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THAILAND

FINANCIAL SECTOR STRATEGY:

CURRENT STATUS AND FUTURE PRIORITIES

September 2002

Oliver Fratzscher

The World Bank

This strategy paper reflects discussions of a financial sector mission to Bangkok during June 14 to 26, 2001with policy makers at the Ministry of Finance, Bank of Thailand, Securities and Exchange Commission aswell as with SET, TBDC, NESDB, TDRI, and with various private sector executives. The authorities haverequested further Bank assistance to review their financial sector strategy and to select future priorities.Contributions from Noritaka Akamatsu, Ejaz Syed Ghani, Sameer Goyal, Michael Markels, Thomas Rose,and Renuka Vongviriyatham as well as comments from Gerard Caprio, Thomas Glaessner, Vikram Haksar,James Hanson, Daniela Klingebiel, Takashi Miyahara, Ijaz Nabi, JoAnn Paulson, Larry Promisel, BertrandRenaud, and Timothy Ryan are gratefully acknowledged.

EXECUTIVE SUMMARY: THAILAND’S FINANCIAL SECTOR STRATEGY

Thailand’s financial crisis of 1997 remains as a legacy with very high costs: $GDP per capita declinedby 40%, restructuring costs are exceeding 30% of GDP, capital outflows have surpassed 60% of GDP ;Thailand’s GDP has just reached pre-crisis levels, whereas Malaysia’s and Korea’s are above 125%

Main reasons for the crisis were macro- and financial factors leading to over-investment under fixedexchange rates, while institutional factors acted as a catalyst, and external factors became the trigger

Thailand’s policy response was successful in rebuilding the macro framework, in developing domesticbond markets, and in improving its legal and regulatory environment with access to FDI ; but theresponse was mixed in resolving non-performing loans, in operational corporate restructuring, indeveloping capital markets, in consolidating the financial sector and in enhancing its competitiveness

“Vision” of financial sector as enabler of economic growth within regional financial architecture,which consolidates towards universal banking with subsidiary structures [example of SCB]under integrated supervisory agencies with development of new financial products [e-finance]

Banking sector remains vulnerable with low profitability, dominated by three large commercial banks[42% of assets], three state-owned banks [27% of assets],and foreign-owned banks and branches [18%of assets] with system-wide distressed assets of 36%. Loan growth is limited as long as the corporatesector is not restructuring [still aggregate debt exceeds 100% of GDP]

Capital markets intermediate only one third of financing with two thirds coming from bank lending;equity market capitalization declined from $140 bn [1995] to $36 bn [2001] with participationof 1% of household savings, average D/E ratios at 300% [Korea 250% ; Malaysia 120%], plan for50% increase with 18 privatizations in three years, “corporatization” of SOEs, and tax incentives

Bond markets tripled in past three years to $38 bn, but only account for 5% of ASEAN market [Korea27%] with few corporate issues [15%], weak infrastructure and few institutional investors, plan forcentralized clearing and settlement with DVP, electronic trading platform, required credit ratings

Institutional investors could become conduit for good corporate governance [Thailand ranked aheadof Malaysia but behind Korea] requiring professional management of government pension funds,regulatory support for provident funds, liberalization of mutual fund industry, phasing out of depositguarantee, consolidation of insurance industry with elimination of minimum returns and 10% limits

Thailand’s competitiveness [IMD ranking 34 th out of 49] is facing major constraints, including lack ofcorporate restructuring ; weak legal capacity and effectiveness ; inefficient privatization and M&Aobstacles ; and lack of IT investment and education

Both pace and quality of financial restructuring have been weak: 82% of restructuring only extendedrepayment periods or lowered interest rates ; backlogs in civil courts may take at least five years toclear plus additional two years for auctioning foreclosed assets ; FIDF losses are estimated at 28% ofGDP ; corporate restructuring has rarely changed ownership or management with very little new equity

Legal effectiveness could be improved by stronger foreclosure laws and better access to collateral,by strengthening credit culture with Credit Bureau Bill, by adding capacity at civil courts andrequiring pre-trial mediation, by changing commencement requirements for bankruptcy rehabilitationproceedings, and by improving work of planners in drawing up rehabilitation plans

Privatization and cross-border M&A have been constrained by obstacles in Public Company Lawand Revenue Code [Korea’s M&A is three-times higher], regulatory restrictions on entry and exit ;foreign banks and branches account for only 18% of assets [Poland 36%, Chile 48%] and contribute totransparency and banking stability

Access priorities are further liberalization of trade and investment regimes, re-orientation of SFI torural areas, housing finance, enhancing investment in IT and infrastructure, and promoting newfinancial products for SME such as e-finance, leasing and cooperative lending.

THAILAND: FINANCIAL SECTOR STRATEGY SEPTEMBER 2002 PAGE -3-

THAILAND

FINANCIAL SECTOR STRATEGY:CURRENT STATUS AND FUTURE PRIORITIES

1. Thailand’s financial crisis in 1997 and subsequent policies of crisis managementhave been subject to a lot of research and debate. This paper aims to provide aperspective beyond crisis management by putting together various ideas on the futurestructure of the financial sector which have been developed by institutions in Thailand.After reviewing the main factors and lessons from the crisis in 1997, the paper takesstock of the achievements in the financial sector during the past four years with anattempt to benchmark against initial objectives and achievements of other crisis countries.On this basis, four main themes are proposed as pillars of Thailand’s future financialsector strategy. Given the wide scope of this analysis, it cannot be comprehensive, but itaims to identify the main issues while cross-referencing to various technical documents.

A. Crisis of 1997: causes and lessons

2. A major financial crisis hit Thailand in mid-1997 and marked the outset of whatbecame the Asian financial crisis. Five years later, the crisis remains as a legacy, whilerebuilding of the financial sector continues after per-capita income has dropped by 40%,capital of $75 bn has left the country [60% of GDP], and restructuring costs haveexceeded 30% of GDP. Thailand’s output has just reached pre-crisis levels, whereasKorea and Malaysia are now above 125% of pre-crisis levels. Extensive research hasillustrated the main causes of the crisis, it has revealed why the costs have been so severe,and it has also pointed to possible policy mistakes.

3. The literature identifies four main factors which have contributed to the crisis:Macro-economic factors created the basis for the misallocation of resources: a decade-long fixed exchange rate combined with a liberalized capital account encouraged short-term capital inflows, sizeable current account deficits, and massive over-investment.Financial factors had deteriorated prior to 1997, as the property bubble burst after yearsof excessive credit growth and increasing corporate leverage, and a general asset pricecorrection reflecting deteriorating corporate profits led to rising non-performing loans.Both macro-economic and financial imbalances would have required major adjustmentseven in the absence of a crisis. Micro- and institutional factors were the weakest linkwhich greatly aggravated the crisis, as corporate governance and creditor rights wereweak, supervision was inadequate and enforcement was poor [rule by exception], implicitgovernment guarantees created moral hazard, and infant domestic capital marketsincreased reliance on bank financing. External factors were not the main cause but thetrigger of the crisis, especially the weakness of Japanese banks and the depreciation ofthe Yen in 1996 as well as the rising competitiveness of Chinese manufacturing after theRenminbi devaluation in 1994.


4. Bordo and Eichengreen (2001) review the characteristics of financial crises duringthe past century and find that a crisis lasted on average for 2.5 years and cost on average8% of GDP, although combined currency and banking crises had double the average costof about 18% of GDP. By all measures, Thailand’s crisis has been among the mostsevere and protracted. This severity can be explained by four factors, which are alsoidentified by Berg (1999): Reversal of over-investment with the bursting of property andasset price bubbles [equity market decline of 80% since 1996] ; collapse of domesticdemand [34% decline during 1997/98] reflecting lack of confidence and overcapacity ;reduction of real credit [20% real decline since 1997] reflecting the slow resolution ofNPLs and protracted corporate restructuring ; as well as massive capital outflows [$76 bnas compared to $17 bn in IFI financing, table 1] especially the withdrawal of short-termlending by Japanese banks.

Table 1: Capital Outflows from Thailand during 1997-2001

(US$ bn) 1997 1998 1999 2000 2001

Commercial banks 6.4 9.4 14.2 8.3 3.1Resident lending abroad 6.1 9.3 2.6 1.5 0.3Errors and omissions(net)

7.9 2.6 0.2 4.0 0.7

Total outflows ($ bn) 20.4 21.3 17.0 13.8 4.1(% of GDP) 14% 19% 14% 11% 4%

Source: Institute of International Finance (2002)

5. Policy mistakes also appear to have contributed to the severity of the Thai crisis:On the external side, the sequencing of capital account liberalization as well as theoffshore operations of the Bangkok International Banking Facility (BIBF) have beenlinked to the large buildup of short-term external debt [26% of GDP in 1996]. On themacro-policy side, it appears that fiscal and monetary policies were initially toorestrictive [1997/98] which exacerbated the cyclical downturn. On the structural side, ithas been argued that the protracted process of bank and finance company closures andslow recapitalization combined with legal uncertainty and the absence of real corporaterestructuring have damaged the credit culture. Finally, on the institutional side, the short-term crisis management has not always been guided by a medium-term vision for afinancial sector strategy that could help to rebuild Thailand’s competitiveness. While theformer three factors are mainly related to the past, it is the last factor that is most relevantlooking ahead, and hence a focus of this note.


B. Crisis management 1997-2001: a comparative assessment

“What is going to be diminished, must first be allowed to inflate”(Tao Te Ching, chapter 36)

6. Tremendous efforts to reform Thailand’s financial sector have led to someimpressive results. However, implementation has been uneven and inconsistent, andcompetitiveness has not yet been restored. This section aims to develop a horizontalassessment of progress as of September 2002, measured against two benchmarks: first,compared to the initial targets [MoF Plan, IFI programs] and second, compared to otheremerging market economies. Progress of reforms is measured on a five point scale forfive broad categories: macro-economic policy, capital markets, legal and regulatoryregime, resolution of NPLs, and financial sector vision. While this approach revealssome stylized facts, it needs to abstract from a number of details.

6a> Macro-economic policy has been widely successful, but micro-economic issueshave been problematic. The policy mix of exchange rate, monetary, and fiscal policieshas been supportive of the recovery, and FDI inflows have continued at a lower pace,although recent policy shifts have added some uncertainty. Bank lending to the privatesector has been inhibited by structural factors and weak demand despite ample liquidity.Fiscal stimulus measures have helped to stimulate demand albeit at high cost.

6b> Capital market development has been partially successful, especially in growingthe domestic bond market and in improving infrastructure and regulation. However, theequity market remains constrained by a low free-float, protracted corporate restructuring,and slow privatization. The main constraint is the poor intermediation of savings throughinstitutional investors, which are not able to operate effectively. Regional initiatives havealso progressed slowly due to capital controls, and implementation of e-businessinitiatives and IT investment have been disappointing. Thailand has started from a verylow base in this area, and appears to be still at a distance to its peer group.

6c> Legislative reforms have been numerous, with the implementation of a newConstitution, Bankruptcy Act, foreclosure procedures and a Competition Law, althoughthe BoT Act and the Financial Institutions Law are still pending and judicial capacityremains limited. The adoption of international accounting standards and riskmanagement practices has significantly improved transparency, but implementation hasnot yet been completed. Corporate governance has been strengthened through theInstitute of Directors, but this process is progressing slowly. However, legal andregulatory reforms have been uneven and inconsistent, foreclosure procedures have beenslow, given large backlogs and incremental improvements, and regulatory forbearance onprovisioning for loan losses appear to have increased.

6d> Resolution of NPLs has been limited, and the quality of restructuring has beenpoor. Although three quarters of Thailand’s banking sector remains in private hands,consolidation has been limited, foreign ownership is only 12% of assets, commercialbanks still carry 10% of NPLs, while distressed assets are exceeding 36% of loans


[adding back write-offs and transfers to AMCs]. State banks remain operationally weak,directed lending appears to have increased, privatization has been progressing slowly,and a major constraint is the absence of real corporate restructuring.

6e> Financial sector vision has been inconsistent, despite various attempts in 1995and 1998 to develop a “masterplan” with the help of consultants. There is no clear policyto develop universal banking and consolidated supervisory authorities [as in Korea andAustralia], there are no clear roles for NBFI and SFI [as in Singapore], there is nosignificant investment into IT and E-business [as in Hong Kong and Korea] and there isstill no program to rebuild Thailand’s competitiveness through the financial sector.Recently, BOT and SEC have prepared proposals for a medium-term strategy, which isnow being discussed in the public and private sector.

7. The following chart illustrates the progress of financial sector reform across 15measures [three per category] on a five-point scale [5=best, 1=worst] as of September2002. The purpose of this chart is to indicate areas in need of improvement, not a precisemeasure of achievement. The shaded area illustrates progress as benchmarked againstinitial goals [larger area indicates good progress], whereas the dotted line revealsprogress relative to the peer-group, which illustrates how much more progress is stillrequired in each area. Although an emerging economy has naturally a lot of scope fordeveloping its financial sector, the differences across categories can be revealing.Measures are somewhat subjective, based on aggregate rankings from qualitativeobservations, drawing both on academic literature and on market views. Thailand’sstrengths in its financial sector program have been in a balanced macro-economic policy,sizeable FDI inflows, bond market development, and the adoption of internationalaccounting standards (cf. table 2). Main weaknesses are revealed in corporaterestructuring, the quality and pace of NPL resolution, in rebuilding competitiveness andin developing a vision for Thailand’s financial sector.

Table 2: Thailand’s financial sector reforms (1997-2001) – areas of main achievements

Macro-economic balance: C/A surplus ($40 bn); FDI inflows ($20 bn); low inflation Resolution of weak financial institutions: 60 closures, 15 mergers, 4 interventions Reduction / transfer of NPLs: reduced from 48% to 10% through FRA, AMC, TAMC Recapitalization of commercial banks: THB 320 bn of private tier-one capital raised Limited corporate restructuring: CDRAC, Central Bankruptcy Court, private AMCs Institution building: Public Debt Management Office, Monetary Policy Board, TAMC Supervision framework: Financial Institutions Law, Central Bank Act, Currency Act Legal framework: amendments to Bankruptcy Act and foreclosure procedures Accounting: strong Accounting Act, compliance with ICAAT, Institute of Directors Bond market development: tripled bond market size, better clearing and settlement Social programs: Miyazawa and SIP initiatives, education reform, social protection.


Thailand:

Financial Sector Assessment

shaded areareflects progress

dotted line arearelative to peer group

World Bank estimatesSeptember 2002 WEAKNESS

STRENGTH

0

1

2

3

4

5Macro-policy

Accounting

Legal / risk mgmt

Regulation

Governance

Consolidation

NPL resolution

Corp restructuringCompetitiveness

Vision / structure

Credit growth

Inst investors

Equity market

FDI inflows

Bond market

C. Pillars for future financial sector strategy

“If the sage governs with vision, then his people will not go wrong”(Tao Te Ching, chapter 3)

8. There are four themes which appear essential for shaping the future of Thailand’sfinancial sector: first, a concise financial sector vision which points towards financialconglomerates, integrated financial services, and an alignment of regulatory structures.Second, an immediate focus on corporate restructuring as the major impediment tofinancial viability, supported by effective legal and regulatory reforms in order to restorecompetitiveness. Third, an emphasis on nurturing institutional investors in order todevelop open capital markets with a modern infrastructure while enhancingtransparency and corporate governance. Finally, the broadening of access to financewhich would stimulate domestic demand, including SME activities, housing initiatives,infrastructure projects, IT investment and innovative financial products. TherebyThailand’s financial sector could become an enabler and catalyst of economic growth anddevelopment, which would gradually restore competitiveness and be supported by aregional financial infrastructure with long-term foreign investment.

C.1> Financial Sector Vision

9. Thai policymakers have expressed a number of objectives with respect tofinancial sector development: The Ministry of Finance (MoF, 1995) published a“Masterplan” for the future of the financial system in February 1995 which wasendorsed by the cabinet and called for the opening of Thailand’s financial system, thedevelopment of a regional financial center, the improvement of competitiveness, and the


expansion of pension and mutual funds. NESDB (1997) specified in the Eighth Plan thateconomic stability should be safeguarded by increasing domestic savings and curtailingthe current account deficit. The Bank of Thailand (BoT, 1998) drafted a proposal toassess the structure of the financial services industry as well as Thailand’s supervisorystructures based on experience from international competitors. At the same time, BoTand MoF (1998) emphasized that further consolidation of the financial sector wasinevitable and that “financial restructuring and the restoration of viability of Thailand’sfinancial system is an essential precondition to economic recovery”. The MoF (1999)recommended improved governance and competition of Thailand’s specialized financialinstitutions (SFI) and proposed a transition to unified BoT supervision of all deposit-taking institutions. The Financial Services Task Force (1999) pointed towards universalbanking as the evolving structure, recommended to remove legal and tax impediments onmergers, proposed to support development of new financial products such assecuritization, and identified six areas for improvements in capital markets. The BoT(2001b) has reiterated the need for further consolidation with “the decline in the share ofbank credits, from 77% of the total sources of funds presently, to 55% over the course ofthe next 10 years”, the need for supervisory improvements as specified in the pendingFinancial Institutions Law, and the need to draft a new “masterplan of the financialinstitution system” [BoT, 2002]. The current effort to develop a new blueprint aims toimprove competitiveness, enhance stability, and to improve access to financial services.

10. As Thailand has struggled with crisis management since 1997, very little of thefinancial sector vision has been implemented, while the rest of the world has moved on inthe rapid transformation of the financial industry. BIS (2001) illustrates the rapidprocess of mergers and acquisitions in 13 countries during the past decade, which hasresulted in a consolidated number of large and complex banking groups with a globalreach. Increased size and market share with “one-stop shopping” from banking to capitalmarket services have created synergies and enhanced shareholder value. A good exampleis Australia, which developed a vision for its financial system in the “Wallis Report”(1997) which predicted the “evolution of large financial conglomerates” as well asgrowth of niche players as “information technology could well erode the traditional rolesof financial institutions”. Meanwhile “financial innovation has continued unabatedly,institutions are rationalizing and consolidating, and transactions and services are rapidlygoing electronic and online” (MAS 2000), which is illustrated in Singapore with thedemutualization of the equity market, and in Korea with the rapid growth of electronicfinance. Innovative financial services have also helped to improve access in remoteplaces, as for example evidenced in South Africa and Canada. Regulatory structures havealso been aligned, albeit in different directions, as Hong Kong focused on market-basedincentives for consolidation [interest rate liberalization, DIS, regulatory streamlining, as aresult of 1998 KMPG/Barings report] whereas Malaysia focused on a mandatory mergerprogram [54 banks have been regrouped into banking entities, “Masterplan” BNM, 2001].

11. Despite numerous reform efforts, Thailand’s banking sector remains vulnerableand faces low profitability in its current structure. Consolidation has been successful inreducing finance companies’ share of financial system assets from 22% to 4%, leavingonly 19 out of initially 91 finance companies in operation. At the end of 2001, thebanking sector remains dominated by three large commercial banks (42% of assets, two


with foreign minority participation) and three state-owned banks (24% of assets),whereas four small foreign banks and foreign branches account for 18% of bankingsector assets. Market participants estimate that more consolidation is inevitable ifprovisioning requirements are strengthened and M&A activity could help to rationalizethe current structure. Although private banks’ regulatory capital is currently in excess ofstatutory minimum requirements after $8 bn of new capital was raised, the questionablevaluation of collateral, weak quality control over reclassified assets, and continuinglosses from distressed assets provide forbearance. IMF estimates reveal that additionalcapital of about 6% of risk-weighted assets may be required (IMF 2001c, medium casescenario). Although most NPLs of state-owned banks have been transferred to theTAMC, their balance sheets remain weak and system-wide distressed assets continue toaccount for about 36% of loans as compared to headline NPL figures of 10%. Whilebanks showed small positive earnings in 2001 (helped by FIDF subsidies to state-ownedbanks), the overall income generation capacity remains weak. New lending remainssubdued as long as the corporate sector is not restructuring (aggregate corporate debt of105% of GDP, average D/E of publicly traded companies is trending down from over400%, but remains well above pre-crisis levels).

12. Against this background, it appears that policy-makers are finding a consensus tomove towards financial conglomerates [widely defined as allowing integration of bank-and non-bank financial institutions, but excluding industrial conglomerates] and haveidentified four areas for priority actions: market-based consolidation of commercialbanks; privatization of remaining state banks; gradual closure or integration of remainingweak finance companies and credit fonciers; and narrowing business lines and subsidiesof SFIs. Policymakers envisage that the structure of Siam Commercial Bank with varioussubsidiaries for capital market functions could become the blueprint for the newinstitutional structure, or alternatively the concept of holding companies could beexpanded. The pending Financial Institutions Law allows for such subsidiaries andwaives the current 10% ownership limit for non-bank institutions. Policy-makers havealso announced their intent to sell minority stakes in state-owned banks as a first steptowards implementing commercially based corporate governance. Meanwhile, atemporary increase in SFI activity has occurred with the recent focus on developmentfinance, despite the recommendation of the MoF consultant report (1999) to streamlineSFIs to become efficient niche players rather than competitors of commercial banks.There appears to be a consensus that more market-based structures could help torationalize remaining state-owned banks and SFIs.

13. Policy makers have also repeatedly stated their intent to enable a knowledge-based economy which is competitive, innovative, and technology-driven (i.e. PrimeMinister Thaksin’s statement in June 2001). By providing a wider scope of financialservices (such as banc-assurance, electronic commerce, and structured finance) Thailandcould benefit from economies of scale and scope as well as better diversification whichcould also help to enhance access [Claessens and Klingebiel (1999)]. However, potentialrisks could arise when banks get too close to enterprises which could lead to conflicts ofinterest, excessive risk taking, and difficulty in monitoring which might require tighterdisclosure requirements. New financial products could further help to reducetransaction costs and enable better risk management, two examples are credit derivatives


[credit-default swap, total rate of return swap, credit-linked note] and securitization[pooling assets to back new issuance]. Moreover, the internet has been described as oneof the most important strategic issues for innovative financial institutions, where Asianeconomies have made a lot of progress. Hong Kong and Singapore have establishedcomprehensive legislation and developed e-trading platforms; Korea is meanwhile “leap-frogging” with 60% online trading of equities; Malaysia’s masterplan for the financialsector emphasizes electronic banking; whereas in Thailand only few commercial banksoffer limited e-banking services. While Thailand has joined the regional e-Aseaninitiative and is upgrading its settlement system, most of its e-commerce laws have beenstalled [E-Transaction Bill, E-Signature Bill, E-Fund Transfer Bill, Universal Access Bill,Computer Crime Bill, Data Protection Bill], and only 3% of equity trading is conductedelectronically, which hampers Thailand’s ability to participate in a regional infrastructure.A recent Singaporean study (MAS, 2000) concludes that “local financial institutions mustupgrade and match international standards of management and technology or riskbecoming marginalized”. Hong Kong’s SFC has proposed to create regional trading andclearing networks (based on European model) to enhance competitiveness, which furtherillustrates the need for rapid catch-up of Thailand’s financial services’ infrastructure.

14. Policy-makers have recently changed their dream of making Thailand a regionalfinancial center and now realistically propose to build strong regional partnerships.The recent establishment of swap-facilities with a number of ASEAN members is a firstconcrete example. The finance literature also supports this shift of paradigm, as Caprioand Honohan observe [World Bank (2001c)] “it is access to financial services thatmatters, not who provides them”. However, Thailand’s neighbors are moving fast,Australia, Singapore and Hong Kong have demutualized their stock exchanges and builtalliances, following a global trend of cross-border consolidation of exchanges. Progresson regional ASEAN initiatives has been slow due to numerous capital controls, althoughsome bilateral initiatives appear to proceed. Three specific proposals are to establishregional credit rating agencies, to link regional trading platforms and settlement systems,and to accept sovereign bonds of ASEAN members as collateral at Central Banks. Theseinitiatives could help efficiency gains in utilizing the region’s significant pool of savings,rather than relying on more volatile portfolio flows.

15. Policy-makers have not yet implemented proposals that aim to align regulatorystructures with new market realities, although proposals for improved supervision offinancial conglomerates are being considered. Thailand’s regulators are proposing moresystematic sharing of risk analysis between regulators of conglomerates [similar to theapproach used in the Netherlands]. However, the proposal to consolidate supervision ofSFIs at the BoT has not yet been fully implemented. Meanwhile, regional regulatorystructures have been evolving towards consolidated supervisory agencies, as Koreaestablished a single supervisory agency, while Australia and Hong Kong haveconsolidated all non-bank supervision at the SEC. Moreover, international trends revealsome consolidation of supervisory agencies, and a survey by the Institute of InternationalBankers in 1998 illustrates that 26 countries [out of 70 surveyed] have moved to eithertwo or a single consolidated supervisory agency. At present, Thailand has five regulatoryauthorities [BoT, MoF, SEC, Ministry of Agriculture, and Ministry of Commerce] withvarious degrees of political interference. The literature [Claessens and Klingebiel (1999)]


suggests that such a structure may create incentives for regulatory arbitrage, which couldundermine transparency and have an adverse effect on the health of the banking system.However, Goodhart (2000) argues that the high quality of supervisory staff at mostCentral Banks warrants to retain banking supervision under the wing of the Central Bankin emerging markets. These arguments would be consistent with the proposal toconsolidate all non-bank supervision at the SEC.

C.2> Competitiveness and Restructuring

16. The Minister of Finance summarized Thailand’s restructuring efforts as “aprocess of change never witnessed in our modern economic history ... in conducting ourbusinesses, governing our constituencies, and regulating our markets” (May 2001).However, leading investment banks have questioned Thailand’s progress and assertedthat “corporates are not restructuring, banks are not lending, and the judicial system hasno teeth. As a result, the financial system remains gridlocked, impeding economicgrowth” (June 2001). Moreover, competitiveness ratings from the World EconomicForum (WEF) and the Institute of Management Development (IMD) have improved sincethe crisis in 1998 but still assess Thailand’s competitiveness behind those of China,Malaysia, and Korea. IMD ranked Thailand’s overall competitiveness as 34th (out of 49)and stated that Thailand’s educational system does not meet the needs of a competitiveeconomy, that investment in research and development is insufficient and that labormarket skills in IT are inadequate. It appears that Thailand’s strategy to move to highervalue-added industries was abandoned after the crisis of 1997, without a new strategyhaving been developed. In March 2002, the government announced that the PrimeMinister will head an expanded National Competitive Committee, and that NESD willalso expand technical assistance projects on labor and capital productivity. Thailand’sfinancial system has been constrained by four major structural bottlenecks: absence ofcorporate restructuring; lack of legal reform and judicial capacity; delayed privatizationand reform of related regulatory regimes; and lack of IT investment.

17. Before the 1997 crisis, Thailand’s corporate debt amounted to about $200 bn, ofwhich $165 bn was owed to domestic creditors. By May 1999, 48% of bank clients werenot performing on debt operations [equivalent to 60% of GDP], with concentration inmanufacturing and real estate, and many corporations had difficulties in collecting fromand meeting obligations to suppliers. About half of the NPLs came from SMEs, whichaccount for 98% of Thai enterprises, and one third of the NPLs originated in the largest350 corporations. Key elements of the corporate restructuring program were:

an institutional mechanism for applying workout rules [Bangkok Rules, CDRAC] closure of 60 financial institutions, 15 mergers, and 4 interventions transfer and disposition of assets from failed finance companies through the FRA transfer of NPLs to private AMCs and FIDF, and creation of a national TAMC amendments to bankruptcy and foreclosure laws to strengthen creditor powers reform of financial accountability & corporate governance [Institute of Directors] limited bank re-capitalization [$8 bn] and tax relief for restructuring companies strengthening of provisioning rules while keeping some regulatory forbearance.


18. However, corporate debt still remains at $120 bn [107% of GDP] and averagedebt equity ratios exceed 300%. The pace of debt restructuring has been rather slow.By July 2002, CDRAC has managed to restructure THB 2.8 trn [$68 bn] but over half thecases [some 65,000 files] have been transferred to the courts. It is estimated that courtswill take about five years to process these cases. At the same time, losses of FIDF areestimated at THB 1.4 trn [28% of GDP] which will be fiscalized. Moreover, the qualityof debt restructuring has been poor, as 82% of restructuring agreements simplyextended repayment periods or lowered interest rates, while only 9% included debt-assetor debt-equity swaps (table 3). As a result, about one third of the NPLs have been re-entries, and as of July 2002 Thailand’s NPLs stand at THB 457 bn [10% of total loans,plus 20% transferred to AMCs and 6% write-offs, estimated total distressed assets are36%]. The slow pace and poor quality of debt restructuring have been mirrored in theabsence of corporate restructuring. As CDRAC and AMCs mostly rescheduled NPLs[except for a few larger cases syndicated with foreign creditors], few corporations havedeveloped restructuring plans that include management or ownership changes, and mostcases continue to suffer from debt overhang. An amendment of the Public Company Lawto allow for the direct conversion of debt into equity has not yet been implemented andtax incentives continue to favor the status-quo.

Table 3: NPL restructuring methods for Thai banks (2000)(percent of cases using at least one of the methods below)

(%) 2000Debt rescheduling 41%Grace period 21%Interest rate reduction 20%Principal / accrued interest reduction 6%Debt-asset swaps 5%Debt-equity swaps 4%Other methods 3%

Source: Bank of Thailand (2001)

19. The government has enacted an emergency decree to establish the Thai AssetManagement Company (TAMC) which has acquired about THB 700 bn of impairedassets mostly from state-owned banks and is assisting with rehabilitation plans and debtrestructuring. By August 20002, TAMC has resolved about THB 292 bn of thetransferred assets of which about 40% were resolved through debt restructuring. TAMCdefines resolution as decision of its executive committee rather than closing oftransactions. About 15% of TAMC cases have been proceeding to business rehabilitationin court. While TAMC does not report the use of special powers, foreclosure andreceivership have accounted for about 40% of resolutions. However, the TAMC mandatedoes not require to maximize recoveries, and it is mostly relying on restructuring plansproposed by the borrower. So far, the TAMC average recovery ratio has been 44%, ascompared to an average transfer price of 33%. This appears to be a stronger performancethan that of FRA, which had an average recovery of 30% and was criticized for weak


operating procedures which initially led to collusion and flipping back of NPLs tooriginal creditors at steep discounts. However, confidence in TAMC could be furtherimproved if its objectives are prioritized, its operations strengthened and focused, and itsdisclosure is improved such that stakeholders are well informed. TAMC plans to acquirean additional THB 150 bn of impaired assets from state-owned banks during 2002.

20. The pace and quality of debt restructuring have been constrained by a weak legaland judicial capacity, limited legal effectiveness, and slow adjudication and liquidationprocesses which could expedite cases where consensus-workouts have failed. Under thecurrent structure, Thailand’s financial and corporate sectors are only four years into atleast a ten year healing process. Experts have suggested that the legal and administrativeprocess could be improved in order to clear outstanding cases within two years if the civilcourts establish a special division for cases involving financial institutions, if the numberof judges and administrators is increased at the civil court of Southern Bangkok wheremost cases are filed, and if pre-trial mediation is mandated. In August 2000, a mediationcenter for financial disputes (MCDF) was opened to help relieve the backlog, which hasworked very well. Moreover, legal effectiveness could be improved by strengtheningforeclosure laws and access to collateral, by implementing the Credit Bureau Bill, and byreinforcing the credit culture with clear penalties for default. Furthermore, the LegalReform Committee was established in March 2001 with the mandate to develop a moreeffective legal framework.

21. Thailand’s banking sector remains dominated by three large commercial banks(42% of assets), three state-owned banks (27% of assets) and foreign owned banks andbranches (18% of assets). While financial performance of the private banks improved in2001, interest margins remain below 2% and have only allowed a modest improvement ofearnings. S&P has affirmed its negative outlook on several banks due to concerns aboutthe sustainability in the economic upturn, weak bank capitalizations, and high rates of re-entry NPLs. It appears that the entry of foreign banks has increased competition andacted as catalyst for change, although single branches are still unable to obtain a full banklicense. The literature confirms that on balance, “competitive pressures created by suchentry lead to improvements in banking system efficiency” [IMF, 2001a] and have “astrongly favorable impact on growth” [World Bank, 2001c]. In contrast, state ownershipof banks leads to higher interest rate spreads, less private credit, and higher probability ofa banking crisis. It is surprising that Thailand’s share of foreign banks remains relativelylow (table 4). It is important to identify strategic investors and managers and to introducecommercial corporate governance for the three state owned banks, which may not beachieved by floating minority stakes to retail investors without impact on governance.

22. Privatization is a key instrument to enhance competitiveness. The currenteconomic rebound shall enable the government to reverse the rapid increase of publicdebt [64% of GDP] by selling 14 state-owned enterprises during 2002/2003 with assets ofabout THB 2.5 trn [$ 60 bn] in banks, transport, utilities, and telecommunications.However, these privatizations have been repeatedly delayed because of marketconditions, poor internal restructuring, and an inadequate legal framework [especially inthe telecommunications sector]. Cross-border M&A activities are another instrument to


attract FDI into services sectors, although tax and regulatory restrictions and the non-existence of asset re-pricing have constrained Thailand’s M&A activity [$7 bn during1999/2000 as compared to $22 bn in Korea (IMF 2001b)]. The government has proposedamendments to the Public Company Law that would improve incentives for mergers bychanging the Revenue Code to allow tax benefits from losses to be carried forward intothe combined equity. These measures should help to stimulate M&A activity and toimprove the quality of debt restructuring.

Table 4: Foreign bank ownership in emerging markets, 1994-1999(% foreign ownership of banking sector assets ; and % majority control)

(%) 1994foreign

1994majority

1999foreign

1999majority

Poland 5.2 2.3 36.3 52.8Argentina 17.2 16.5 41.7 48.6Chile 23.0 17.6 48.4 53.6Malaysia 8.5 6.8 14.4 11.5Thailand 1.4 0.5 12.0 5.6

Source: International Monetary Fund (2001)

23. Thailand introduced a blanket deposit guarantee on financial institutionsdeposits in 1997 in order to avoid a full-scale banking crisis. However, such a blanketguarantee could create moral hazard for excessive risk taking of weaker institutions, andpremium payments typically represent a subsidy to weaker institutions. Moreover, it mayintroduce market distortions by discouraging the development of short-term moneymarkets and fixed-income mutual funds as the deposit rate becomes a risk-free subsidizedasset. The government has designed a transition to a limited deposit insurance scheme(DIS) and it is proposed to phase-in the DIS, to create a self-regulatory agency, and tocharge differential risk-adjusted premiums with limited coverage. As of December 2001,total deposits exceeded 104% of GDP, but 97% of the accounts had balances below THB500,000 [equal to six times GDP per capita]. However, the value of those 97% ofaccounts represents only 18% of deposits, which illustrates the high concentration[Wesaratchakit, 2002]. As a result, deposits of institutional investors may be shifted tomoney markets or mutual funds, which should help to expand capital markets, while atthe same time banks should be able to consolidate and to enhance their profitability. Thistransition should bring Thailand’s banking system one step closer to stability and itwould strike a balance between protecting depositors and restoring competitiveness.

C.3> Capital Market Development

24. During the first half of the 1990s, Thailand had a highly developed bankingsector, a buoyant stock market, but a moribund bond market as a result of continuousfiscal surpluses and quasi-fiscal liabilities. When Thailand’s industry desired morecapital for higher value-added processes, the BIBF was created to provide low-cost short-term external debt in addition to plentiful domestic bank lending. During 1988-1995,


annual credit growth was 22% and loan portfolios of finance companies grew at annualrates of 30%. By 1995, bank lending exceeded 100% of GDP, while the bond marketcapitalization was only 10% of GDP. During the same period, short-term external debtgrew from 4% to 31% of GDP. When the deteriorating corporate performance revealedmassive over-investment, the asset price bubble started to burst in 1995, foreign capitalleft after the devaluation in 1997, and a massive banking crisis became inevitable, as a“safety valve” in capital markets did not exist. As of December 2001, Thailand’s banklending still accounts for 85% of GDP, but bond markets had grown to 37% of GDPwhile equity market capitalization had stabilized at 32% of GDP (table 5). While the sizeof capital markets is modest at about 69% of GDP, the institutional investor basis[insurance companies, pension funds, mutual funds] remains shallow at just 20% of GDP.

Table 5: Thailand’s bank lending and capital markets, 1995-2001

(% of GDP) 1995 1996 1997 1998 1999 2000 2001

Bank lending 100.9 104.4 127.4 116.1 110.9 93.6 85.0Equity market cap 85.0 55.4 23.9 27.4 47.5 26.1 31.7Bond market cap 10.1 11.2 11.5 20.3 30.1 33.4 37.1

Source: Thai Bond Dealing Centre (2002)

Table 6: Thailand’s institutional investors compared to other emerging markets

% of GDP Deposits Bonds Equity Mutual Contractual Institutional

Hong Kong SAR 269.7 38.7 312.5 113.1 18.5 131.6Singapore 102.8 60.2 218.9 167.8 76.3 244.1Australia 68.2 51.0 104.4 85.2 92.9 178.1Korea 81.0 91.0 46.8 32.5 34.7 67.1Thailand 94.6 37.1 31.7 7.9 12.0 19.9Brazil 27.4 60.9 37.0 25.2 19.7 44.8Chile 42.1 18.3 91.7 7.3 71.9 79.1South Africa 41.3 31.5 129.6 13.7 91.3 105.0

W. Average (8) 78.5 59.1 93.1 50.9 47.9 98.8

Sources: IMF, OECD, ICI, Swiss Re, National Statistics. Data are end-2001 estimates.Note: Institutional Assets = Mutual Funds+ Contractual Funds (Pension and Insurance).

25. Policy-makers have strongly advocated capital market development andstrengthening of institutional investors, and the MoF has requested that SEC and SETprepare inputs for a masterplan on capital markets. In May 2001, the Cabinet approved avariety of measures to boost capital markets, which so far have mostly focused on thesupply side through tax incentives. As consumer demand and property business ispicking up, it will be critical to balance new bank lending with sharing risks throughcapital markets. Moreover, the fiscalization of FIDF debt will boost supply in bondmarkets, which may lead to more interest of institutional investors, which on balance mayshift assets from bank deposits into the fund management business. However, Thailand’s


capital markets are still some distance behind others in the region, for example Koreamanaged to build a bond market that in terms of its ratio to GDP is twice the size ofThailand’s and institutional investors which are three times larger. The average ratios foreight of the more developed emerging markets (table 6) reveal that capital markets aretypically twice the size of bank deposits and that institutional investors can account forover 90% of GDP as compared to just 20% of GDP in Thailand. This reveals that banksare still sticking to their traditional deposit-taking business, rather than expanding intonew capital markets business through financial conglomerates.

26. Thailand’s equity market capitalization has dropped from $140 bn in 1995 to$36 bn in 2001, which represents only one third of bank deposits. Over half of the SETlisted firms still suffer from debt overhang, and the average D/E ratio remains over 300%[as compared to 250% in Korea and 120% in Malaysia]. The market remains fragmentedand retail driven, as only 1% of household savings are invested in equities, and fewerthan 60,000 individuals trade per month. Due to the low free-float, the MSCI Asia-Pacific index weighting has declined to 0.9% from originally 12% in 1993, which attractsfewer global investment funds. On average, SET companies have only 7% of free-floating shares, and 15 families control 53% of the market capitalization. Against thisbackground, the government announced measures to boost the equity market by $15 bnthrough privatizing 18 enterprises within three years. The government wants to“corporatize” a number of state-owned enterprises in super holding companies, initiallyconsolidating management from various ministries, and subsequently preparing them forprivatization. The government intends to attract more institutional investors to the equitymarket, although various equity fund and matching fund proposals have not found asmuch interest as anticipated. Moreover, the demutualization of the SET now seems toproceed, although this is only one step to enhance competitiveness of capital markets,which could be complemented by more competition [for example Korea introduced asecond exchange] and by more regional alliances.

27. Thailand’s bond market has grown rapidly since 1998 and is expected to furthergrow with the new FIDF issuance. However, the Thai bond market accounts for only 5%of ASEAN bond markets [Malaysia 12%, Korea 27%], which is dominated by corporatedebt. The main constraints of the bond market are a weak infrastructure and littledemand from institutional investors. Against this background, the government hasannounced incentives for new issuance, tax credits, new products [securitization, repo,and derivatives], and enforced credit ratings for new issues. A more effective clearingand settlement system is being developed, which should allow for integrated clearing,straight-through processing, RTGS, and a delivery versus payment system in line withbest market practice. However, market access, pricing techniques, and trading platformscould be further enhanced. Further improvements could be achieved by creating acentralized exchange [TBDC is currently an information center without revenue base], byestablishing a modern electronic trading platform [an example would be Italy’s MTSsystem that has been among the most successful], by creating a central registrar [currentlythere are 12 for corporate bonds] and depository, and by ensuring cross-border tradingand settlement capabilities. Subsequently, new derivative products [interest rate futuresand repos] could enhance liquidity and attract more institutional demand.


28. Institutional investors are the drivers to develop and deepen capital markets.Singapore reveals a prime example on how pension reform and rapid growth of providentfunds and asset managers can propel capital markets into a different league. Thailand isstill developing its pension system, which covers only 15% of the workforce (ADB,1999) and consists of three types: mandatory pensions, government pensions, and privateprovident funds. The largest institution is the Government Pension Fund [assets of $4 bn]which has outsourced management for 25% of its assets to private asset managers, but ithas also been used as a policy tool [i.e. purchasing assets of state owned banks withdownside guarantees] and has not achieved market-oriented returns. Provident funds[assets of $2 bn] have been constrained by regulatory restrictions with five-year penaltiesin case contributions are suspended. Private pension funds remain small with total assetsbelow $2 bn. However, recent development of unit-trust products and private pensionproducts offered by insurance companies could help to grow this market segment. Thegovernment recently announced tax incentives for retirement mutual funds to encouragelong-term savings which would further support capital market development.

29. The insurance industry currently manages assets of $7 bn, although its annualpremium income represents only 1.2% of GDP, as compared to 2% of GDP in China.The industry consists of 100 companies, including five foreign participants, but it isplagued by a monopolistic market structure [the largest insurer accounts for 40% of themarket] , weak capitalization and low profitability, and several small companies whichmay not be viable. The proposed increase in minimum capital requirements should leadto the necessary consolidation of the industry. Measures to eliminate the 5% guaranteedreturn for unit-linked products, to widen the current 10% asset limits and to improveregulatory standards should also help to strengthen financial performance. Theregulatory regime needs to shift away from price controls to a modern, prudentialframework. On the other hand, the mutual fund industry currently manages assets of$10 bn and consists of about 13 major fund managers, with several foreign joint-venturesand advisors participating. However, performance has been poor, transparency has notmet international standards, and further consolidation may be required. Regulatoryreforms could stimulate the mutual fund industry ; the phasing out of the general depositguarantee could help to shift deposits into fixed-income mutual funds ; and improvedbenchmarking [rather than guaranteed returns] with limited access to regional securitiesmarkets [SET proposed a $100 m exchange-traded pilot fund for regional investments]could enhance financial performance. Especially the intermediation of provident fundsinto specialized mutual funds could significantly increase market capitalization.

30. Institutional investors are often the conduit to improve corporate governance byrequiring best practice standards [auditing, disclosure, management] for their investmentrecipients. A recent survey of institutional investors by McKinsey & Co. found thatcross-border investors pay on average 26% more to invest in Thai companies thatproperly implement good corporate governance. Thailand has come a long way inimproving its corporate governance, and the same survey ranks Thailand ahead ofMalaysia, but slightly behind Korea and Taiwan. Since the beginning of the crisis, 18new accounting standards have been adopted, more than 90% of SET listed companieshave an audit committee in place, the Institute of Directors offered training to 180 Thaicompanies, and the Accounting Act has introduced mandatory standards. However, full


implementation and enforcement of new standards will take time, especially in thecurrent environment of financial distress, and the appearance of backtracking couldundermine investor confidence. Looking ahead, key challenges are to complete thelegislative changes and to deepen reform at the firm level. It has been proposed to furtherimprove minority shareholder rights by amending the Public Companies and theSecurities and Exchange Acts, to increase accountability of board of directors andofficers, and to strengthen the enforcement process. Financial institutions and regulatorshave also heavily invested in risk-management and are gradually implementing IOSCOand best practice guidelines. One major constraint of good corporate governance is thestill heavily concentrated ownership structure, as it was mentioned under equity markets.

C.4> Access to Financial Services

31. While Thailand has succeeded in regaining its growth momentum, it has been at ahigh cost, both fiscally and structurally. On the fiscal side, Thailand’s public debt hasrisen from 36% of GDP in 1997 to 64% of GDP in 2001, and an additional 20% of GDPmay be added under the new FDIF issuance. The fiscal deficit over the past five yearshas on average been 5% of GDP and it is expected to increase again this year. Efficientand transparent public debt management and financing through capital markets requiresprudent fiscal management over the medium term. On the structural side, investment inmodern information technology and the knowledge economy have been compromised,access to financial services for rural communities has been neglected, and thecompetitiveness of Thailand’s economy has declined. Given the limited fiscal resources,it will be critical to develop a market-oriented strategy to restore competitiveness withbroader and more efficient access to financial services. This strategy could be based onthree pillars: reorientation of specialized financial institutions (SFI) to rural areas andSME finance ; liberalization of financial services with new licenses for institutions withSME focus ; and leveraging investment into IT and knowledge industries.

32. First, Thailand’s economy has been anchored in a strong enterpreneurial systemof small enterprises, which are mostly outside of Bangkok. Some 800,000 SMEscontribute over 50% of Thailand’s GDP and account for half of its exports, although thelargest share remains in the informal sector and few SME pay corporate income taxes.Commercial banks have been active in SME lending and suggest that there is excessliquidity but lending has become very risky, which has led the IFC to establish a market-based pilot program to provide a partial risk guarantee for THB 5 bn of new SMElending. Clearly, there is a role for specialized financial institutions to enhance theinfrastructure (i.e. credit registry, information exchange) and to develop services that areprofitable and can eventually be taken over by commercial banks. One good example ishousing finance, where GHB programs have been successful, both in urban and ruralareas. The property market has been revitalized, in part due to tax exemptions for newhome purchases, higher depreciation allowances for corporate property, and subsidizedGHB financing for new home loans of civil servants and SOE employees. As homeownership in Thailand is currently only 20% [far below Malaysia’s], such incentives cansignificantly increase demand, which would feed through to related consumer spending.However, financial measures need to be combined with structural measures, and


particular emphasis needs to be put on needs of rural areas. SFI are leading the path thatshould become a profitable avenue for private banks in future.

33. International experience suggests that incentives for private institutions canmake them very successful in SME business without increasing contingent liabilities ofthe public sector. Canada and South Africa give examples of how financial institutionscan service SMEs and rural customers, for example Standard Bank’s e-business hasgreatly enhanced access and Old Mutual’s insurance products have reached low-incomeclients. Moreover, Rabobank (Netherlands) and DZ Bank (Germany) represent thesuccess of the cooperative banking system in Europe, albeit at a high cost. AlthoughThailand’s banking industry is currently not very profitable, there appears to be a demandfor new licenses. This could be highly beneficial if a new license could be linked to theintroduction of new financial products (such as leasing, factoring, e-finance, etc.) and toproviding access to rural areas. Moreover, non-bank financial institutions could also beallowed to provide innovative financial products. However, this process would requiremore liberalization of Thailand’s financial services, which is among the most restricted inAsia and which has attracted a low inflow of FDI. A simplified trade regime withoutquantitative restrictions could help to enhance the effective allocation of capital.Regional efforts could also help to develop new financial services, as for example theleasing industry often bundles expertise and capital at a regional level.

34. Thailand’s competitiveness has been hampered by a weak knowledge economy.Productivity growth has been small compared to other Asian economies, especially SouthKorea, where innovation and IT investment have been driving factors. Althoughprograms in information technology will require a long-term horizon, they could alsoimprove the competitiveness of SMEs by providing them skills and access to higher-value added IT and e-commerce. Moreover, Thailand lags behind in its educationalsystem with low secondary school enrollment, in its industrial and technological skill mixand its knowledge networks / institutions. The government has committed to make ITand education priorities for future investments, and it appears that the economic reboundcould help in rebalancing social expenditure with investment programs. Thailand’s socialsafety net programs, especially the Miyazawa Initiative and the World Bank’s SocialInvestment Program, have been successful in cushioning the social impact of the crisis,and now need to refocus on the need to rebuild the knowledge base of the economy.

D. Conclusions and Priorities

35. Thailand’s financial crisis of 1997 remains as a legacy with extremely high coststhat are still being digested. Thailand has successfully rebuilt a macro-framework,developed its bond market, and substantially improved legal and regulatory regimes.However, corporate restructuring and financial consolidation have a long way to go and aconcise medium-term vision has yet to be realized to enhance competitiveness. Unlesssome more difficult structural reforms are implemented, it is unlikely that Thailand willreturn to the high growth rates that it experienced prior to 1996. The evolving strategyfor its financial sector should identify three areas of priorities:


Corporate restructuring is most critical. High-profile cases of M&A withoperational and managerial restructuring could become catalysts. TAMC could beused as a vehicle to implement rigorous rehabilitation plans and to avoid any furthercosmetic reschedulings. The credit culture and reporting need to be strengthenedwhich could be supported by regional institutions.

Bank consolidation on a level playing field is essential to rebuild a stable andprofitable banking system. Market structure and role of SFI and NBFI need to be re-defined in the direction of financial conglomerates with consolidated supervision.Attention needs to be focused on “winners” and “innovation” with local and foreignparticipants. Investment programs and SME lending should be market-based and besupported by liberalized financial services and innovative financial products.

Capital market access and financial services are areas for innovation and growth.Institutional investors, esp. mutual and pension fund development, are critical tobuild demand and enhance corporate governance. Competitiveness can be restoredby upgrading infrastructure and technology and educational institutions.Corporatization and privatization are key to improve supply and transparency.

36. The World Bank Group has assisted the authorities in many projects and wishesto continue its support with more focus in these three priority areas. Unbiased advicebased on best international practice and proven examples of locally successful policieswill enhance the effectiveness of the new reform program of the Thai government.Coordination between policy makers and across international agencies will also help themost efficient allocation of resources, which may include training, technical support,and/or financial assistance, as appropriate. This document is intended to contribute to thefruitful discussion among policymakers in the effort to develop a new “masterplan” forthe modernization of Thailand’s financial services industry.

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