or public offers) linked to sector objectives;

* establishment of an appropriate regulatory framework for transport, water, energy,and telecommunications; and

* improved monitoring of state enterprises remaining in public ownership.

Signed

Minister of Finance

SCHEDULE 2: THE POLICY MATRIX

OBJECTIVES AND PROGRAM BOARD) CONDITIONS LETrER OF DEVELOPMENT POLICY

I. MACROECONOMIC AND FISCAL

1. Maintain nacroeconomic stability andfiscal balance

Issue: Macroeconomic stability is fundamental to return of Satisfactory progress made in implementing the revised Government will maintain the macroeconomic programr

confidence and corporate recovery. macroeconomic program announced on May 19, 1998. including an adequate reserve position and a prudent

Objectives and Program: Pursue agreed strategies to monetary policy to consolidate the ongoing stabilization o

ensure economic stability. the economy.

2. The Fiscal Program

Issue: Maintaining a fiscal surplus in view of economic Develop a framework for a flexible fiscal stance in view of

contraction and reduced revenue collections will the potentially large fiscal costs of financial sector

exacerbate the decline in aggregate demand and may delay workouts and an extended recession.

economic and corporate recovery.

Objective and Program: Implement a less contractionaryfiscal policy to support economic recovery. Create the

fiscal room for foreign financing of social expenditures. £

3. Easing the liquidity crunch of the Thai corporations and increasing competitiveness

Issue : The sharp contraction in credit associated with the Make available credit to exporting firms through bilateral By December 1998, MOF will prepare an action plan for

financial sector crisis has resulted in high interest costs and multilateral sourcing of funds under transparent increasing competitiveness of Thai corporations.

and reduced liquidity for manufacturers. This has reduced eligibility criteria.

capacity utilization and has adversely affected firml

prospects.

Objective and Program : Implement a credit program toease the liquidity crunch faced by Thai corporations in a

Itransparent and nondistortionary manner.

rU

OBJECTIVES AND PROGRAM1| BOARD CONDITIONS LETTER OF DEVELOPMENT POLICY

A Corporate Restructuring

Issue: Current Tax law favors debt over equity financing; The Ministry of Finance has established a working group 1. A draft proposal to allow tax deferral on cash free assetdoes not promote debt rescheduling; and discourages cash- to provide advice on corporate debt and equity transfer, share acquisitions, and mergers, for the purposefree asset transfers, share acquisitions, and mergers as restructuring. of encouraging mergers and acquisitions in support omethods of corporate restructuring. corporate reorganization, will be submitted to the Ministry

Objectives and Program: Regulatory reforms to of Finance for consideration by July 15, 1998.encourage equity financing and to promote corporate 2. By September 30, 1998, the Ministry of Finance willrestructuring through debt restructuring and equity review the Revenue Code in order to remove and/orrestructuring. reduce any impediments to corporate debt and equity

restructuring, including; (a) deductibility of interestexpense, (b) promotion of debt restructuring in selectedcases, and (c) encouragement of mergers and acquisitionsin support of corporate reorganization.

5. Additional Tax Measures

Issue : Securitization industry is virtually nonexistent, In order to promote asset securitization, the Governmentwhich has prevented banks from improving balance will eliminate any tax disadvantages to the securitizationsheets, reducing the need for recapitalization and increase business in setting up special purpose vehicles.lending to the corporate sector.

Objectives and Program : The tax regime governingsecuritization industry has to be refofrmed to promotesecuritization.

II. FINANCIAL SECTOR RESTRUCTURING

1. FINANCE COMPANIES RESOLUTION

1. Progress in the FRA sales process

Issue: The FRA needs to finalize criteria and procedures FRA has adopted and begun implementation of a program FRA will target December 31, 1998, to complete thefor the sale of core assets of the 56 finance companies to sell the portfolio of core financial assets pertaining to disposal of all assets.taken over (FCT), and carry out the sales. finance companies taken over by FRA.

Objectives and Program: Implement the sale of assets ofFTCs, and continue showing concrete progress. j __ X~~~~~~

OBJECTIVES AND PROGRAM BOARD CONDITIONS LETTER OF DEVELOPMENT POLICY

2. Establishment of theAMC

Issue: An adequately funded, well-perforning AMC is an The Government has taken steps to enable AMC to be 1. AMC will manage, restructure, and collect on assets inimportant component of the resolution process. The AMC fully operational, including through: (a) approving an an efficient manner.will need to have the capacity to acquire, manage, increase to the authorized capital of AMC; (b) approving 2. AMCwillresell induecourseallassets.restructure, collect on the assets, and/or resell the assets to internal policies and procedures; (c) setting-up of aprivate sector buyers. Management Information System (MIS) for asset 3. AMC's operational plan and MIS will be reviewed and

Objectives and Program: Maximize the price of assets management and disposition; and (d) approving bidding endorsed by external experts selected by MOF, by Augustsold by the FRA in a way that enhances the confidence of methodology and asset valuation procedures for the 31, 1998.the domestic and intenational capital markets. resolution of assets pertaining to finance companies taken

over by FRA.

3. Establishment of the Radhanasin Bank

Issue: The Government has created the Radhanasin Bank In the coming months, the RAB will actively search for(RAB), a state-owned commercial bank expected to bid and acquire a strategic foreign partner with a view tofor the highest quality assets. strengthening the domestic banking system.

bjectives and Program: Ensure that RAB (i) plays amarket-oriented role in the auction process, and (ii) onlybids for the highest quality assets.

2. SAFETY AND SOUNDNESS OF THE FINANCIAL SECTOR

1. Restructure and strengthen the corefinancial institutions

Issue: The BOT must continue to take tough actions The Bank of Thailand has launched a due diligence 1. MOF and BOT will develop a restructuring andagainst the weakest financial institutions, and speed up the program in order to assess the financial condition of four privatization strategy for the four intervened banks byrecapitalization and restructuring process of the whole intervened banks. July31, 1998.financial industry. 2. All scheduled diagnostic reviews will be completed by

Objectives and Program: Assess the financial condition December31, 1998.of financial institutions through diagnostic reviews 3. BOT will conduct enhanced onsite examinations in allconducted under specific TOR and with foreign expert nonintervened domestic commercial banks with expertassistance; monitor recapitalization of all financial assistance.institutions through the progressive implementation ofloan classification and provisioning standards in line with 4. New MOUs will be signed with banks and financebest international practices; carry out special audits; companies by August 15, 1998; under these new MOUs, Udevelop a strategy for dealing with the four intervened recapitalization will be phased in to comply with the newbanks; develop a strategy for dealing with the remaining classification and provisioning set of rules at the latest byweak institutions, particularly any finance company that is 2000. a

unable to recapitalize in accordance with the MOUs signedin 1997. __

OBJECTIVES AND PROGRAM BoARD CONDITIONS E - LETTER OF DEVELOPMENT POLICY

2. Redefine the role offinancialplayers in a modernized Thaifinancial sector

Issue: The authorities must determine a strategy to MOF/BOT/SEC will carry out a study on options for thedevelop a more sound and efficient financial sector in Ifuture structure of the financial sector and will makeThailand over the next several years. recommendations to the Government by November 30,

Objectives and Program: MOF must explore ways to 1998.provide adequate financial services to various economicplayers. In particular, it must review the respective role ofcommercial banks, finance companies, security companiesand other specialized financial institutions, and determinedhow such institutions should be allowed to operate in thefuture.

3. Develop a comprehensiveframeworkfor supervision offinancial institution

Issue: The authorities must develop a comprehensive MOF will develop a comprehensive framework forframework for supervision of all financial institutions to financial supervision by December 31, 1998.avoid a piecemeal approach that could result in gaps in thesupervisory process and inconsisteint decisiors regardingthe supervision of different financial functions.

Objectives and Program: The comprehensive frameworkwill determine the most appropriate supervisory model forThailand.

4. Improve legal provisions and regulationsfor supervision

Issue, Objectives and Program: To develop a 1. BOT will conduct a review of the legal and regulatorycomprehensive supervision framework, MOF and BOT framework for supervision of commercial banks andwill develop amendments to the law and prudential finance companies by October 31, 1998. Based on thisregulations related to the supervision of commercial review, by December this year, MOF and BOT willbanks, finance companies and Specialized Financial present to the Cabinet legal amendments to the BankingInstitutions (SFIs). The legal framework governing Act and the Finance Companies Act.bankruptcy and reorganization of distressed financial 2. By December 31, 1998, the BOT will begin the processinstitutions will also need to be revisited. of revising existing regulations arsd issue new prudential

regulations for cormnercial banks and finance companies rjCincluding regulations on insider lending and foreign Q

exchange exposure.

3. MOF will review the legal and regulatory framework bfor supervision of the Specialized Financial Institutions byJuly 31, 1998. Based on this review, by December 31,1998, the MOF will initiate the process of revising 2existing regulations and issue new ones.

OBJECrTVEs AND PROGRAM BOARD CONDITIONS LETTER OF DEVELOPMENT POLICY

5. Strengthen the supervision capacity of the supervisory agencies

Issue: Regardless of the location of the supervision The Bank of Thailand has adopted a time-bound program By July 31, 1998, MOF will conduct an assessment offunctions, the MOF and the BOT should start building up to develop its institutional capacity to supervise banks and MOF's/BOT's capacity to supervise Specialized Financialsupervision capacity in existing agencies. finance companies. Institutions (SFIs). Based on this above assessment, MOF

Objectives and Program: Based on the assessment of will develop an Institutional Development Plan fortheir supervision capacity, the BOT and FPO must strengthening supervision capacity of SFIs by Septemberdevelop an Institutional Development Plan to strengthen 30,1998this capacity over the medium term.

6. Strengthen market discipline

1) Enhance transparency 1. By September 30, 1998 a review of current accounting,

Issue: Lack of transparency in financial institutions has auditing and disclosures requirements for financialdramatically undermined the ability of both supervisors institutions will be conducted by MOF and BOT andand investors to assess in a timely fashion the weaknesses amendments proposed in these areas.and risks borne by financial institutions. 2. New specific rules on accounting, external auditing, and

Objectives and Program: The authorities will help financial disclosure for banks, finance companies and SFIsintroduce transparency by developing accounting, external will be proposed by December 31, 1998.auditing and disclosure standards more in line with bestinternational practices. Thus, shareholders, supervisorsand market participants would be provided with moreaccurate and meaningful information on activities carriedout and risks borne.

2) Implement an explicit deposit protection scheme MOF and BOT will develop a plan for a deposit protection

Issue: The government must demonstrate its commitment scheme by December 31, 1998.to move away from the general blanket guarantee set inAugust 1997 and towards a more limited depositprotection scheme once the financial markets stabilize.

Objectives and Program: The government will definethe scope of the new deposit protection and will clarify thestatus of quasi-deposits vis-a-vis the new scheme. It willset up an institutional framework to manage the depositprotection scheme and an adequate funding mechanism.

ffi X . | _ " M~~~~~~~~~~~~~

OBJECTIVES AND PROGRAM BOARD CONDITIONS LETTER OF DEVELOPMENT POLICY

III. LEGAL REFORM

1. Provide appropriate legislative and institutionalframeworks for corporate bankruptcies and reorganizations

Issue: The Corporate Insolvency regime of Thailand (the Cabinet has approved further revisions to the amended 1. By July 31, 1998, Government will have submittedBankruptcy Act B.E.2483 (1940), as amended, including Bankruptcy Act B.E.2483 (1940) in order to facilitate these amendments to the Bankruptcy Act B.E. 2483the Companies Reorganization Act, 1998) requires various corporate bankruptcies and liquidations. (1940) to Parliament for enactment.refinements in order not to deter the reorganization of 2. By October 31, 1998, Government will have: (a)companies whose liquidation values are smaller than their endeavored to have these amendments to the Bankruptcyvalues as going concerns and the automatic liquidation of Act B.E. 2483 (1940) approved by Parliament; (b)companies for which the opposite is true. designed and begun implementation of a program ofObjectives and Program: Make improvements in the capacity-building within the Reorganization Office of thelegislative framework for corporate bankruptcies and the Ministry of Justice; and (c) on the basis of a diagnosticpossible reorganization of companies in financial distress. assessment of the requirements to implement theEstablish better institutional infrastructure to ensure that insolvency law, adopted an action plan which identifiesany company in financial distress either gets reorganized the procedural and budgetary elements of an efficientas efficiently as possible, if reorganization is appropriate, system of corporate insolvencies.or, if not, is liquidated as efficiently as possible. Carry out 3. Government will continue to provide training in aspectsthorough training of all relevant parties to ensure new of corporate bankruptcies and formal corporateprovisions quickly become fully operational. reorganizations for judges and receivers and expand such

courses for trustees-in-bankruptcies, company managers,lawyers accountants and others.

2. Provide appropriate legislative and institutionalfraneworks for secured lendingIssue: Existing procedures for the realization of secured Government has adopted a time-bound action plan for 1. For the purpose of expediting the process of foreclosinginterests result in inordinate delays. Also, the existing legislative changes necessary to accelerate the process of on collateral, by July 31, 1998, Government will have: (a)provisions on pledges and mortgages in Book III of the foreclosing on collateral. submitted to Parliament, for enactment, appropriateCivil and Commercial Code (CCC) need to be amended so amendments to the Civil and Commercial Proceduresthat creditors' rights are more certain and effective and the (CCP); and (b) prepared adjustments to the existingrange of assets of borrowers that can serve as collateral procedural frameworks.greatly expanded. Simple means of registering secured 2. By October 31, 1998, Government will haveinterests and for the public to obtain this information need endeavored to have these amendments to the CCPto be provided. approved by Parliament.Objectives and Program: Establish new procedures to 3. On the basis of a diagnostic analysis of Book III of thespeed up the realization of secured interests. Establish CCC and the requirements of a registry system for secured Qcomprehensive legislative regime for secured lending. interests, by December 31, 1998, the Government willEstablish, and make fully operational, a modem, have proposed steps to be put in place for: (a) an amended,automated, centralized registry for secured interests. comprehensive, legislative regime for secured lending;

and (b) an automated, centralized, registry system forsecured interests.

OBJECTIVES AND PROGRAM BOARD CONDITIONS LETrER OF DEVELOPMENT POLICY

3. Ensure inprovements in the process of enforcing conumercial contracts and of corporate and commercial legislation, broadly defined

Issue: Judicial procedures in respect of corporate and Government will undertake a thorough assessment of thecommercial cases, broadly defined, as well as the process obstacles to the development of a more efficient system oof enforcing judicial decisions once made, are too slow judicial procedures for the resolution of commercialand inefficient. disputes, including the enforcement of judggments, and, on

Objectives and Program: Ensure early improvement in the basis of this assessment, recommend legislativeudicial system procedures in respect of the settlement of proposals and institutional changes necessary to achievecorporate and commercial disputes, broadly defined, and the stated objectives.ensure the efficient enforcement of judgments of courtsonce these are rendered.

Iv. FINANCIAL ACCOUNTABILITY AND CORPORATE GOVERNANCE

1. Rationalize the institutionalframeworkfor setting standards and regulating accounting and auditing practices

Issue: Responsibility for setting formal accounting Government has adopted a time-bound program to The ICAAT will conduct a comprehensive review ostandards does not rest with a private independent establish an independent organization responsible for standard-setting and the regulation framework of theorganization; currently, standards are endorsed by the setting accounting standards consistent with international accounting and auditing profession by September 30,Government. Moreover, there are multiple agencies that best practices, by December 31, 1998. 1998; it will then propose amendments to applicable lawsregulate, supervise, and define reporting requirements. and regulations by December 31, 1998. The review will

Objectives and Program: Rationalize the institutional determine the relevance and appropriateness of the drafi eframework for setting standards and regulating the Accountants Council Act and the Accounting Act.accounting and auditing profession in order to remove therole of various agencies in regulating and supervising theprofession. Establish and ensure a proper role for anindependent standard-setting organization.

2 Strengthen the ICAATtoplay a leadership role in developnment of theprofession consistent with international best practices

Issue: The ICAAT, which develops all accounting and Government has adopted a time-bound program to review The professional body will become the primary privateauditing standards, is not fully independent in the role and functions of the Institute of Certified Accountants source for developing national qualifications, ensuringstandard-setting process and is not a self-regulating and Auditors of Thailand (ICAAT) to become an implementation of accounting and auditing standards, andnational professional body. independent self-regulatory professional body consistent conducting quality control of its members by December

Objectives and Program: Determine an appropriate role with international best practices, by December 31, 1998. 31, 1998. The professional body will ensure that a formalfor the ICAAT in standard-setting and regulating the quality assurance process for audit firms that audit listed hprofession. Ensure that ICAAT's role in standard setting companies will be established. The body will beginand regulating the profession is consistent with enforcing the code of ethics for practitioners by Decemberinternational best practices. An independent and self- 31, 1998.regulating ICAAT will be responsible for setting auditingstandards and regulating the profession.

OBJECrlES AND PROGRAM BOARD CONDITIONS LETTER OF DEVELOPMENT POLICY I

3. Improve the quality and reliability of keyfinancial informaion provided by public corporations to regulators, shareholders, and the generalpublic

Issue: Accounting and auditing standards and practices, Government has announced that financial statements of|ICAAT will issue revised accounting standards forparticularly in the areas of financial statement disclosures, listed and nonlisted public cnmpanies banks and finanicia1nancial statement disclosures asset classifictcin,iloss recognition, asset classification, marketable securities, institutions with assets in excess of one billion Baht will marketable securities, and loss recognition as well as newdebt restructuring and impairment of assets, as well as be required to be prepared and audited in accordance with standards for attestation, debt restructuring andaudit reports, are not consistent with international best international best practices beginning with the year 1999. impairment of assets, by December 31, 1998.practices. Along with reputable accounting firms, ICAAT, SET, and

Objectives and Program: Upgrade accounting and SEC will prepare a plan to improve the quality of auditauditing standards to make them consistent with reports conducted for listed companies, nonlisted publicinternational best practices, and revise relevant laws and companies, as well as banks and financial institutions byregulations as necessary to require that financial September 30, 1998, under TOR acceptable to the Bank.statements of public companies be prepared and audited in The Government will put into effect the revised formataccordance with such standards beginning with the year (proposed by ICAAT) of audit reports, consistent with1999. international best practice, to include a paragraph on the

responsibility of management for preparation of financialstatements and responsibility of the auditor in rendering anopinion on the fairness of financial statements. The newformat of the audit reports will be effective for thefinancial year 1998.

The Government will produce a plan to remove theburdensome statuary and mandatory requirement forsubmitting audit reports to authorities for about 300,000partnerships and inactive limited companies by September

130, 1998.

4. Strengthen thefinancial oversight role of the board of directors of corporations by requiring the establishment of audit committees

Issue: The intemal control and the related oversight role SET, SEC, ICAAT and IIAT will review existingof the boards of directors of companies is weak. Audit requirements for the audit committees of the boards ocommittees of the boards of directors are nonexistent or directors for public companies by December 31, 1998.ineffective.

Objectives and Program: Strengthen the internal control X

structure of listed companies, banks, and financial Qinstitutions and the related responsibility for oversight of lthe internal audit function and selection of extemal Iauditors. I

OBJECTIVES AND PROGRAM BoARD CONDrrIONS LETTER OF DEVELOPMENT POLICY I

5. Improve accountability of boards of directors and managemnent ofpublic companies

Issue: The boards of directors of listed companies and SET and SEC will conduct a comprehensive review of thefinancial institutions have not been effective in monitoring duties and appointment process of directors,corporate management performance. responsibilities of officers, and shareholder rights o

Objectives and Programs: Strengthen the effectiveness public companies, including the listed companies, as welland monitoring role of the boards of directors and enhance as the liability of directors, officers, and shareholders. Theshareholder rights. review will be completed by September 30, 1998 under

TOR acceptable to the Bank. Based on the review, aworking group consisting of SEC, SET, IIAT, ICAAT,MOF and MOC will recommend appropriate changes tothe legal and regulatory framework to ensure protection ofminority shareholder rights and accountability of officersand directors by December 31, 1998.

6. Rationalize the regulatoryframeworkfor enforcement of laws and regulationsfor public companies

Issues: SEC and SET responsibilities overlap in The Government will review the roles and responsibilitiesenforcement of laws and regulations. of SET, SEC, MOC, BOT and MOF in enforcing laws and

Objectives and Programs: Strengthen the framework for regulations related to public companies, in consultationenforcement of laws and regulations. with the Bank. The Government will revise laws and

regulations as necessaty to ensure sanctions in case ofbreach of duty by officers of Public Companies.

V. PUBLIC ENTERPRISE REFORM/PRIVATIZATION

1. OrganizationalArrangementfor State-Enterprise Reform

Issue: Responsibility for privatization, state enterprise The Government will establish an effective Office of Statereform and private participation in infrastructure services Enterprises within the Ministry of Finance to support theis fragmented among CGD, FPO, NESDB. State Enterprise Policy Commission and work with other

Objectives and Program: Defining authority and agencies in coordinating the country's overall program forresponsibility of the various entities charged with the privatization and private sector participation indesign and implementation of the reform program, infrastructure.allocating staff of the appropriate seniority andqualifications, and establishing clear and effective decision U.making processes would demonstrate the government'scommitment to advance the privatization agenda.

OBJECTIVES AND PROGRAM BOARD CONDITIONS LETrTER OF DEVELOPMENT POLICY

2. Corporatization Law.

Issue: Privatization of individual public enterprises that The Cabinet has approved the draft Corporatization Law|The Government to submit Corporatization Law tohave not been incorporated usually requires complex to enable State-Owned-Enterprises to convert intolParliament by July 31, 1998. This law will permitcase-by-case legal approvals which leads to delays. corporatized companies. corporatization of state-owned enterprises so that these

Objectives and Program: A Corporatization Law would may be wholly or partly divested to private owners.constitute a first critical formal step in initiating the reform Iprogram. The law includes provisions to transform state l

enterprises into corporatized companies. l

Master Plan for State- Enterprise Reforml

Issue: The Government has not as yet formulated a By August 31, 1998, the Department will submit to thecoherent privatization strategy Cabinet a Master Plan on state enterprise reform that

Objectives and Program: A comprehensive "Master would set out its medium-term strategy for privatizationPlan" setting out the broad medium-term vision form and SOE restructuring over the next two years.privatization would be a major factor to restore This would include a firm commitment onconfidence in Thailand's economy among international (a) objectives, organizational arrangements, strategy ofinvestors priivatization and the future role of the state;

(b) timetables and sequence for the for corporatization and divestiture of key state enterprises (including energy,telecommunications, water, EGAT);

(c) choice of the divestiture strategy (liquidation, full orpartial privatization through joint ventures, privateplacements or public offers);

(d) establishment of an appropriate regulatory frameworkfor transport, water, energy, and telecommunications; and

(e) improved monitoring of state enterprises remaining inpublic ownership.

rjQ

EU

- 63 - ANNEX 1

ANNEX 1: EXPANDING AND STRENGTHENING THESOCIAL SAFETY NET

1. Adoption of a Social Investment Project (SIP) Aimed at Mitigating the SocialCosts of the Crisis in the Short Term. The project has three main objectives: (a) togenerate immediate employment by supporting high-priority labor-intensive programs;(b) to improve chances of employment by providing training for the unemployed; and (c)to support social programs used by the vulnerable which are now threatened by budgetcuts.

2. The project includes B 21.6 billion of additional spending over the next 3.5 years,backed by B 15.3 billion of Bank loans, and includes the following measures:

EmploymentSupplementary support of existing government job-creation programs:* rehabilitation of cultural, historical and recreational sites (Tourism Authority

of Thailand);* construction of village roads, weirs and reservoirs (Ministry of Interior);* school building repair, footpath construction (Bangkok Metropolitan

Administration);* rehabilitation and repair of river weirs (Royal Irrigation Department).Expenditure: B 10 billionEmployment Impact: more than 500,000 person-months over 2.5 years.

TrainingExpansion of vocational and technical training for the unemployed (Ministry ofLabor and Social Welfare)Expenditure: B 1.5 billion over 2.5 yearsImpact: more than 300,000 three-month training places.

HealthImproved and expanded coverage of the Low-Income Public Assistance HealthInsurance Scheme (Ministry of Health)Expenditure: B 1.25 billion over 2.5 yearsAdditional coverage: 1.5 million people a year

Supplementary financing of the Community-Based Care of Patients with AIDSProgram (implemented through NGOs)Expenditure: B 90 million

-64- ANNEX 1

Rural DevelopmentExpansion of the Rural Industrial Employment Promotion Program (Ministry ofIndustry, with implementation support from NGOs), to stimulate investment andemploymentExpenditure: B 310 million over 2.5 yearsImpact: 84 new industrial enterprises, 3,000 permanent jobs created

Strengthening Decentralization and Community ParticipationTwo new funds will be created to support local investments aimed at reducingpoverty and creating new employment opportunities:The Social Investment Fund will provide grants to support rural communityprojectsThe Regional Urban Development Fund will provide subloans to helpmunicipalities expand their investment programs:Expenditure: B 7.8 billion over 3.5 yearsEmployment Impact: 475,000 person-months through more than 11,000

subprojects.

Monitoring Poverty and Improved TargetingCreating of a special unit within the Ministry of Finance to monitor SIPperformance and effectiveness, working with the Bank to ensure improvedlargeting and efficient delivery of SIP social programs.

3. Social assistance programs under the ADB's Social Sector Program Loan,involving expenditures of approximately B 20 billion over two years.

3Labor Market and Social Welfare PolicyE.stablish a center for providing retraining, counseling, and placement-supportservices for the unemployed. Extend social security coverage to at least sixmonths for laid-off workers, to include medical, maternity, disability, and deathbenefits.

Education and Health4l Expand scholarship and loan programs to minimize student dropouts;* Protect operational budgets for teacher training and instructional materials in

science, mathematics, and foreign language education;Reallocate the budget toward health programs for the poor and redeploy healthstaff to rural areas;

El Maintain program coverage for maternal, child health, and HIV/AIDSactivities.

4. Price-based measures to cushion the impact of the adjustment program

El Maintenance of urban bus and rail fares at subsidized prices, with a budgetaryimpact of about B 3 billion annually.

-65 - ANNEX 1

5. The Government has already decided to increase severance pay to 10 months forworkers with more than 10 years' service, and has also established an Assistance Fund toensure that workers dismissed from bankrupt firms receive adequate cash support. TheGovernment is currently considering an enhanced strategy to strengthen further the socialsafety net. Toward this, the Government has just extended social security benefits(including maternity, disability, and death) for those unemployed, from 6 months up to 12months.

Source: Compiled by IMF with inputs from the Bank and the Asian Development Bank.

-66- ANNEX 2

AN:NEX 2: RESOLUTION OF SUSPENDED FINANCECOMPANIES

1. This Annex sets out in greater detail the institutional arrangements and policiesthat the authorities have put in place to deal with the resolution of the suspended fmancecompanies. It outlines government actions to resolve the situation of the 16 financecompanies suspended on June 27, 1997, and the 42 finance companies suspended onAugust 5, 1997.

1. BACKGROUND

2. St:ructure and Size of the Finance Company Industry. The Thai financialsystem includes 91 finance companies (FCs) and finance and securities firms worth B 1.7trillion in assets as of May 1997. Over 40 percent of this amount was held by 11 FCsprior to the suspension of the 58 companies. The FC sector accounts for about 22 percentof total banking assets.! Many FCs are affiliated with and controlled by commercialbanks, often in a nontransparent manner. Specifically, of the remaining 33 nonsuspendedfinance companies, five are affiliated with foreign banks and 20 with whollydomestically-owned Thai commercial banks.

3. FC loans and investments are concentrated in real estate or construction lending,consumer hire-purchase loans (primarily automobile financing), loans against shares, andother securities operations (much of which is linked to the real estate market). The qualityand value of all these assets have deteriorated sharply during the current economicdownturn. Most FCs are funded with wholesale liabilities, and thus run significantliquidity risk. FCs also typically run 'significant interest rate risk due to the maturitymismatch between their assets and liabilities-35 percent of loans and 5 percent offunding have on average a maturity of over one year. The recent increase in interest ratestherefore has resulted in significant losses. Finally, FCs also obtained foreign funding viasyndications (particularly the largest FCs), and in many cases these funds were onlent tononhedged companies or sectors.

4. The fixed exchange rate regime coupled with a lack of adequate informationrelating to the sectors (notably real estate) to which the FCs lent contributed to the severeproblems facing the FCs. First, the fixed exchange rate made it attractive to borrow at lowrates internationally and onlend funds at higher rates into risky sectors. Second, the poorquality of information about the sectors where FC lending was concentrated made itdifficult for such entities to properly assess the risks to which they were exposed.

I This includes commercial banks, finance companies and five specialized public banks.

-67 - ANNEX 2

5. Suspension of 58 Finance Companies. On June 26, 1997, the Ministry ofFinance (MOF) ordered 16 FCs into suspension, effectively bringing their operations to ahalt. A further 42 FCs were suspended on August 5, 1997. The suspended companieswere ordered by the Committee to Supervise the Mergers and Acquisitions (ScreeningCommittee) to submit rehabilitation plans and undergo due diligence by independentaccountant. Four categories of rehabilitation plan were invited to be submitted: self-recapitalizations or recapitalizations with new ventures, mergers among suspendedfinance companies, mergers with other local financial institutions as a core, and mergerswith commercial banks. The companies had until October 30, 1997 to submit therehabilitation plans.

2. BOTTLENECKS TO THE RESOLUTION PROCESS

6. Lack of Accurate Information on the Solvency of Financial Institutions. Thecapacity of BOT to ascertain the present solvency situation of financial institutions andidentify insolvent institutions was limited at the time of the suspension. Evidence of thisproblem is the fact that suspension of the 58 finance companies was largely based uponthe extent of borrowing from FIDF, rather than their solvency situation. This was largelydue to the very poor information available on the quality of financial institutions' loanportfolio. In particular, income recognition policies allowing the accrual of interest intoincome (for collateralized loans) even in the case of loans in nonaccrual for 12 months,led to great difficulties for the authorities to determine the "true" capitalization of specificfinancial institutions.

7. Limited Capacity to Take Control of Insolvent Institutions. As a matter ofgood practice, when a financial institution is forced to suspend its operations, theauthorities must act aggressively to take control of the institution's records and assets inorder to preserve value on behalf of depositors, creditors and other claim-holders. It isimportant that the value of assets not be dissipated. BOT, however, lacked the legalpower as well as the institutional capacity to take immediate control of the suspendedFCs, and proceed to dispose of the assets:

(a) BOT did not have the legal power to take immediate control overinsolvent or rapidly deteriorating financial institutions. This occurredbecause existing legislation (the Banking Act and the Finance Companyand Credit Foncier Acts) did not give BOT and/or FIDF the power torapidly extinguish shareholder rights. Moreover, BOT lacked the capacity(in termns of skills and manpower) to practically remove the existingmanagement and putting each company under conservatorship. Duringsuspension therefore, shareholders and managers remained in control ofthe institution, and are potentially in a position to strip the institution ofsubstantial value.

(b) No institutional framework existed for disposing of the assets ofsuspended finance companies in the event they were taken over and

-68 - ANNEX 2

liquidated. In addition, the role of the public and private sector in thisprocess had not been clearly defined nor had the overall institutionalframework.

8. Other constraints to a timely resolution. The Government faced other practicalconstraints to liquidating the assets of the suspended FCs, which have delayed theresolution process and undermined market confidence in the authorities' capacity andwillingness to act:

* a significant proportion of assets in suspended companies were of poor quality; thissituation has worsened in the months between suspension and the takeover of thecompanies on December 8;

* under the Thai legal system it is difficult to foreclose on assets or take delinquentborrowers to bankruptcy;

* very few, if any, healthy domestic financial institutions existed that could bid for theassets of the suspended FCs;

* market liquidity continues to be limited; and

* the Government had limited institutional capacity and banking and investmentbanking skills needed to implement a resolution strategy for the FCs.

9. Effects of Delays in the Resolution Process. The way the suspension wasmanaged in its early stages had significant adverse consequences for the institutions'customers. Borrowers, including viable firms, have been unable to obtain additionalcredit from the suspended FCs. As a result, they have increasingly gone into default withother lenders such as commercial banks and nonsuspended finance companies; in manycases, they have been unable to establish credit relationships with other financialinstitutions, since their assets and deposit-account relationships are tied up in thesuspended institutions. Liability holders generally have not had access to their fundsaccording to original contractual terms, contributing to an undermining of confidence inthe financial system.

10. As the confidence crisis intensified and the suspension period lengthened, more ofthe 58 suspended companies became technically insolvent. Calculations based onreasonable assumptions suggest that the suspended FCs came under greater stress than the33 remaining companies and that at least 51 had a negative capital ratio as of October1997.2

2 This result assumes that nonperforming loans as a percent of total loans for the suspended FCstogether would be almost 30 percent.

- 69 - ANNEX 2

3. OBJECTIVES AND INSTITUTIONAL SETUP FOR THE RESOLUTION PROCESS

11. Objectives of the Finance Company Resolution Strategy. Against thisbackdrop, the objectives of the recommended strategy for the resolution of the 58suspended FCs were to:

* obtain adequate legal powers and adopt better institutional arrangements and policiesfor the speedy takeover and ultimate liquidation of suspended FCs;

* rapidly sell obligations of good borrowers in FCs that will not be authorized toreopen;

* clarify the status of creditor claims in suspended FCs ; and

* ensure adequate financing to achieve above.

12. Institutional Arrangements and Overall Resolution Process. The large numberof suspended finance companies presented BOT and FIDF with difficult managementproblems. Hence, to provide coordination and insure a speedy process for resolution ofthe 58 suspended finance companies the authorities issued a package of six newemergency decrees promulgated on October 22, 1997. Two new institutions, the FinancialSector Restructuring Authority (FRA) and the Asset Management Corporation (AMC),were established as the focal points for resolving the suspended finance companies. Thenew structure addresses these problems in a systematic and comprehensive manner.

13. The FRA was established on October 24 as an independent body with the mandateto evaluate the rehabilitation plans submitted by the suspended finance firms inaccordance with the Emergency Decree on Financial Sector Restructuring-one of the sixemergency decrees. Charts 1 and 2 below illustrate the functions that the FRA hasundertaken from the time the 38 rehabilitation plans were submitted, until the finaldecision on rehabilitation plans, which was made public on December 8, 1997.

14. FRA has responsibility for reviewing the rehabilitation plans submitted by thesuspended FCs according to explicit criteria outlined in the following section. In addition,it is to oversee the orderly winding-up of finance companies not reopened and thedisposition of their assets. This process involves appointing Committees for each financecompany which replace the original Board of Directors. The committees are to appointspecial managers with responsibility for: (a) assuming control of each company; (b)stratifying the assets into categories according to their quality; and (c) recommendingspecific options for the resolution to a special advisory board (the Sales Group), underFRA. FRA is not to engage in the restructuring of individual assets nor will it directlymanage or finance note exchange schemes (with KTT and KTB). FRA is committed tobegin selling the closed finance company assets in the first quarter of 1998, and tocomplete asset sales by December 1998.

-70 - ANNEX 2

CHART 1: FRA RESOLUTION PROCESS

FINANCIAL SECTOR RESTRUCTURING AUTHORITY

OVERVIEWSources Suspended 7 Bankof FinancialOf / Rehabilitation / / Finance / Thailand Informadon

Of / Plan Company / DueDiigence Supervision from SuspendedInformation Dialogue / Division Finance Companie

Tools ~~~~~~~~~~~~~~~~~~~~~~~~~~~~Financial Model

Tools_ |

Rehabilitation Planand DD Work

Program Financial Model

Work Program

IndependentConsultancy Business Strategy Eonomic Assumption

Assessmeng: Asset Compliance Roll Forward Asset Capital Adequacy Stress Tetas:Assistance: Robustness of Review Quality Review Compliance Review Robustness of

Assessment, Business Plan Business Plan

Validation AndControl

Detailed Rehabilitation Plan Financial Modeland Due Diligence and

Reports Detailed Report Stress Test Report

Final Reports FRA BoardSunumary Report

CHART 2: FRA RESOLUTION PROCESS

FINANCIAL SECTOR RESTRUCTURING AUTHORITY

- SELF-RECAPITAUSATIONS- RECAPITALSATION WITH NEW VENT1URE ECONOMIC- MERGER AMONG SUSPENDED FIRMS _ AssuMPnoN -

REHABIlIATION STRESS TESTPLANS

|DD REVIEVWSFINANCIAL EVALLI_UAON

-1- MODEWNG - COMPLETENESSONITlOL CHECKS STUIO

* MERGER WYlTH BOT UAISONLOCAL FINANCIAL _INSTITUTIONS CAPITAL AGGREGATE AND

+ ADEQUACY PEER GROUPREHABIH.JTAION COMPILATION MODELJNG r

PLANS REVIEW REHABIUTATON DR,UI / FINAL / ACCEPTPLAN AND DO _ SUMMARV N SDMMARV

| DD REVIEWS REVIEW / REPORT / REPOR BOT ASSET FREHBILTATON I I I REJECT

- MERGER WIUALITYHG LACOMMERCIAL RREPORING ROBUSTNESSBANKS

REHABIUTATION ASSET | REHABIUTONPLANS COMPUANCE PLAN EVALUATION

REVIEW SUPPORT

|D REVIEWS

ROLL FORWARDASSET QUALITY

REVIEW

ESTIMATED 31.10 * 14.41 26.11 30.11- TIME

3RD PARTYVERIFICATION

-72- ANNEX 2

15. T1he second institution created under the October emergency decrees, AMC, is toact as a de facto asset disposition corporation for either suspended finance companies oropen finEnce companies and commercial banks. This entity is responsible for buyingthrough reserve bids impaired assets put for sale by FRA, in competition with privatesector institutions (see Chart 4). It would subsequently manage, restructure, collect on theassets, and/or resell the assets to corporate buyers. The goal of AMC is to maximize thevalue of the assets to be sold, and to maintain an orderly real estate rmarket. AMC isdesigned as a vehicle to overcome in the near term the impediments to asset liquidations,to create a market for distressed assets, and to utilize new troubled debt restructuringtechniques to assist in what will be a large number of industrial restructurings.

16. The Government has appointed the AMC Board and Chairman, and is in theprocess of examining options for its financing and governance structure. The authoritieshave committed themselves to a series of additional actions so that AMC will be staffedand operational by January 31,1998. The authorities have authorized a capital of B 1billion for the AMC, of which B 250 million have already been approved.

17. Finally, the authorities are currently examining options for the asset disposalprocess. This process will be of prime importance to the financial outcome of the closureof the designated finance companies. The institutional and policy framework for disposalof good and bad assets is to include the specific roles of FRA, AMC, FIDF, and thecreation of a "new bank." PLMO, an earlier unsuccessful mechanism for purchasingfinance company assets, is not expected to play a significant role in the resolutionsprocess.

4. EVALUATION OF SHAREHOLDER-LED REHABILITATION PLANS

18. The shareholders of the suspended finance companies have been given anopportunity to propose voluntary rehabilitation plans. Criteria for the evaluation of theseplans were originally issued in early September by the special Screening Committee, andsubsequently modified by the authorities, in negotiations with the Bank and the IMF, toreflect relevant agreements between the Government and the IMF. In particular, it wasdeemed crucial to the integrity and credibility of the overall resolution package that FCsbe permitted to emerge from suspension only if they had adequate equity capital andliquidity, strong management, and fit and proper shareholders.

19. The final criteria against which the rehabilitation plans were measured included:(a) adequate recapitalization of the suspended firm; (b) plans for repayment of debt; (c)sufficient and reliable sources of funds for liquidity management; and (d) quality ofmanagement. To gain approval, a submitted rehabilitation plan had to pass evaluation oneach of the criteria.

20. The overall rehabilitation package also included the following guidelines: explicitrecapitalization standards for both existing and new owners; guidelines for conversion ofFIDF debt to equity as part of rehabilitation plans; requirements that existing shares befully written down; imposition of upper limits on allowed conversions; and allowance for

-73 - ANNEX 2

up to 100 percent foreign equity investment for 10 years, with the investment (but not thepercentage ownership) grandfathered thereafter. FIDF debt can now be restructuredprovided other creditors restructure their claims in a similar manner. Moreover, BOT hasannounced criteria relating to finance companies to be rehabilitated for the approval ofproposed new management and for monitoring acquisitions and new sources of capital.

21. The final criteria have been applied by FRA in its evaluation of the rehabilitationplans (see Chart 3). A total of 38 rehabilitation plans were submitted in accordance withthe prescribed deadlines. Of the 38, 29 involved recapitalizations, two were based onmergers among suspended companies, five anticipated mergers with other local financialinstitutions and two involved mergers with commercial banks. Operationally, FRA hasimplemented a three-step decision-making process for rehabilitation proposals:

(a) design of a modeling framework within which FRA evaluated thesubmitted rehabilitation and business plans;

(b) validation of asset valuations implicit in the rehabilitation proposals; and

(c) examination by an independent third party to ensure that the processfollowed by FRA in assessing rehabilitation plans is consistent with thecriteria designed in close coordination with the Bank and the IMF.

22. With strong economic leadership provided by the new Government-in placesince early November, 1997-and the full backing of MOF, FRA has moved withimpressive speed, decisiveness and transparency in dealing with this stage of theresolution process. It has been effectively supported by experts from consulting,accounting, law and public relations firms of international standard, mobilized at shortnotice, and funded under the World Bank-financed technical assistance loan. The WorldBank has deployed additional resident capacity in the Bangkok office to assist this urgentprocess, providing an immediate response capacity on a day-to-day basis.

23. On December 8, the authorities announced that 2 of the 38 rehabilitation plans hadbeen approved, and 36 rejected. This has meant that only 2 of the 58 suspendedcompanies have been authorized to reopen. Strict conditions have been applied to thecompanies, whose rehabilitation plans were approved by FRA in agreement with BOT,particularly in respect to capitalization. FRA will monitor implementation of theapproved rehabilitation plans.3 Once rehabilitation has been satisfactorily completed,FRA will report this to MOF, which will transfer supervision responsibility to BOT.

3 BOT is forrnally represented in the FRA Board.

L CHART3 I

FINANCIAL SECTOR RESTRUCTURING AUTHORITY

(No. 3/2540 Sec 1.1) FIDF's Conversion Foreign Source of Funds.Capital Adequacy Ratio of Debt to Equity Shareholders Bid Bonds

*Self recapitalisation *Cash, bonds and other liquid assets*"Capital Adequacy *Unlimited amount of shares may are acceptable in evidence for the BidRatio" *Not permitted for "self- be held by foreign shareholders up Bond.

*Recapitalisation with recapitalisation" or to the period of 10 years. *Evidence presented must not be lessnew venture "merger among other *After 10 years, foreign investors than 5% of total recapitalised funds.

suspended firms" where may not purchase any more shares *Once the plan has been approved,Yr 1 15% Tier 1 and 2 the structure of the major unless the amount held is less than new investors must transfer the total

*Merger among 12% Tier 1 shareholder remains 49% of the total shares recapitalised funds into an escrowsuspended finance Yr 2 12% unchanged and (accordingly, the foreign investor account not less than 15 days prior tocompanies Yr 3 10% management control. may acquire up to the 49% level) pursuing the normal cause of

business.

*Permitted once the *Cash, bonds and other liquid assets*"Capital funds after the existing shareholders *Unlimited amount of shares may are acceptable in evidence for the Bidmerger less contingent have realised the loss be held by foreign shareholders up Bondliabilities with maturities incurred, provided that: to the period of 10 years. 'Evidence presented must not be less

*Merger with other local and provisions for -conversion must not *After 10 years, foreign investors than 5% of total recapitalised funds.financial institutions doubtful assets" exceed 33% of may not purchase any more shares *Once the plan has been approved,which act as a core recapitalised funds unless the amount held is less than new investors must transfer the total

Yr 1 12% -conversion may be made 49% of the total shares recapitalised funds into an escrowYr 2 12% up to 25% of institutions' (accordingly, the foreign investor account not less than 15 days prior toYr 3 10% fully paid capital if may acquire up to the 49% level) pursuing the normal cause of

appropriate. business.

'Cash, bonds and other liquid assets*Unlimited amount of shares may are acceptable in evidence for the Bidbe held by foreign shareholders up Bondto the period of 10 years. *Evidence presented must not be less

*Merger with *"'Capital adequacy ratio *After 10 years, foreign investors than 5% of total recapitahsed funds.commercial bank specified by the Bank of may not purchase any more shares *Once the plan has been approved,

Thailand." unless the amount held is less than new investors must transfer the total49% of the total shares recapitalised funds into an escrow(accordingly, the foreign investor account not less than 15 days prior tomay acquire up to the 49% level) pursuing the normal cause of

business.

EI CEIART3I

FINANCIAL SECTOR RESTRUCTURING AUTHORITY I

*Quality of management*If extension of *Track Record *Sufficiency to support customers'repayment to FIDF is *Honesty and trustworthiness withdrawalsrequested, maturity must *Absence of fraud, lack of responsibility,not exceed eight years unfair play, dishonesty *Appropriateness of nature of stock of

*Own financial conduct liquidity*Interest cost and penalty *Questionable business practices and activitiesfees *Sources of additional liquidity

*Quality of management*If extension of *Track Record *Sufficiency to support customers'repayment to FIDF is *Honesty and trustworthiness withdrawalsrequested, maturity must *Absence of fraud, lack of responsibility,not exceed eight years unfair play, dishonesty *Appropriateness of nature of stock of

*Own financial conduct liquidity*Interest cost and penalty *Questionable business practices and activitiesfees *Sources of additional liquidity

*Quality of management*lf extension of *Track Record *Sufficiency to support customers'repayment to FIDF is *Honesty and trustworthiness withdrawalsrequested, maturity must *Absence of fraud, lack of responsibility,not exceed eight years unfair play, dishonesty *Appropriateness of nature of stock of

*Own financial conduct liquidity*Interest cost and penalty *Questionable business practices and activities qit

fees *Sources of additional liquidity

CHART 4-OVERVIEW OF ASSET REALIZATION PROCESS

I >R F~~~~~~~~~~~~~~~~~~~~~~~~~~-

EE: ';~~~~~~~~~~~~~~~~~.~~~~~~~~~~~~~~

-77- ANNEX 2

5. A BROAD LOOK AT ASSET DISPOSITION

24. Asset Classification and Recovery Process. As of the December 8announcement, those suspended companies whose rehabilitation plans were not acceptedwere put under the direction of Committees, which have been established and appointedby the FRA Board in accordance with Section 30 of the Emergency Decree on FinancialSector Restructuring.4 The Committees, in turn, appointed Special Managers under aPower of Attorney to take control and manage the business of each company and tosafeguard the interests of creditors; Special Advisors, most of them from internationalaccounting forms, were also appointed to provide best-international-practice advice to theSpecial Managers. The mandate of the Special Managers is clear and specific-topreserve and maximize the value of assets on behalf of depositors and creditors, andclassify assets according to type, size and quality for the purpose of their eventual sale.5

Special Managers are also to periodically review the staffing situation at each company inaccordance with relevant Thai labor laws, and work with remaining staff to rejuvenateloan collection and enhance the value of existing businesses.

25. Treatment of Depositors and Creditors. Depositors in the suspended banks arefully protected through the option of exchanging their claims on the suspended FC forclaims on Krung Thai Bank (KTB) or Krungthai Thanakit (KTT)-two publiclycontrolled financial institutions. These claims will be serviced (both principal andinterest) by FIDF. Similarly, creditors of the 42 FCs suspended in August (but not thoseof the 16 FCs first suspended) have the option to exchange notes with KTB. The deadlinefor exchanging to KTB notes, which are fully guaranteed by the Government, wasextended to March 1998. Creditors in the 16 FCs first suspended do not have the optionof exchanging their claims, and will have to modify their claims under a shareholderrehabilitation program, or negotiate their claim to the proceeds of the liquidation of theFCs' assets administered by FRA.6 Creditors, both domestic and international, are to betreated equally et pari passu with the FIDF (which is the largest creditor).

26. Financing. The principal financing requirements under the plan are for AMC'spurchase of impaired assets in FRA auctions, and FIDF's obligations under the noteexchange program. FRA financing needs should be limited to its overhead expenses and

4 Each Committee contains three core members who serve on all committees: a Chairman from theInspector General's office of the Ministry of Finance, a second representative from the Ministry ofFinance and a representative of the Bank of Thailand. Each committee also contains three membersspecific to each individual company. The three include: an FRA representative knowledgeable aboutthe specific finance company, a Bank of Thailand supervisor and a nongovernment-affiliatedrepresentative of the company's creditors.

5 Shareholders may recover some of their investment in the event that funds remain after repayments todepositors and creditors.

6 See Annex 3 on the Note Exchange Schemes for greater detail.

- 78 - ANNEX 2

the cost of consultants, the latter to be financed in large part by the World Bank under theFinancial Sector Implementation Assistanice Project.

27. It is estimated that FIDF's total funding requirement associated with the NoteExchange programs of KTT and KTB will aggregate around B 500 billion assuming allclaimholders exercise their option under these programs, with the bulk of the financingrequired only in the fifth year.

28. The Role of AMC. The Asset Management Company (AMC) has a crucial role inthe resolution process. It is to acquire impaired assets auctioned off by FRA, as a bidderof last resort; manage, restructure, and make collections on these assets; and eventuallyresell them. It is required to do so in a manner that maximizes asset values, and enhancesmarket confidence. Rough estimates suggest that AMC may need to purchase aroundB 300 billion (market value) in assets. An adequately funded, well-performing AMC iskey to a successful resolution, and accelerated progress is needed in these two areas. First,AMC needs to increase its authorized capital, from the current B I billion to B 10 billion.Plans for adequate funding for AMC have been prepared and announced by theGovernment, with a timetable for disbursement, and first payment by MOF in February.Second, AMC needs to urgently develop: (a) appropriate internal polices and procedures;(b) bidding procedures consistent with AMC's role as bidder of last resort, and agreeableto FRA; and (c) an appropriate MIS system. A third-party review of AMC's internalpolicies, procedures, and MIS, is to be carried out by MOF before Board presentation ofthe loan.

6. CORE ASSET SALES PROCESS AND PROCEDURES

29. FRA has prepared guidelines and procedures for the orderly disposal of assets ofthe FCs not authorized to reopen (see Chart 4 above). It is the objective of FRA tocomplete the sale of all core financial assets by end-1998. Assets are to be sold throughcompetitive bidding, with the asset sales process is governed by the following principles:(a) maximizing value to creditors; (b) promptness of execution; (c) nondiscrimination; (d)fairness; and (e) transparency of process. Bidders will include private sector financialinstitutions and other firms or individuals, the creditors of suspended finance companies,the AMC, and the government-established "new bank" (the Radhanasin Bank).7

7 The following parties are excluded from participating in the sales process: (a) FRA'S Board membersand employees; (b) Section 30 Committee(s) of the finance company(ies) participating in each sale;(c) Special Managers and Special Advisors (and their employees) of the finance companiesparticipating in each sale; and (d) consultants and advisors to FRA. For the avoidance of doubt, allother potential bidders, including shareholders, creditors, debtors and former employees of eachfinance company, are welcome to participate in the core asset sales process. Debtors of the financecompanies will not be allowed to bid on only their own or related party loan(s). Debtors will,however, be allowed to bid for a package that includes their own or related party loan(s) where thebook value of their own or related party loans is not greater than a specified percentage of the totalbook value of all loans within the package. This percentage will initially be set at 10 percent.

-79 - ANNEX 2

30. Each sale will contain specific classifications of the core assets, identifiedaccording to the finance company(ies) from which they are sourced. FRA will considerfor acceptance bids in respect of each individual finance company's core assets includedin the sales package. FRA will also consider bids in respect of all, or a number of, financecompanies core assets within a package (that is, an interdependent bid), but the bid mustidentify the amount attributable to each individual finance company's assets.Approximate time between announcement of each sale and signing of contract withwinning bidder, is about 4 to 5 months. Concurrent auctions are expected to take place atthe same time. Governing principles of the sales will include the following:

Provision of Information:

* Sales Information Memorandum. All parties interested in the announced sale mayrequest further information, which will initially comprise a Sales InformationMemorandum-including general information on the sales process and an estimatedtimetable for the current sale. The specific content of each Sales InformationMemorandum will reflect the nature of the core assets for sale and the availability ofrelevant information from the finance company(ies) from which they are sourced.Information provided may include both company fact sheets and summary core assetdetails.

* Sales Data Files. Upon reviewing the Sales Information Memorandum, all partieswishing to obtain further detailed information on the core assets may apply for accessto the Sales data Files. The content of the Sales data Files will again reflect the natureof the core assets for sale (in electronic form) and the availability of relevantinformation from the finance company(ies) from which they are sourced. The SalesData Files will be made available to all parties on the same date.

- Data Room Access. Appropriate loan files, credit papers, collateral documents andother information relevant to the evaluation of the assets will be made available toallow interested parties to perform such due diligence procedures as they considernecessary. Finite time periods will be established for access to the data rooms, asappropriate for each portfolio. These will be determined and disclosed whenconformation of access is provided.

* Bids. Bids must be submitted to FRA by a predetermined date. This date will bedisclosed to potential bidders prior to being granted access to the Data Rooms. Thisdate will vary according to the assets being sold, but is likely to be around four (4)weeks after the date on which Data Room access is first granted. Binding Bids mustbe submitted in accordance with the proscribed format and must remain open foracceptance for at least a predetermined period of time.

* Bid Evaluation and Negotiations. FRA will perform binding bid evaluations withinapproximately 14 days of the due date of submission. Bids will be evaluated inaccordance with defined criteria. These include value, timing and liquidity of

- 80 - ANNEX 2

payment. FRA will commence negotiations of the final sales contract with thepreferred bidder immediately after the priority order of bids has been established. Ifthe negotiations with the preferred bidder are not successful, the second in the priorityorder will be pursued.

Bid Principles:

* Currency. All Bids must be submitted in Thai Baht or such other currency as FRAmay determine and disclose from time to time.

* Consideration. All bid consideration must be rendered in cash or Thai governmentsecurities, which are negotiable, transferable and marketable on a recognizedexchange. FRA may announce other forms of acceptable consideration from time totime.

* Representation and Warranties. FRA will offer no representations and warrantieswith respect to the assets for sale. Further, FRA will not accept responsibility orliability for the accuracy or completeness of information provided to interested partiesin the course of the sales process. Interested parties must undertake suchinvestigations and due diligence procedures as they see fit before entering into anycontract. FRA will offer limited protection to successful bidders in respect of fraudand/or defects in title to underlying security.

Unsolicited Bids:

* Flexibility to Benefit Creditors. The market for the assets held by the 56 FTCs willbe dynamic. FRA anticipates that certain bids will be received that do not conform inall respects to the published sales strategy and portfolios advertised for sale. In orderto ensure attractive offers that may benefit creditors are adequately considered, FRAhas developed a procedure for the receipt, evaluation and treatment of unsolicitedbids.

* Evaluation of Unsolicited Bids. In order for an unsolicited bid to be consideredattractive, it must: (a) be submittedL in writing in the form of a binding bid; (b)incorporate minimum due diligence requirements; and (c) be for an amnount that FRAconsiders would have a reasonable prospect of being the successful bid in an opencompetitive bidding.

* Initiation of Open Competitive Bidding Process. When a bid is consideredattractive, FRA will initiate an open competitive bidding process, as dLescribed in 1 to8 above, for each asset component of the bid received as soon as reasonably possiblethereafter. The minimum of a competitive bidding process will be one month.

ANNEX 3: INSTITUTIONAL DEVELOPMENT PLAN FOR ENHANCING THESUPERVISORY CAPACITY OF BOT

March 1998 - March 2000

ACTIONS TO BE TAKEN SCHEDULE TA REQUIRED

TRAINING/WORKSHOPS

Organize loan restructuring seminar for bankers and supervisory staff; guidelines to be announced in June, 1998 May 1998 WB

Organize training program on real estate valuations for industry and supervisory staff May 1998 WE l

Organize training program on credit analysis and credit risk management July 1998 WB

Organize training program on assessing fnancial institution's internal audit function and internal control 2nd half of 1998 WBinfrastructureOrganize basic training program on market, interest rate and liquidity risks 1st half of 1999 WB

Organize training program on assessing fnancial institution's management 1st half of 1999 WE l

Organize high level training program for specialized examiners on market, interest rate and liquidity risks 2nd half of 1999 WB

Organize training program on information technology risk 2nd half of 1999 WB

REGULATiONS & GUiDELiNES

Draft guidelines for loan restructuring/renegotiated debt May/June 1998 WB/IMF

Draft guidelines for real estate valuations May/June 1998 WB/IMF

Draft notification to industry regarding possible assessment of penalties for late and inaccurate regulatory reports; the May 1998 WBnotification may include the mandatory use of external audits to improve regulatory reporting

Draft internal guidelines for enforcing new classification system 2Q 1998 WB

Draft internal guidelines for credit analysis and credit risk management assessment July 1998 WB

Draft internal guidelines for assessing fnancial institution's internal audit function and internal control enviromnent July 1998 WB

Draft new guidelines for enhanced rating system and develop comprehensive examination manual (pre-exam, exam, 1st half of 1999 WBpost exam)Draft a manual for assessing trading operations 1st half of 1999 WB

Draft internal guidelines for evaluating interest, liquidity and market risks 1st half of 1999 WB

Draft internal guidelines on information technology risk assessment 2nd half of 1999 WB

RATING SYSTEM

Review and enhance the current rating system to provide a supervisory tool for evaluating the overall condition of 2nd half of 1998 WBsupervised institutions

ACTIONS TO BE TAKEN SCHEDULE TA REQUIRED

OFFSITE SURVEILLANCE

BOT to perform a review of regulatory reports to assess usefulness of information requested as well as to identify 2Q of 1998 WBmissing infornationRedefine the roles and responsibilities of financial analysts in the three departments of Bank Supervision 2nd half of 1998

Draft early warning system procedures for financial analysts 2nd half of 1998 WB

BOT to develop consolidated reporting for financial institutions 1 st half of 1999 WB

Monitor and analyze the financial condition of supervised institutions on a fully consolidated basis 1st half of 1999

ExcHANGE OF INFORMATION

Improve exchange of information between the two examinations departments for monitoring related financial June 1998institutions

MIS

Enhance internal supervisory reports for senior management Ongoing

COMMUNICATIONS

Improve the sharing of information and communication within and among departments Ongoing

CAREER DEVELOPMENT00

Institute a formal rotation program 1999

ENFORCEMENT ACTIONS

Develop comprehensive guidelines for requiring prompt corrective actions based on supervisory concerns or breaches End of 1998 WBnoted

- 83 - ANNEX 4

ANNEX 4: STATE ENTERPRISE REFORM

State enterprises play a relatively small role in Thailand's economy. The publicsector owns some 65 companies, with total assets of B 2.8 trillion and net assets of B 743billion (Table 1). Its activities in the real sectors are concentrated in energy (power andpetroleum), communications, and transportation. Energy and communications account fornearly two thirds of assets of the nonfinancial public enterprises and half of theiremployment. The government also owns five banks, including the second largestcommercial bank.

TABLE 1: PUBLIC ENTERPRISE FINANCIAL INDICATORS: 1998

Liabil- Net Reve- Earn- Profit/ Profits/ Profits/ Employ-No. Assets ities Assets nue ings Assets NA Sales ees

Energy 7 644.9 388.6 256.3 465.8 54.8 8.5 21.4 11.8 93,578Transport 5 178.7 127.1 51.6 18.1 -2.4 -1.3 -4.7 -13.3 57,376Marine Transport 4 18.2 5.3 12.9 9.6 3.1 17.0 24.0 32.3 10,168Aviation 4 160.4 108.9 51.5 89.3 8.9 5.5 17.3 10.0 32,001Communications 3 254.9 61.7 193.2 71.3 29.6 11.6 15.3 41.5 54,580Water & Housing 4 96.7 62.0 34.7 15.2 2.5 2.6 7.2 16.4 16,610Industrial Manufacturing 13 37.1 9.5 27.6 44.0 5.4 14.6 19.6 12.3 16,321Agriculture 9 12.8 8.3 4.5 6.4 -1.2 -9.4 -26.7 -18.8 9,550Services 11 12.3 4.1 8.2 20.4 1.1 8.9 13.4 5.4 5,122

Subtotal 60 1,416.0 775.5 640.5 740.1 101.8 7.2 15.9 13.8 295,306

Financial Indicators 5 1,407.1 1,304.4 102.7 144.1 24.5 23.9 17.0 41,342

Total 65 2,823.1 2,079.9 743.2 884.2 126.3 336,648

Source: Government of Thailand.

State enterprises grew rapidly during the 1970s and early 1980s when their shareof investment in GDP nearly doubled to 3.5 percent of GDP in the space of a decade. Bythe mid-1980s, they accounted for about two-thirds of public sector external debt andover 70 percent of total public sector investment. After a period of consolidation in thelate 1980s, the Thai government embarked on a massive effort to overcome infrastructurebottlenecks through public spending, and public enterprise investment surged to over 4percent of GDP in the early 1990s. The boom in state enterprise investment -mainly inpower, rails and telecommunication-peaked in 1995 with a 21.4 percent annual increase,and then tapering off in 10.4 percent in 1996. By that time, investment projects of severalstate enterprises faced bottlenecks and delays in bidding and costs of land acquisition.

- 84- ANNEX 4

Financial Performance and Budget Contribution

The public enterprise sector is a cash cow in Thailand. The rate of return on assetsbefore income taxes averaged 7 percent in 1996 and 16 percent on net assets. Aggregatebefore-tax SOE profits have hovered about 2-3 percent of GDP. Public monopolies-theElectricity Generating Authority of Thailand, the Telephone Organization of Thailandand the Provincial Electricity Authority-are the most profitable public enterprises, andenergy and communications account for 80 of total profits of the state enterprise sector.Lossmaikers are frms subjected to price controls, particularly the transport sector (StateRailways and Bangkok Mass Transit Authority). Nonetheless, losses of even thesecompanies have been relatively limited, amounting to only about 0.1 percent of GDPannually.

Contributions to the state budget increased steadily over the last years, largelyreflecting increased revenues from EGAT, the telephone companies and the proceeds ofprivatizations. During the high growth period over the last few years, the rise in absoluteSOE contributions remained roughly stable as overall government revenues multiplied.

State enterprises have relied on high self-financing ratios to cover investment.They have financed roughly three-quarters of their investment. Total borrowing has heldroughly flat during the 1 990s, and fallen as a share of GDP.

The Government's Reform Program for Public Enterprise

The Government wants to improve the efficiency of the public enterprise sector.The macroeconomic program implies that state enterprises' current operating surpluseswill have to cover all of their investment. This is to be achieved through cutting back ordelaying implementation of low priority investments, and seeking private sectorparticipation in the investment programs of power-generation projects, expressways andother projects. This will be done on the basis of a comprehensive review of publicinvestment. Also, utility tariffs and other SOE prices are to be increased to cover costs ofprovision, including depreciation, with the exception of bus and rail fares.

The recent economic crisis and the subsequent IMF financing package hasprovided the impetus for moving ahead with a comprehensive program of publicenterprise reform. To regain investor confidence and promote more competition ininfrastruLcture markets, the Government is creating a new partnership of the public andprivate sector by addressing the interface of privatization, concessioning and marketderegulation. The Government is currently preparing an agenda for reforming anddivesting public enterprises at an accelerated pace over the next few years. TheGovernment is actively discussing a program to reform state enterprises throughliquidation, sales to joint ventures, and partial or full equity privatization (i.e. sale ofmore than 50 percent of public sector shares).

- 85 - ANNEX 4

How SOEs can Improve Efficiency

The government is placing the reforn of SOEs in the broader context ofimproving the enabling environment for the private sector in order to lower the cost ofinfrastructure development and to increase to effectiveness of asset management.Specifically, it aims at increasing the performance of enterprises in which theGovernment will continue to have an equity share for the time being through threecoordinated measures: (a) change management incentives by stepping up competitivepressure; (b) establish clear accountability by strengthening corporate governance; and(c) access best international practice by inviting strategic partners. It will also beimportant to create an appropriate legal foundation by adopting the CorporatizationLaw and ascertaining the need for corresponding changes in legislation and charters thatestablished specific SOEs, in order to ensure their high-quality privatization.

The key prongs of the reform program are therefore fourfold:

* infrastructure market deregulation;* privatization, on a strategic and a fast track* strengthening of regulatory oversight;* institutional development

Cross-Sectoral Regulatory Frameworks

Constraints on public resources have prompted the Government to turn moredecisively to the private sector for financing infrastructure needs. To mobilize privatecapital at attractive rates, the Government is in the process of setting up regulatoryframeworks that protect state interests while minimizing uncertainty and hence risks forinvestors. These frameworks for private infrastructure would establish clear rules on

* which infrastructure sectors are open to private sector participation;* which agency is responsible for approving private projects and contracts;* competitive bidding, including the scope of any exceptions;* determining tariff adjustments; contract amendments and termination; and* recourse to international arbitration.

In establishing cross-sectoral frameworks, the role of the law needs to beconsidered in the following areas: (a) removing existing barriers to private sectorparticipation; (b) improving the project approval process; (c) providing other assurancesto private investors; (d) removing other gaps or uncertainties in the legal environment;and (e) broader private infrastructure promotion programs.

Organizational Structure

Under the Prime Minister Office's Regulation on State Enterprise PolicyManagement Monitoring of December 19, 1997, responsibility for state enterpriseimprovement and the privatization program rests with the State Enterprise Policy

-86 - ANNEX 4

Conmission (SEPC). The SEPC is chaired by the Deputy Prime Minister and includesministers and heads of the concerned agencies, including the Finance Minister, theSecretary General of NESDB, the Secretary General of the Budget Bureau, the AuditorGeneral, the Permanent Secretary for Finance, the Comptroller General and six expertsfrom the private sector (see attachment). The Permanent Secretary for Finance serves asthe secretary to SEPC and the day-to-day implementation of commission decisions restswith the Office of the Secretary to SEPC. Effective and competent staff support to thissecretariat office is a key factor the success in implementing the Government'sprivatization program. This responsibility has been assigned to the Office of the StateEnterprise and Government Portfolio at the Comptroller General's Department, and theOffice of the NESDB. The responsibilities and staff of this office will ibe transferred tothe new Department of State Enterprises in the Ministry of Finance, which will have astaff of about 70-80.

Role of the State

The Thai Government is preparing to retreat from the role of virtually exclusivefmancier, manager and operator of state enterprises and key infrastructure services.Action programs are being prepared to broaden and deepen the scope for privateinvolvement, both through privatization and concession agreements. Transforming theThai government into an effective facilitator and regulator of infrastructure servicesprovided by private investors involves key reforms. Existing institutions need to bebetter-focused and strengthened, and new institutions need to be established. Aneffective strategy also requires a mechanism to ensure proposed private participation in anew public-private partnership is consistent with the Government's broader developmentobjectives. With the economic crisis in East Asia, attracting private investment inprivatization and new projects will be more difficult and costly than in the recent past. Astrong regulatory foundation is essential to mitigate private investor risk related to: (a)uncertainty over the approval process; (b)concerns over consistent application of rulesgoverning tariff adjustments, service quality standards, and investment targets; (c)inefficient allocation of risks and distorting incentives; and (d) ambiguities about therights and obligations of the parties, to be determined on a case-by-case basis.

-87 - ANNEX 4

TABLE 2: PUBLIC ENTERPRISES AND NONFINANCIAL PUBLIC SECTOR OPERATIONS

1990/91 1991/92 1992/93 1993/94 1994/95 1995/96

(B billion)

Total Revenue & Grants 566.6 607.9 671.9 795.4 927.5 1,060.2Public Enterprises 72.2 78.2 73.7 97.0 120.0 139.2% 12.7 12.9 11.0 12.2 12.9 13.1

Total Expenditure 470.0 564.0 642.9 730.9 826.9 960.7Current Expenditure 282.7 322.6 371.5 406.8 454.6 503.1Capital Expenditure 187.3 240.7 272.0 327.7 377.7 448.7Public Enterprises 99.2 120.4 127.7 122.0 148.1 163.6% 53.0 50.0 46.9 37.2 39.2 36.5

(Percent of GDP)

Overall Public Sector Balance 4.0 1.6 0.9 1.8 2.5 2.2Total Revenue & Grants 23.3 22.1 21.8 22.8 23.0 23.3Public Enterprises 3.0 2.8 2.4 2.8 3.0 3.1Total Expenditure 19.4 20.5 20.9 20.9 20.5 21.2CurrentExpenditure 11.6 11.7 12.1 11.7 11.3 11.1Capital Expenditure 7.7 8.8 8.8 9.4 9.4 9.9Public Enterprises 4.1 4.4 4.1 3.5 3.7 3.6

TABLE 3: OPERATIONS OF STATE ENTERPRISES(B million)

State Enterprises by Economic Category Profits * Tax Contribution(no.) 1995 1996 1995 1996

Power (6) 45,669 55,264 12,635 16,446Transport and Communications (16) 32,531 35,162 15,287 17,314Manufacturing (12) 5,429 5,562 3,911 4,452Agriculture -152 -36 8 3Others, 7,272 6,827 5,447 5,518- including Lottery Bureau 4,612 4,765 4,297 4,338

Total (47) 90,749 102,779 37,288 43,733

Source: BOT

Notes: figures in parentheses stand for the number of enterprises;

* before submitting revenues to Government and before corporate income taxes

- 88 - ANNEX 4

TABLE 4: STATE ENTERPRISE CAPITAL EXPENDITURE AND FINANCING

(B million)

1992 1993 1994 1995 1996

Capital Expenditure 120,365 127,751 121,989 148,113 163,569Sources of Funds (1+2) 120,365 127,751 121,989 148,113 163,5691. Revenues 86,238 92,927 75,408 110,845 126,944-Net profits aftertax 67,879 69,522 75,315 88,319 99,793plus: depreciations 26,877 32,759 36,881 40,713 47,379other revenues 29,395 30,842 48,458 60,120 63,252minus: income remitted to 27,194 29,859 31,372 37,288 43,733GovernmnentBonuses 4,699 5,077 7,135 6,140 7,129Other expenditure 6,020 5,260 46,739 34,879 32,6182. Borrowing 34,127 34,824 46,581 37,268 36,625Net foreign borrowing 16,233 -759 1,347 9,386 10,642Net domestic borrowing 17,894 35,583 45,234 27,882 25,983

Source: BOT.

ANNEX 5: STATUS OF BANK GROUP OPERATIONS IN THAILAND

A. IBRD Loans and IDA Credits in the Operations Portfolio as of May 31, 1998

Difference Betweenexpected and actual Last ARPP

Loan or Fiscal Original Amount in US$ Millions disbursements /a Supervision Rating b/

Project ID Credit No. Year Borrower Purpose IBRD IDA Cancel. Undisb. Orig Frm Rev'd Dev Obj Imp Prog

Number of Closed Loans/credits: 112

Active LoansTH-PE-4787 IBRD 34460 1992 KINGDOM OF TIIAILAND H'WAY IV 177.50 0.00 13.03 7.10 20.15 3.94 HS STH-PE-4796 IBRD 35980 1993 METRO ELEC AUTIIORITY DISTRIB. SYS & EGY E 109.00 0.00 0.00 18.30 18.28 11.46 S STH-PE-4802 IBRD38890 1995 B3ANGCHAKPETROLEUMPCL CLEANFUELS&EAQUA 90.00 0.00 0.00 74.57 50.90 0.00 S STH-PE-4799 IBRD 3884A 1995 EGAT LAM TAKHONG PUMP STO 70.47 0.00 0.00 60.97 24.29 0.00 S STH-PE-4797 IBRD 3799A 1995 PETROLEUM AUTHORITY SECOND GAS TRANSMISS 2.00 0.00 0.00 2.00 44.58 .34 S STH-PE-4801 IBRD 37980 1995 PROV ELEC AUTHORITY DISTRIBUT.SYSTEMREI 50.00 0.00 0.00 7.91 6.90 0.00 S STH-PE-4803 IBRD37970 1995 RTG LANDTITLINGIII 118.10 0.00 0.00 71.46 27.32 0.00 S STH-PE-4793 IBRD 40530 1996 GOVT OF THAILAND TECHNICAL EDUCATION 31.60 0.00 0.00 31.60 12.34 0.00 S S 00TH-PE-4791 IBRD 40520 1996 GOVT OF THAILAND SEC.EDUC. QUALITYIM 81.90 0.00 0.00 81.90 19.34 0.00 S STH-PE-4800 IBRD 39680 1996 GOV. OF THAILAND HIGHWAYS V 150.00 0.00 0.00 149.65 112.65 1.10 S STH-PE-37086 IBRD 41990 1997 METROPOLITAN N METROPOL'N DIST REIN 145.00 0.00 0.00 134.71 -8.62 0.00 S S

ELECTRICITYTH-PE-4805 IBRD 41600 1997 GOVT OF THAILAND UNIVER SCI & ENG.EDU 143.40 0.00 0.00 143.40 20.00 0.00 S STH-PE-42268 IBRD 40670 1997 PEA DISTR AUTOM & RELIA 100.00 0.00 0.00 98.17 34.67 -.36 S STH-PE-54799 IBRD 42880 1998 ECOMGTIMPLEASSIST 15.00 0.00 0.00 15.00 0.00 0.00TH-PE-53616 IBRD 42330 1998 FIN SEC IMPL ASST 15.00 0.00 0.00 13.14 -1.85 0.00

Total 1,298.97 0.00 13.03 909.88 380.95 16.48

Active Loans Closed Loans Total

Total Disbursed (IBRD and IDA): 392.66 4,543.25 4,935.91

of which has been repaid: 9.93 3,102.72 3,112.65

Total now held by IBRD and IDA: 1,326.13 1,448.08 . 2,774.21

Amount sold : 0.00 196.73 196.73

Of which repaid : 0.00 196.73 196.73

Total Undisbursed : 909.88 7.26 917.14

/a Intended disbursements to date minus actual disbursements to date as projected at appraisal./b Following the FY94 Annual Review of Portfolio performance (ARPP), a letter based system was introduced (HS = highly Satisfactory, S = satisfactory, U unsatisfactory, HU highly X

unsatisfactory): see proposed Improvements in Project and Portfolio Performance Rating Methodology (SecM94-901), August 23, 1994.

- 90 - ANNEX4

B. Statement of IFC's Committed and Disbursed Portfolio as of April 30, 1998(In US Dollar Millions)

Committed DisbursedFY IFC IFC

Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic

1979/81/84/ Siam City 20.00 0.00 0.00 55.00 20.00 0.00 0.00 55.0087/91

1984/91 SEAVI Thailand 0.00 1.50 0.00 0.00 0.00 1.50 0.00 0.001987/96 HMC Polymers 0.00 3.92 .71 0.00 0.00 3.92 .71 0.001988 Peroxythai 5.02 0.00 0.00 0.00 5.02 0.00 0.00 0.001989 SCB-CKAP 0.00 .41 0.00 0.00 0.00 .41 0.00 0.001989 SCB-Thai Baroda 0.00 .78 0.00 0.00 0.00 .78 0.00 0.001989 TFB-Ladprao 0.00 .33 0.00 0.00 0.00 .33 0.00 0.001989 TFB-Top Easy 0.00 .15 0.00 0.00 0.00 .15 0.00 0.001990 Siam Asahi 0.00 7.64 0.00 0.00 0.00 6.37 0.00 0.001990/95 Shin Ho Paper 13.75 7.54 0.00 21.13 13.75 7.54 0.00 21.131991 Bank of Asia-AL 17.50 0.00 0.00 0.00 0.00 0.00 0.00 0.001991 VIM Thailand 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.001991/93/96 Ayudhya Leasing 0.00 1.50 0.00 0.00 0.00 1.50 0.00 0.001992 Krung Thai IBJ 0.00 .35 0.00 0.00 0.00 .35 0.00 0.001993 Advance Agro 10.00 0.00 0.00 0.00 10.00 0.00 0.00 0.001993 Bumrungrad 25.00 2.24 0.00 29.00 25.00 2.24 0.00 29.001993 Central Hotel 0.00 13.95 0.00 0.00 0.00 13.95 0.00 0.001993 Samui Beach 2.57 0.00 0.00 4.29 2.57 0.00 0.00 4.291993 Star Petroleum 100.00 0.00 0.00 332.50 100.00 0.00 0.00 332.501993 Sukhontha 1.71 0.00 0.00 4.29 1.71 0.00 0.00 4.291993 TUNTEX 11.70 4.92 0.00 109.55 11.70 4.92 0.00 109.551994 Dhana Siam 24.15 0.00 0.00 3.71 24.15 0.00 0.00 3.711994 Vinythai 35.93 0.00 0.00 47.93 35.93 0.00 0.00 47.931995 Finance One 30.00 0.00 0.00 132.40 30.00 0.00 0.00 132.401995 Saha Farms 25.00 9.90 10.00 25.00 25.00 9.90 10.00 25.001995 UPOIC 0.00 1.08 0.00 0.00 0.00 1.08 0.00 0.001995/96 BTSC 50.00 9.83 9.83 0.00 21.32 9.83 9.83 0.001996 NFS 30.00 0.00 0.00 250.00 30.00 0.00 0.00 190.001996 Thai Petrochem 80.00 0.00 20.00 400.00 76.67 0.00 20.00 383.331997 Phatra Thanakit 22.79 0.00 0.00 0.00 11.39 0.00 0.00 0.00

Total Portfolio: 505.12 66.04 40.54 1,414.80 444.21 64.77 40.54 1,338.13

Approvals Pending CommitmentLoan Equity Quasi Partic

1996 ADLC II 10.00 0.00 0.00 15.001998 BTSC II 30.00 0.00 0.00 0.001998 HMC RI II 0.00 1.84 0.00 0.001996 NFS 10.00 0.00 0.00 0.001997 PHATRA 0.00 0.00 0.00 13.04

Total Pending Commitment: 50.00 1.84 0.00 28.04

-91- ANNEX 4

ANNEX 6: THAILAND AT A GLANCE

Lower-POVERTY and SOCIAL East middle- F

Thailand Asia income ! Developmentdiamond

Population mid-1 996 (millions) 60.1 1,726 1,125GNP per capita 1996 (USS) 3,020 890 1,750 Life expectancyGNP 1996 (billions US$) 177.3 1,542 1,967

Average annual growth, 1990-96

Population (%) 0.9 1.3 1.4 GNP GrossLabor force (%) 1.3 1.3 1.8 per Gpnmary

Most recent estimate (Iatestyear available since 1989) capita enrollment

Poverty: headcount index (% of population) 13Urban population (% of total population) 20 31 56Life expectancy at birth (years) 69 68 , 67Infant mortality (per 1,000 live births) 35 40 41 Access to safe waterChild malnutrition (% of children under 5) 13Access to safe water (% 0f population) 81 77Illiteracy (% of population age 15+) 6 17 - ThailandGross primary enrollment (% of school-age population) 87 117 104

Male .. 120 105 - Lower-middle-income gnoupFemale .. 116 101

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1975 1985 1995 1996Economic ratlos

GDP (billions USS) 14.9 38.9 168.4 185.0Gross domestic investmentUGDP 26.7 28.2 41.8 41.6 Openness of economyExports of goods and services/GDP 18.4 23.2 41.7 38.6 OGross domestic savingslGDP 22.1 25.5 36.2 35.3Gross national savings/GDP 22.7 24.2 34.8 33.7

Current account balance/GDP -4.1 -4.0 -8.0 -7.9Interest payments/GDP 0.7 2.3 1.8 1.2 Savings InvestmentTotal debt/GDP 12.5 45.1 50.6 49.9Total debt servicelexports 12.0 31.9 11.6 11.4Present value of debtlGDP ..Present value of debtlexports .. Indebtedness

1975-85 1986-96 1995 1996 1997-05(average annual gtowth) .ThailandGDP 6.5 9.6 8.7 5.5 .Lower-middle-income gupGNP per capita 4.1 8.3 7.7 4.6 - -Exports of goods and services 9.5 15.9 14.8 2.4

STRUCTURE of the ECONOMY1975 1985 1995 1996

(% of GDP) Growth rates of output and Investment(%)Agriculture 26.9 15.8 10.8 10.7 I 40Industry 25.8 31.8 39.4 39.8 30

Manufacturing 18.7 21.9 28.5 28.6 20Services 47.3 52.3 49.7 49.5 10 _

Prvate consumption 67.6 61.0 54.4 55.1 91 92 93 94 95 95General government consumption 10.3 13.5 9.5 9.6 GDI OGDPImports of goods and services 23.0 25.9 47.4 44.3

1975-85 1986-96 1995 1996(average annual grovth) Growth rates of exports and imports I%)Agriculture 4.1 4.0 3.2 3.0 25Industry 7.9 12.6 11.3 7.7 20

Manufacturing 7.0 12.8 12.4 7.3 isServices 6.7 9.1 7.7 6.0 10

Private consumption 5.2 8.3 8.3 6,3 s-General government consumption 9.1 4.5 0.8 4.4 o i-_, Gross domestic investment 8.1 15.3 13.6 7.4 91 92 93 94 95 95Imports of goods and services 6.2 17.6 16.9 2.8 I -Exports O-,mportsGross national product 6.3 9.5 8.4 5.4

Note: 1996 data are preliminary estimates. Figures in italics are for years other than those specified.The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond willbe incompiete.

- 92 - ANNEX4

Thailand

PRICES and GOVERNMENT FINANCE1975 1985 1995 1996

Domestic prices Inflation (%)(% chinge) -

Consumer prices 5.3 2.5 5.8 5.9

Implicil. GDP deflator 3.5 2.2 6.2 5.1

Government finance 2

(% of GOP,) o (% of GDP) ~~~~~~~~~~~~~~91 92 93 94 95 9e

Current revenue 12.8 15.4 18.2 18.6Current budget balance 1.5 -0.6 7.8 8.3 1GDP def. C CPIOverall surplus/deficit -1.6 -4.9 2.5 2.2

TRADE

(millions US$) 1975 1985 1995 1996 Export and import levels (mill. USS)Total exports (fob) 2,208 7,121 56,444 55,721 80,000 -

Primary Goods .. .. 9,679 9,598 70,000 -

Rice 287 829 1,962 2,012 S60000s

Manufactures ,, 2,920 46,445 45,653 50,500 T

Total imports (cif . 9,248 71,493 72 768 40,00-

Food .. 348 1,489 1,660 0:0".Fuel and energy .. 2,696 4,672 6,248 2.0Capital goods er 2,598 32,716 33,822 o 0l

Export price index (1987=100) 73 139 138 90 91 92 93 94 95 96

Import price index (1987=100) 72 154 153 . r Exports * ImportsTerms of trade (1987=100) 101 90 9o

BALANCE of PAYMENTS1975 1985 1995 1996

(millions US$) Current account balance to GDP ratio (%)Exports of goods and services 2,780 9,100 70,590 71,725Imports of goods and services 3,478 10,160 82,169 83,617 1 IResource balance -698 -1,060 -11,579 -11,892

Net income 181 -643 -2,114 -3,257 3 4

Net current transfers 80 15 47 780 4

Current account balance, -beforn official capital transfers -607 -1,537 -13,206 -14,369 7

Financing items (net) 555 1,620 20,442 16,538 -Changes in net reserves 52 -82 -7,236 -2,169 9

Memo:Reserves including gold (miDl. US$) 2,008 3,003 34,976 38,551Conversion rate (local/US$) 20.4 27.2 25.5 25.8

EXTERNAL DEBT and RESOURCE FLOWS1975 1985 1995 1996 C

(million.s USS) Composition of total debt, 1996 (mill. USS)Total debt outstanding and disbursed 1,865 17,552 83,166 90,812 A B D

IBRD 270 2,202 1,805 1,607 1607 1277

IDA 4 105 102 100 E

Total debt service 357 3,263 8,608 8,666 7623IBRCD 32 232 336 318 G

IDA 0 1 3 3 37613

Composition of net resource flowsOfficial grants 11 120 99 110 .Official creditors 93 556 511 634 F

Private creditors 107 956 5,788 9,618 -4259

Foreign direct investment 22 163 2,068 2,900 42552Portfolio equity 0 44 2,154 1,551

World Bank programCommitments 95 113 190 250 A- IBRD E- BilateralDisbursements 44 285 146 138 B-IDA D-Other multilateral F - PrivatePrincipal repayments 13 75 203 198 c - IMF G - Short-ternm

Net flows 31 210 -57 -60 1

Interest payments 20 158 136 122Net tiansfers 12 51 -193 -183

Development Economics 6/12/98