Originally published in Businessweek.

Thailand’s Stocks: What’s Going On Here? (Int’l Edition)

As many Thai companies restructure, stocks still slide

October 15, 2000

TelecomAsia seems to be making all the right moves to recover from the Asian crisis. In September, the Bangkok telephone operator used proceeds from the sale of a stake in a subsidiary to pay $40 million of its $841 million in dollar-denominated debt. With the help of partner Verizon Communications, it has cut costs and renegotiated loans. Thanks to growth in the local wireless and fixed-line markets, revenues for the second quarter were $114 million, up 36% from 1999. “We’re performing very well,” says John Doherty, executive vice-president for finance.

Trouble is, the market isn’t paying attention. In January, TelecomAsia’s stock price hit $1.86, up from 15 cents during the depths of the crisis in September, 1998. But in recent months, its stock has sunk again by more than 60%. Doherty, a Verizon executive seconded to the Thai company in 1998, blames the poor sentiment that has crept through the entire Thai stock market. “A lot of people are wondering: `Has Thailand got its act together?”‘ says Doherty. “And we’re caught up in that.”DISCONNECT. Call it Thailand’s Big Disconnect. Companies like TelecomAsia are restructuring. The economy is expected to grow 5% this year, exports will probably surge by some 20%, and the recovery is expected to pick up next year. Yet the currency and the Stock Exchange of Thailand are in free fall. Since January, the baht has slipped from 37 to about 43 against the dollar; some predict it will lose another 5% this year. After rising to half its pre-crisis value, the SET Index is down 44% since January, making Thailand one of the worst-performing emerging markets.

Is Thailand’s recovery in jeopardy? Not necessarily. For starters, 60% of the nation’s exports are produced by multinationals that aren’t locally listed. Some of the strongest growth is being posted by domestic small and mid-size companies, such as Hana Microelectronics, Thai Union Frozen Products, and KEC Electronics. Although their stocks are in the tank and bank credit is scarce, many corporations can still raise cash on the domestic bond market.

But there are also plenty of reasons for weak investor confidence. Soaring oil prices, disappointment over the glacial pace of corporate reform, and uncertainty over looming elections are fueling the sell-off. Even a year ago, there was far more forward momentum. Says Thai Farmers Bank PLC President Banthoon Lamsam: “The country is in a drift, economically and politically.”TELECOM TYCOON. The election, which must be held before the end of the year, could spell the end of Prime Minister Chuan Leekpai’s three-year hold on power. Many analysts believe he will be replaced by telecom tycoon Thaksin Shinawatra of the Thai Rak Thait Party. Investors fret about Thaksin’s proposals to essentially bail out the banking sector, which is still staggering under $37 billion worth of nonperforming loans, or about 31% of total lending. While Chuan’s government says it will buy bad loans only from banks that have first transferred their debt and collateral to private asset- management companies, Thaksin proposes to buy debt unconditionally. This, investors fear, would send the message that Bangkok will bail out the banks if they get into trouble again–and remove any incentive to reform their lending practices.

The eroding currency, at its lowest in 27 months, also has hurt sentiment–and triggered a vicious cycle. Fearing further depreciation, Thai corporations that hold U.S.-dollar debt have sold some $9 billion in baht since the beginning of the year, in order to keep servicing their loans. That drives the currency even lower. The fear of currency losses is prompting foreign investors to avoid Thai equities, even in companies that are strong performers. “People think: `God knows where the baht will be in December,”‘ says Asia Securities Research Director Sriyan Pietersz.

As a result, the bourse’s market capitalization, which was $248 billion on the eve of the crisis in July of 1997, is now just $31 billion. Average daily turnover, as high as $450 million in 1995, has dwindled to some $40 million. The market has been in such a coma that there had not been a new initial public offering in Thailand for three years–until the September issue by General Environmental Conservation PLC, a Bangkok-based waste management company. Its stock closed down 12.5% on the first day of trading.

Even though the reeling markets may inspire flashbacks to 1997, it doesn’t mean that Thailand is headed for disaster. For one, the weak baht is a boon to many exporters. Consider Hana Microelectronics, a Bangkok-based maker of circuit boards for foreign electronics companies. Chief Financial Officer Terrence Philip Weir says no more than 60% of Hana’s costs are in U.S. dollars, and virtually all of its revenues are in greenbacks. Still, Hana’s stock has tumbled by 33% in the past three months. “The irony of the whole thing is that the baht under pressure is positive for us,” says Weir. This year, analysts say, Hana will report earnings of about $39 million on revenues of $171 million.BUFFER. The emergence of a vibrant domestic bond market also is buffering the stock market collapse. It has gained ground thanks to low bank deposit rates of about 2.5%, plus a big push by the central bank to broaden financial markets. Bond issues rose more than tenfold in 1999, to $7.45 billion. Corporations have raised an additional $2.5 billion in the first nine months of this year. Thai savers have been snapping up issues of such companies as blue-chip conglomerate Siam Cement PLC, which has used bond proceeds to retire $3.5 billion in foreign debt in 18 months. In March, Siam Cement shelved an equity issue because of slack demand. “We don’t need new equity,” says its president, Chumpol NaLamlieng.

The Thai economy is demonstrating that it can grow without access to bank credit and stock issues. The question is: For how long? It can’t rely on strong electronics exports forever. And eventually, Thai industries must upgrade or build new manufacturing capacity. The bond market alone cannot provide the billions of dollars that will be required–especially if a major corporate issuer defaults. So the banks and stock market will need to be in far better shape. That will require a solid program for cleaning up the remaining financial problems and advancing corporate-sector reform. Such initiatives will have to wait at least until after the upcoming election. It is a vote that could determine whether the current market gyrations are mere jitters–or the harbinger of another genuine panic.

By Daniel Lovering in Bangkok and Frederik Balfour in Hong Kong.