1. As with most of the other crisis-hit economies in East Asia, the Thai economy exhibited some clear signs of economic recovery in 1999. The country's solvency in terms of having adequate foreign reserves to meet its potential obligations has been achieved. Capacity utilization and production have increased significantly in many sectors. The growth of export value in US dollar has surpassed the original target. Quarterly GDP growth has been positive and increasing since the first quarter of 1999, driven particularly by high growths of the manufacturing sector. Nevertheless the problem of non-performing loans (NPL) is still very severe, putting continued stress on the financial sector. The increase in economic activity many ease the task of debt restructuring somewhat, but an adequate resolution of the NPL problem will take many more years to resolve. At the same time, many other reforms are necessary for a sustainable recovery from the crisis. In particular, more attention needs to be paid to reform measures that will prevent a similar crisis in the future, rather than just to crisis management measures necessary to lift the country from the recession. In spite of currency and financial crises affecting many countries since the start of the Thai crisis, very little concrete reform measures have been carried out at the international level to reduce the risks from potential instabilities arising from international currency trading and short-term capital flows. From the experiences of the crisis, it is clear that each of the crisis-hit countries had very little understanding of these risks prior to the crisis, and lacked the management capacity to adequately protect itself from these risks. For a really sustainable recovery from the crisis, each country needs to strengthen its macroeconomic management structure so that such risks can be contained, while at the same time potential benefits from the international financial markets can be harnessed. Apart from measures at the country level, regional cooperation initiatives should also be explored to make the East Asian region as a whole more resilient from a similar crisis in the future.
   
   
2. In 1998, Thailand's real GDP declined by over 10% compared to 1997. It was the biggest recession for the country since the second world war. GDP growth started to become positive from the first quarter of 1999, increasing by 0.9% compared to the same quarter of 1998. GDP growth increased to 3.3% in the second quarter and 7.7% in the third quarter (Table 1). Manufacturing growth has been particularly impressive; increasing by 6.6%, 9.5% and 17.4% in the first, second and third quarter respectively. The leading subsector within manufacturing showing the most spectacular growth has been transport equipment (mostly motor vehicles). Domestic expenditure for this sector grew by 10.9% in the second quarter of 1999 and by 37.3% in the third quarter. Overall growth was also helped by the recovery in export growth. The index of export volume increased by 7.2% and 17.2% in the second and third quarter of 1999 respectively (Table 2). Export value in US dollar for the first eleven months of 1999 increased by 6.7% compared to the same period of 1998. This is much higher than the official target growth of about 4% set at the beginning of 1999.¹ Imports have also grown rapidly since the second quarter, showing the improving trend of the economy. Import volume grew by about 24% in both the second and third quarter (Table 2). Import value in US dollar for the first eleven months increased by 15.4% compared to the same period in 1998 (5.1% increase in Baht value).
   
   
3. The current account has continued to remain in surplus, with the total for the first eleven months being 10.4 billion US$. At the same time, net repayment of foreign debt by the private sector amounted to 12.8 billion US$ during the same period. Therefore, all of the current account surplus was used to reduce the foreign debt burden of the country. Currently, the foreign reserve position of the country is very healthy when compared to the outstanding short-term foreign debt. Free official reserves² at the end of September amounted to 16.7 billion US$ compared to an outstanding short-term foreign debt of 19.9 billion US$ for the country. If account is also taken of the 14.1 billion US$ in foreign assets of financial institutions for the same period, then free official and private foreign reserves was about 1.55 times the amount of the country's outstanding short-term foreign debt. This same ratio at the end of the years 1990 to 1995 was respectively, 1.58, 1.37, 1.26, 1.38, 1.27 and 1.14 times. At the end of the third quarter of 1997, this ratio was 0.16. Thus, it can be seen that the country's solvency in terms of having foreign currency at its disposal to meet its obligations is no longer in doubt.
   
   
4. While one can say that the recession of the economy is now likely to be over, problems for the economy are far from over. Production has been increasing, but the level of production is still well below the pre-crisis level (Chart 1). At the end of the third quarter of 1999, real GDP (at 1988 prices) was at about the same level as at the beginning of 1995. The significance of this is that prior to the crisis the private sector incurred a huge amount of debt (both foreign and domestic) to build up production capacity. This was done with the expectation that production can continue to increase and earn sufficient revenue to repay the debt and make profits. At the present production level, there is very little chance for many producers to be able to repay their debt.³ This is one reason why the NPL problem continues to be very serious. At the end of November 1999, the estimated ratio of non-performing loans to total loans for the whole financial system was 42.3% (Table 3). While this ratio has declined from the level of about 48% in May 1999, the problem is still very serious, and will take several more years to resolve.
   
   
5. The NPL problem has continued to create tremendous pressures on the financial institutions in their struggle to provide adequate loan-loss provisioning. The Bank of Thailand estimates that the remaining 8 private Thai Banks will need to raise between 40-95 billion Baht in additional capital before December 2000 in order to meet with the current provisioning standard. Others have made more pessimistic estimates, depending on assumptions about losses from debt restructuring and deterioration in loan quality. Currently, the financial institutions are being encouraged to set up their own Asset Management Companies (AMC) to separate out some of the bad assets from their balance sheets. However, if the financial institution holds a majority stake in the AMC, then the balance sheet of the AMC will have to be consolidated with that of the financial institution, so that it is unlikely to significantly ease the pressure on the financial institution. On the other hand, to find new partners willing to hold a majority stake in the AMC, the financial institution will need to take a large loss on those loans transferred to the AMC, so again the benefit of setting up the AMC is not that apparent.⁴ This approach of letting the financial institutions set up their own AMC is obviously not as attractive as one where the government sets up a national AMC to buy out bad loans from the financial sector, as was done for example in South Korea or many other countries that have gone through a banking crisis. However, in Thailand's case, the government has been constrained by political economy considerations, as it has been constantly attacked for any kind of policies that could be seen as helping the so-called "rich", particularly those in the financial and business sectors who have been publicly perceived as being responsible for the crisis.
   
   
6. It is unclear how much of the increase in production that has occurred is due to the fact that businesses are not servicing their debt. Not repaying interest or principle on past loans will obviously lead to a very healthy cash flow situation that can be used to finance increases in production. This is made easier by large excess capacities inherent in the system, so that little new investment is needed to increase production. However, if production increases are being financed in this way, the situation is obviously temporary. Eventually, debt restructuring will have to be finalized or legal procedures begun. How much disruption to production will this entail is not clear, and this is part of the uncertainty about the sustainability of the recovery. As was mentioned earlier, dealing adequately with the remaining NPL problem will require several more years. New measures may also be needed to speed the process along. As long as the ratio of NPL remains high, caution is needed in making any projections about the economic recovery. For the first three quarters of 1999, real GDP grew by about 3.9% over the same period of 1998. For the whole of 1999, real GDP growth could be close to 5%. For the year 2000, one should not expect a continual increase in GDP growth given many remaining problems. A level of real GDP growth close to or slightly lower than that for 1999 would seem to be a reasonable estimate.
   
   
7. Achieving a sustainable recovery is more than simply looking at the growth trend. The mistake before the crisis was that past growth generated too much optimism about future growth prospects, to the point of turning attention away from factors that could bring about a crisis. Too much optimism about the current recovery could simply be the repetition of past mistakes. As Krugman has written, "..if the sense of imminent doom that hung over the region last summer has abated, that is not entirely a good thing. For when you come down to it, Asia has not emerged from this crisis with any clear idea about how to avoid the next one."⁵ While this statement is much too extreme, it is useful in drawing attention to needed measures that could prevent a reoccurrence of a similar crisis in the future.
   
   
8. Some of the reform measures carried out since the onset of the crisis could be regarded as helping to strengthen the economic structure against a future crisis. The floating of the exchange rate in Thailand was done out of necessity, as by the middle of 1997 Thailand had almost no free reserves left to meet its international obligations. At the same time, the previous fixed exchange rate regime (to a basket of currency) did not go well with more and more financial sector liberalization. Thus, the current managed float regime gives more flexibility for macroeconomic management in the current world where currency trading and capital movements can be very volatile. However, it cannot shield the economic system totally from these external volatility's. The exchange rate can still swing wildly creating problems for the business and financial systems, especially where markets to hedge against volatility's are thin, as they are for most developing countries. The financial sector reform measures, which has been one centerpiece of the IMF reform package, can also be seen as strengthening the financial sector against a reoccurrence of vast amount of imprudent lending such as occurred before the crisis. This is, however, more controversial. Imprudent lending (including so-called crony capitalism) was not only a feature of Thai financial institutions before the crisis, it was also true for foreign financial institutions that lent vast amount of foreign loans to the Thai private sector before the crisis. These foreign financial institutions obviously abided by high prudential standards, standards that are now being introduced to the financial system in many of the crisis affected countries. These high prudential standards did not prevent them from lending to non-viable projects before the crisis, or to Thai financial institutions that may have had long-term relationships with them. Thus, after the Thai financial institutions have gone through the reforms to upgrade prudential and management standards, it is unclear whether this will prevent them from making imprudent lending on a large scale as they did before the crisis if conditions become similar.
   
   
9. There is a need for a lot more systematic research and analyses of whether the reform measures that have been and are being carried out are sufficient to prevent a reoccurrence of a similar crisis in the future. For Thailand, many changes have been and are still being introduced to try to strengthen the macroeconomic management structure that has been seen as a key weakness leading to the crisis. One area has to do with the operations of the Bank of Thailand. A situation where the central bank could throw away most of the foreign reserves to defend the currency while ignoring all the foreign currency obligations of the country obviously indicated grave flaws in the system. Simply changing to a managed float system is not sufficient, even though everyone now knows the risks from currency speculation and short-term debt. Attention needs to be paid to increasing the transparency of central bank operations, so that a more balanced view can be reflected in policy making. Checks and balances are needed, both within the policy making process itself, and in enhancing public scrutiny of policy. Currently, the Bank of Thailand is in process of introducing an "inflation targeting" framework for monetary policy to accompany the managed float system. This is expected to significantly increase the transparency of monetary policy and also give more importance to price stability to counterbalance possibilities of excessive growth that might recur after the recovery. Whether such a system can provide an adequate protection against risks from external volatility's in practice will need to be constantly monitored and analyzed. Other aspects of the Bank of Thailand's operations are also being reformed, including financial sector regulation and supervision. These will be legalized through a new Bank of Thailand Act that is expected to go to the Cabinet and Parliament within the next few months.
   
   
10. Many other reform measures are also necessary for a sustainable recovery. Better data for economic management than was available before the crisis is obviously crucial. Significant improvements have been made. More and more monthly and quarterly data series are now available on a timely basis. The quarterly GDP series in Table 1 is now available with a one quarter lag. None was available before the crisis. Vast amount of official data are now accessible for downloading through the internet from agencies such as the Bank of Thailand, the National Economic and Social Development Board (NESDB) and the Ministry of Finance. Apart from the Bank of Thailand, other central government agencies, such as the NESDB and the Budget Bureau, are also in the process of restructuring their operations. How effective will the overall macroeconomic management system be after all these reforms have been carried out remains to be seen, and is certainly an important area for further monitoring and research. Many questions also remain to be answered. For example, one question concerns the need for some instruments for the public sector to use to manage the overall external debt profile of the country. The public sector does have elaborate rules, regulations and instruments to manage its own debt structure, both domestic and foreign. It has relative few measures for an effective management of the debt profile of the private sector. Clearly, too much management could be counter productive, as one wants the economy to remain predominantly laissez faire. On the other hand, not managing the private sector debt structure sufficiently led to the vast increase in short-term foreign debt before the crisis, and was one important element that eventually led to the crisis. A balance needs to be found that will minimize the risks, while at the same time still enabling potential benefits from access to the international capital market. This could be an area for productive regional cooperation to try to come up with a common approach for all the countries in the region, rather than for each country to come up with its own scheme.
    
    
11. Apart from measures at the country level, regional measures can also help to shield the region as a whole from volatility's. As is well known, the East Asian region as a whole is in capital surplus. Yet, before the crisis many capital deficit countries in the region were financing their development with short-term loans. One way to protect from the risks and volatility's of short-term capital movement is to rely less on them. This will require an effective mechanism for long-term recycling of funds from the surplus countries in the region to the deficit countries. Recycling at the government to government level is not much of a problem, and the Miyazawa initiative to make funds available to crisis affected countries or to help guarantee public bonds of some countries is an example of what could be done. However, what is much more needed, especially as the recovery gets under way, is for a mechanism to recycle long-term funds to the private sector in the region. This requires much deepening of the regional corporate bond market. The fact that the government in most of the crisis affected countries has had to incur large budget deficits to get the countries out of recession and deal with the financial crisis has led to the emergence of a deeper market for government bonds in these countries. This will lead to the availability of various benchmarks that are necessary to the development of the corporate bond market. Apart from that, instruments to share the risks from exchange rate movements between borrowers and lenders within the region will be necessary, as exchange rate regimes in the region are very diverse, from managed floats, to dollar peg, to yen denominated. Bonds denominated in one single currency will lead to an excessive risk bearing on the part of either the borrower or the lender. Indexed bonds may emerge naturally from market forces as instruments of choice for various pairs of lenders and borrowers. Obviously, if currencies in the region become more closely linked to each other then the exchange rate risks would be reduced. This has been discussed in the region, but a feasible development of this is likely to take a very long time given the diversity of exchange rate and policy regimes in the region, not to mention the diversity in development level and fiscal and monetary situations.⁶
    
    
12. In conclusion, a really sustainable recovery from the current crisis goes beyond measures to get countries out of the recession. Attention needs to be paid to how to prevent such a crisis from occurring again in the future. More analyses are needed in many areas, both on the appropriate measures at the country level as well as initiatives at the regional level. This should be the focus of attention at this point in time when recovery signs are becoming clearer. There is a danger that optimism of the recovery will simply lead countries back to old habits, habits that will eventually lead to the next crisis.

Table 1
Quarterly GDP Growth
(From Same Quarter of Previous Year)

Source: National Economic and Social Development Board.. Gross Domestic Product: Third Quarter 1999, December 1999.

Table 2
Growth of Export and Import Volume Indices

Source: Bank of Thailand.

Table 3
Ratio of Non-Performing Loans to Total Loans: 1999
(Percent)

Source: Bank of Thailand