(UNTITLED)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T01017R000605780001-4
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 13
• Document Creation Date: January 12, 2017
• Document Release Date: March 7, 2011
• Sequence Number: 1
• Publication Date: March 11, 1986
• Content Type: MEMO

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HATE
DOC NO
OCR
P&pr)
Central Intelligence Agencv
DIRECTORATE OF INTELLIGENCE
11 March 1986
Thailand's Foreign Debt Management: Frictions for US-Thai
Summary
We believe Thailand can avoid a formal rescheduling of its $18.5
billion foreign debt over the next two to three years through a
combination of continued budget austerity and refinancing of some of its
short-term liabilities. If such measures are carried out, we expect the
debt service ratio to rise only modestly from the record 35 percent
registered in 1985 before beginning a gradual decline by the end of the
decade. Nonetheless, the pressures on Prime Minister Prem's government
will intensify as austerity continued export difficulties slow economic
As Bangkok struggles to curb its foreign borrowing and boost
exports, we believe more friction is likely in US-Thai relations. Bangkok
probably will urge Washington to keep US imports of Thai products high
and to avoid competing in Thailand's traditional markets abroad. The US
farm bill, in particular, probably will be a bone of contention in the coming
year. Continued economic difficulties, moreover, could affect other areas
This memorandum was prepared by Office of East Asian Analysis.
Information available as of 11 March 1 86 was used in its preparation. Comments and
queries are welcome and may be directed to the Chief I dochina, Thailand, Malaysia
Branch, Southeast Asia Division, OEA
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of the bilateral relationship, such as cooperation on security or refugee
Debt Management Difficulties
Although international financial analysts believe that Thailand's foreign debt
remains moderate compared with that of many LDCs, the Prem government over the
past two years has become increasingly worried that the country's debt service
payments (principal and interest) are growing substantially faster than its capacity to
meet them. These payments have grown from about $2 billion annually in the early
1980s to $3.2 billion in 1985, when they represented 35 percent of export earnings for
goods and services--up sharply from the 1980 debt service ratio.1 In the same period,
Thailand's foreign debt has grown an average of 18 percent per year, rising from $9.7
billion in 1980 to $18.5 billion last year.2
An export slowdown has made Thailand's debt service more of a burden. Export
growth has declined from 20 to 25 percent annually during the 1970s, to an average of
2.5 percent per year since 1980. as higher oil prices, depressed international
commodities markets, and growing protectionism have combined to weaken import
demand in Thailand's overseas markets. These factors also have caused the country
terms of trade 3 to decline by over a fifth since 1980, compounding the strain on its
balance of payments. At the same time, moreover, the domestic savings rate has
declined as consumption has outstripped income growth, and foreign loans have been
used increasingly to finance current consumption rather than for investment. (See
appendix and table 2 for further information on Thailand's foreign debt and balance of
payments.)
The debt service ratio is the ratio of principal and interest due on a country's foreign
debt in a given year to exports of goods and services for that year. Short-term
principal repayments are excluded.
Thailand in 1984 ranked 14th among the world's top LDC debtors, with its foreign
debt substantially below that of the other ASEAN nations. In terms of its debt service
ratio, however--32 percent in 1984--it ranked second to the Philippines' 49 percent
and well above Indonesia, South Korea, and Malaysia, which had debt service ratios of
24, 21, and 12 percent, respectively. Nonetheless, Thailand's debt service ratio
remains far lower than the 60-percent level of the Philippines when that country's
debt crisis began to unfold in 1983.
3 A country's terms of trade is the ratio of an index of its export prices to an index of
its import prices. The concept is a measure of the relative purchasing power of the
country's exports.
F
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Concerned that continued growth of the debt service ratio could jeopardize
Thailand's good international credit rating--and its long-term economic
prospects--Prime Minister Prem's government as early as 1984 began taking steps to
curb external borrowing and to improve the balance of payments. Bangkok cut
public-sector foreign borrowing--which accounts for about half of total foreign
debt--from $2-3 billion per year in the early 1980s to about $1.6 billion in 1985, and
recently lowered its 1986 borrowing ceiling to $1 billion. In late 1984 it devalued and
floated its currency, launched an export drive, and stepped up basic economic
reforms--such as tighter regulation of the financial sector--to boost domestic savings
and investment. In addition, Bangkok last year undertook a five-year, $1.9 billion,
debt-refinancing plan" to lower interest costs and avoid a bunching of repayments over
the next two years. Although the refinancing plan--which covers 10 percent of total
foreign debt at the end of 1985--initially was limited to public enterprise debt, it now
includes government debt as well.
Prime Minister Prem, in our view, probably will face intense pressure as debt
management considerations continue to limit the government's range of economic
policy options, leaving him with few choices but continued austerity. There is little that
Bangkok can do to boost exports in the current world trade environment--although it
undoubtedly will fight to protect Thai exports from further cuts because of import
As a result, we expect Prem to stick with his unpopular austerity program for the
near term, even if a recent reshuffle of some of his cabinet ministers fails to soothe
public discontent over his government's economic policies or to quiet squabbling within
his coalition. We believe Finance Minister Sommai--the architect of Bangkok's austerity
program--is unlikely to be ousted because he retains the support of Prem and the
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Prem's other economic advisers advocat
e similar policies. If 25X1
anything, they will probably urge the government to adopt additional belt-tightening
measures over the next two to three years--a course they would be supported in by the
IMF, according to the US Embassy.
In addition, Bangkok will probably try to find other methods of raising revenue.
For example, the cabinet recently approved a hotly debated tax-restructuring program
that is intended to boost government receipts by increasing taxes on interest income,
diesel fuel, and registration of certain vehicles. We believe that Bangkok may also
launch a new offensive to promote foreign investment and tourism.
In our opinion, the Prem government will consider additional politically
controversial reforms to reduce Thailand's need to borrow abroad and to boost export
earnings. These may include measures to reduce the budget deficit--for example, by
" Bangkok last year refinanced $300 million with the help of an IMF standby
arrangement. The government plans to restructure an additional $700 million this
year, and $300 million per year from 1987-89.
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cutting subsidies to the state enterprise sector, broadening the tax base, and improving
tax collection--making local capital markets more efficient, and improving agricultural
productivity.5 If fully implemented, we believe these measures--advocated by the World
Bank--probably would help to prevent a recurrence of Thailand's debt management
difficulties. However, progress probably will be slow because of stiff opposition from
influential interest groups. For example, efforts to privatize some state
enterprises--such as the Communications Authority of Thailand--have stalled because
Bangkok is reluctant to provoke powerful unions--or the military officers who sit on
boards of directors.
The Political Spillover
As Prem and the technocrats try to push ahead with financial austerity, we
believe the opposition Thai Nation Party (TNP)--and Prem's chief political rival, General
Arthit--probably will increase their pressure on the government. This would add to the
strain on Prem's coalition, which is fraying as a result of intense bickering within the
Social Action Party--the coalition's largest faction--over the party's responsibilities for
executing unpopular economic measures.
With limited budget resources for agricultural price support programs,
however, we believe there is little that Prem or his government can do in the short run
to ease the farmers' plight
frictions between the military and civilians.
technocrats who are calling for cuts in military spending, especially for items
requiring foreign exchange outlays. As a result, we believe the $300 million purchase of
12 US-made F-16s will once again to become a matter of public debate as the
government looks for additional ways to alleviate its debt service burden. If Arthit
maintains his opposition to delaying or scrapping delivery of the planes, the issue also
could deepen splits within the military and lead to more political turmoil.
Reducing the budget deficit--$1.9 billion last year--could lead to a drop in private as
well as government borrowing abroad if fewer private-sector borrowers were
"crowded out" of domestic capital markets. A reduction in real interest rates--among
the highest in the world--also would decrease the incentive among many Thai
borrowers to seek cheaper loans abroad.
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If Prem remains in office through the end of his term in 1987, we believe his
government's economic policies--especially the austerity budget and more realistic
exchange rate policy--together with the refinancing plan will allow Thailand to avoid a
formal rescheduling of its foreign debt during the next two to three years. The
country's foreign exchange reserves of $1.9 billion at the end of 19857 --about 2
month's import coverage--are comfortable, and it retains access to foreign credit on
favorable terms
Unless there is a major export setback because of a severe global recession or
an upsurge in protectionism in Thailand's major overseas markets, we believe the debt
service ratio will probably rise no more than 3 or 4 percentage points--to 38 or 39
percent--before beginning a gradual- decline by the end of the decade. We estimate
that foreign debt service payments will grow at only 6 percent per year through the late
1980s--about half the annual rate of increase during the first half of the decade--based
on our assumption of new public sector foreign borrowing of about $1 billion annually, a
slight contraction of private sector foreign debt, and export growth averaging at least 4
percent per year.
If we are wrong, we believe that the most likely cause would be if Prem is turned
out of office and his successor abandons the current government's conservative
financial management. A less likely cause, in our opinion, would be either a marked
softening of the austerity program if the Prem government gives into demands from
interest groups in business or the military to ease up, or an abrupt withdrawal of
Thailand's commercial lines of credit if, for example, a series of violent coup attempts
made foreign bankers cautious.
In our judgment, Prem and his economic team can probably stay the course until
1987, despite their troubles. However, we believe Prem's chances of remaining in office
over the next 12 months will erode unless he takes some action to shore up his political
position. Although he has done little to this end since last September's coup attempt,
we believe his options consist of:
? Calling for early parliamentary elections--which do not have to be held until
1987-- to renew his mandate from the legislature.
? Making further cosmetic changes in the cabinet to defuse criticism of his
economic ministers.
This figure represents gross official reserves. Net reserves are substantially lower.
For example, net official reserves (official reserves less IMF drawings) plus net
unofficial reserves (net commercial bank assets) amounted to about $800 million at
the end of 1985.
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Although we expect Prem to stick with his current policies, the pressures to back
off from austerity seem certain to become more intense as Bangkok's debt management
measures combine with weak export markets to rein in the domestic economy. We
believe the government's austerity policies probably will restrain growth to about 3.5
percent this year--almost 50 percent below the average annual growth rates of the last
decade--with only a marginal improvement in 1986 and 1987 if international
commodities prices remain weak. The slow growth in store this year represents a
further decline from 1985's growth rate of 4 percent--already the lowest in 20 years.
Moreover, with annual population growth of about 1.8 percent, per capita incomes will
expand even more slowly.
Implications for US-Thai Relations
We are certain, in any case, that the bilateral relationship will face a bumpier road
as Bangkok struggles to curb its foreign borrowing and improve the balance of
payments. We believe Bangkok probably will ask Washington for increased security
assistance to partly compensate for its own budget austerity. It also is likely to request
better financial terms on the F-16 deal, and already has begun sounding out US officials,
according to the Embassy. In addition, Bangkok is certain to press Washington to keep
US markets open to Thai products.
We believe the recently enacted US farm bill, in particular, will be a bone of
contention in the coming year. According to the US Embassy, the Thai are concerned
about the prospect that their foreign exchange earnings from agricultural exports such
as rice--Thailand's leading merchandise export--will suffer if US grain exporters take
advantage of the bill's export promotion provisions to increase sales in Thailand's
traditional overseas markets. We believe such a setback to Thai exports would
aggravate Bangkok's debt management problems and probably would leave Prem with
little choice but to bow to demands from farmers, exporters, and members of his
cabinet to retaliate against imports of US agricultural products such as soybeans and
cotton.
In the worst circumstances we can imagine, continued economic difficulties could
lead to more political turmoil and open the way for a less pro-US leadership in Bangkok,
especially if the Thai perceive US trade restrictions as a significant cause of their
current problems. In that case, Bangkok might become less cooperative on narcotics or
refugee matters, or seek to lessen its dependence on the bilateral security relationship.
Moreover, a rescheduling could pose substantial hardships for US banks which have
extended credit to Thailand.
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Appendix A
Estimating Thailand's Foreign Debt
Estimates of Thailand's external debt by international financial
analysts at the end of 1985 ranged from $15.7 to $18.5 billion. The
difference, we believe, is largely a function of poor data on private
sector debt. Based on these figures, the debt service ratio ranges from
28 to 35 percent. We have used the higher figures
because we believe that Thailand's private sector debt is
generally underreported.
Table 1: Thailand's Foreign Debt
Yearend 1985
(Estimated, US $ billion)
Total Debt ...................
$18.5 b
By source:
Official ....................
8.8
Short term .................
0.9
Medium & long term.........
7.8
Private .....................
9.7
Short term .................
3.6
Medium & long term .........
6.1
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Table 2: Balance of Payments Summary
(Million US
1980 1981
1982 1
983
1984
1985*
CURRENT ACCOUNT
-2070 -2569
-1006 -
2874
-2108
-1700
Merchandise trade
-1903 -3022
-1571 -
4092
-2862
-2700
Exports, f.o.b.
6449 6902
6835
6308
7338
69oo
Imports, c.i.f.
-8352 -9924
-8406 -10
,400
-10,200
-9600
Services & transfers (net) -167
453
565
1218
754
1000
Of which:
Interest payments
-964
-1471
-1563 -
1475
-1769
-1760
Capital account
2044
2479
1443
2126
2562
1600
Of which:
Direct investment
187
288
188
348
406
325
Errors and omissions
-180
133
-521
587
62
620
-206
43
-84
-161
516
520
*1985 figures are estimated.
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Selected Measures of Thailand's Foreign Debt
DEBT SERVICE/EXPORTS
1980 1981
1982
1983
1984
1985*
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CURRENT ACCOUNT DEFICIT/GDP
_
211
1980 1981
? 1885 FIGURES ARE ESTIMATED
1983
__,
1984 1985*
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SUBJECT: Thailand's Foreign Debt Management: Frictions for
US-Thai Relations?
Distribution:
Original - OEA/SEA/ITM
1 - Richard Childress, NSC
1 - Byron Jackson, Commerce
1 - Linda Droker, Commerce
1 - Charles Salmon, State
1 - Janet Malkemas, State
1 - Cora Foley, State
1 - Alan Kitchens, State
1 - Alice Straub, State
1 - Tom Forbord, State
1 - Jack Sheerin, State
1 - Lt. Col. William Wise, Pentagon
1 - Richard Rice, Pentagon
1 - NSA
1 - DI 'A
1 - DIA
1 - Doug Mulholland, Treasury
1 - Bob Anderson, Treasury
1 - Lincoln Bloomfield, ISA
1 - Greg Moulton, USTR
1 - Melissa Coyle, USTR
1 - FBIS
1 - OCR
1 - DDO/EA (5C18)
1 - NIO/EA (7E62)
1 - NIO/ECON (7E48)
1 - NIC/Analytical Group (7E47)
1 - C/DO/PPS ( D01)
1 - ANIO/Econ (7E48)
1 - C/OEA/SEAD
1 - DC/OEA/SEAD
1 - OEA/SEA/IB
1 - OEA/NEA (4G43)
1 - OEA/CH (4G20)
1 - D/OEA (4F18)
1 - OEA/Research Director (4G48)
1 - C/PES/DDI (7F24)
1 - C/EA/RR (5D10)
1 - CPAS/ILS (7G15)
5 - CPAS/IMC/CB (7G07)
1 - DDI/OCR/EA/A (1H18)
1 - DDI (7E44)
1 - PDB Staff (7F30)
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1 - Senior Review Panel (5G00)
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