After two years of financial turmoil and suffering, the economy finally began to show distinct, if muted, signs of recovery in 1999.

But questions remain about whether Thailand's steps to recovery will be sustainable for the long run, whether graphs charting economic growth will show a ''U'' shape or a ''W'', pointing to problems down the road.

While market liquidity improving markedly throughout the year, allowing interest rates to decline, new lending remained subdued.

Banks and finance companies, despite raising nearly 800 billion baht in new capital since the beginning of 1998, remained under pressure from non-performing loans.

Investment and consumer spending remained sluggish, prompting policy makers to unveil a raft of new fiscal measures to help jump-start recovery.

Still, many key indicators suggested the worst for the economy was over. The manufacturing production index turned upwards in February 1999, showing 2.6% growth from the year before, following 17 straight months of declines. By June, the index was up 12% from the year before, and 14.4% in October.

The private investment index reached its lowest point in October 1998. From - 23% year-on-year in January, the index improved to -13.4% in June and -11% in October.

While a clear improvement, overall investment remained well below pre-crisis levels, reflecting lower demand and overcapacity in the industrial sector -- as much as 40-50% for some industries.

The economy benefited from eased consumer prices, reflecting the sharp recession. In April 1999, annual inflation fell to 1% for the first time in 15 years.

Despite rising oil prices in global markets, inflation continued to drop, registering -0.5% in October, with the average for the first 10 months of 1999 at 0.3%.

Money markets
Liquidity in the money markets remained plentiful throughout 1999. Deposit interest rates fell from 6-7% at the beginning of 1999 to 3-4% by year-end.

Despite falling rates, total deposits within the banking system averaged 4.63 trillion baht from January to October, an increase of 1% when compared with the same period last year.

Outstanding credit for the first 10 months of the year fell by 3.3% to 5.35 trillion baht, largely the result of foreign debt repayments to international banking facilities.

Local banks remained cautious of new lending, due to economic uncertainties, capital constraints and fears of new non-performing loans.

Spurred by low interest rates, top corporations instead turned to the bond market, with 120-billion-baht in new corporate issues made in first 10 months of the year.

Local banks meanwhile, continued to focus on raising new capital and restructuring debt.
From January 1998 to October 1999, the banking system succeeded in raising 785 billion baht in new capital, including state funds provided to institutions subject to state intervention.

Non-performing loans peaked in mid-1999 at around 48% of total outstanding credit. By October, bad loans had fallen to 43%, aided by progress in debt restructuring and moves by institutions to transfer bad loans to asset management companies.

Fiscal policy
The government significantly expanded fiscal policy throughout 1999 in an effort to spur recovery. The seventh letter of intent with the International Monetary Fund, completed in late March, expanded the fiscal 1999 budget deficit target to 6% of gross domestic product, or 110 billion baht based on expenditures of 860 billion.

The government announced a 53-billion-baht programme to stimulate the economy on March 30 through jobs programmes, funded by Japan's Miyazawa fund.

In August, the Finance Ministry unveiled a 102-billion-baht plan to spur new investment, cut producer costs and promote the property sector.

For fiscal 2000, which began in October, the government projects a similar deficit as 1999 of about 110 billion baht.

Three years of deficit spending has led to a sharp jump in public debt, from 16% of GDP in 1996 to 36.8% in 1999. Treasury accounts have fallen to about 90 billion baht as of September, compared with around 330 billion before the crisis.

When combined with the some 960 billion baht in liabilities of the central bank's Financial Institutions Development Fund, the debt burden jumps to 2.83 trillion baht, or 55.7% of GDP.

International trade
Analysts and policy makers expressed concern on poor export performance through the first five months of the year. A stronger baht and higher competition in overseas markets raised doubts about whether the government's official growth target of 4% would have to be revised sharply downwards.

But improved performance in the second and third quarters helped reassure policy makers that growth, in US dollar terms, would clearly exceed 4% for 1999.

For the first 10 months, export value totalled $46 billion, an increase of 5.5% from the same period in 1998. Imports over the period totalled $38 billion, up by 12.9%.

The trade surplus and healthy revenue from tourism helped Thailand post an average current account surplus of about $1 billion per month throughout 1999.

The road ahead
While 4% economic growth for 1999 looked assured, many questions remain about the long-term sustainability of the recovery.

Uncertainties in overseas markets, political instability and the rising public debt has helped spark concerns about whether progress toward structural reforms would continue through the new decade.

The high level of non-performing loans within the financial system is also expected to retard a sustainable recovery. Policy makers are expected to pursue a loose fiscal and monetary policy in 2000 to help spur growth.

Unemployment, helped over the course of the crisis by a flexible job market and community-level support, is not expected to ease considerably for several quarters, as more firms downsize staff and undergo corporate restructuring.

Considerable uncertainties remain about whether recent gains in consumption and production are sustainable, and whether government efforts to spur new investment will take hold given excess capacity and under-utilisation in the economy.

Author: Soonruth Bunyamanee