THAILAND: CAPITAL ALLOCATION TO TSUNAMI VICTIMS

1. The streets of Patong Beach are busy, not as busy as
normal and with a distinct scarcity of the Asian tourists
typical during the summer months that comprise the low
tourist season in Phuket, but still enough to give the place
a certain buzz. Hotels report a 40-50 percent occupancy rate,
about 10-15 percent below normal for this time of year and a
marked recovery from the 10-20 percent rates that prevailed
during the first half of the year. Some of the large hotels
are not yet fully operational, using the tsunami recovery
period and damage they incurred as reasons to remodel. Street
vendors still crowd the sidewalk along Beach Road and the
bars and nightclubs are all open, albeit at some the bar
girls outnumber the clientele. (After the tsunami, many bar
girls simply went to work in other Thai tourist centers.
Their return is a positive sign; an indication that they
again see sufficient business potential to return from
Bangkok or Pattaya). We observed very few empty storefronts
although business was slow.
People involved in real estate advised that property prices
have continued to appreciate, not declining even immediately
after the disaster. The Phuket branch of a Thai bank reported
that the volume of transactions at its currency exchange
facilities was down only 14 percent from the same period last
year. As several businessmen told us, over the past 4 years
they have survived the effects of the Bali bombing, SARS,
avian flu and now the tsunami. They are hopeful that their
run of bad luck will end and they can soon end the
discounting being used to lure back bargain-hunting tourists.



2. In contrast, tsunami economic recovery in the province of
Phang Nga has barely begun. Only about 20 percent of the
province's pre-disaster hotel rooms (1200 of 6000) are now
habitable, and yet there is only 10 percent occupancy. In the
Khao Lak area, which was the center of the province's tourist
industry, unemployment is reportedly around 70 percent. While
the selling price for fish is good, the number of fisherman
and large commercial shipping vessels is about half of what
it was. The shrimp hatchery and shrimp farm businesses in the
province were largely wiped out and have made little progress
towards reconstruction. If not for the rubber, cashew and
papaya plantations -which are currently enjoying high prices-
combined with the inflow of funds from the international NGOs
that have blanketed the affected areas, the Phang Nga economy
would be a complete ruin.



3. The RTG has used commercial banks and government-owned
specialized banking institutions to channel credit to
tsunami-affected businesses. While this has been effective in

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restructuring existing loans, relatively little in the way of
new money needed for reconstruction has been extended. In
addition, those without previous bank relationships or who
have insufficient collateral have a very difficult time
acquiring credit beyond the maximum US$12,500 offered by the
government's Small and Medium Enterprise Bank to those who
can find a credit-worthy co-signer. The often informal nature
of many SMEs in Thailand, a reluctance of many entrepreneurs
to engage with the government, and a failure of businesses or
their communities to organize to have themselves heard and
demand assistance has hindered their ability to take full
advantage of those assistance programs that are available.
NGOs have stepped into the breach to satisfy humanitarian
needs but have also created some degree of dependency and, by
offering some
goods and services for free, have hindered the re-start of
some sustainable businesses. End Summary and Introduction.
Government Assistance


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4. The Thai government says it has spent about US$650 million
on tsunami support and reconstruction. How much of this has
been spent vs. how much has been allocated is not clear. In
Phuket, US$1.78 million has been distributed to 1200
individuals as compensation for the destruction or damage to
their homes. Each family that has lost a family member is
entitled to a Bt20, 000 (US$486) lump-sum payment which would
total Bt62.9 million (US$15.3 million) for the 3147 Thai
citizens who have been confirmed dead (2817 people remain
missing and 1650 bodies have yet to be formally identified).
The RTG through the Royal Thai Army has reportedly built 1456
homes at a cost of Bt100, 000 (US$2400) each for a total
housing spend of about US$3.5 million. Other funds have
reportedly been spent by the Fishery Department (US$15
million on fishing boats in Phuket only, no figures for Phang
Nga). The new houses are not always of the quality or style
appropriate to the situation: southern Thai families
typically live three generations to a house, five to ten
persons, but the RTG provides only a single house of 36
square meters (387 sq feet). Also, many fishermen own land on
tidal flats and, appropriately, built their homes on stilts.
The RTG-supplied homes are built on cement slabs on the
ground. Land title disputes have slowed the provision of new
houses to hundreds of families and there are accusations of
land-grabbing by powerful figures including the sister of the
Speaker of Parliament. Schools and hospitals have been
rebuilt but much of the money and labor for these (as for
other houses not included above) have been provided by NGOs.
Critics of the government claim that the amount the RTG says
it has spent and the observed results don't match and assume
that there must be fraud. Others argue that the number of
RTG agencies, NGOs, foreign governments and individuals that
have flowed into the region have resulted in significant
problems in coordination and resulting waste. Some school
rebuilding projects, for example, have more resources than
needed, others not enough.

Capital Allocation and Commercial Banks


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5. As a means to funnel capital to businesses affected by the
tsunami, the Bank of Thailand (BoT, the central bank)

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instituted a "soft loan" program. The BoT made available Bt60
billion (US$1.45 billion) for loans to commercial banks and
specialized government lending institutions (Government
Savings Bank-GSB, Bank for Agriculture and Agricultural
Cooperatives-BAAC, and the Small and Medium Enterprise Bank).
The program provides loans to banks at a rate of 0.01 percent
for three years with the following provisions:
-The banks use the funds only for lending to those affected
by the tsunami.
-The banks charge these customers no more than 2 percent per
year.
-If a borrower had insurance coverage for their loss, they
were ineligible.
-The borrower must be at least 50 percent Thai-owned.
- Banks had only until February 1, 2005 to apply, seeking
approval from the BoT for each loan they wished to include
under the program.
-The soft loans would apply only to 80 percent of the total
loan amount. The banks must apply 20 percent of the loan
amount from its own capital. Normal underwriting standards
would apply.



6. BoT reported that it had approved loan requests for Bt48
billion, of which Bt37.5 billion was for hotels and
restaurants, Bt1.3 billion for construction (mainly private
roads and other infrastructure), Bt900 million for
transportation (cruise boats, taxis), Bt400 million for
fisheries and Bt180 million for agriculture. As of August 21,
Bt25 billion (US$607.8 million) had been drawndown, mostly
for large hotels.



7. In fact, the vast majority of money from the BoT program
has to date been used for refinancing existing loans to
tsunami-affected companies. Old loans were turned into new

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three year loans, often with interest and/or principle grace
periods of 6 months to 3 years. While this has provided some
breathing room for borrowers, the banks have been extremely
reluctant to extend new loans either to existing borrowers or
new clients unless the borrower has collateral (cash, land
and buildings only) sufficient to cover the entire amount of
both the existing loan and the new loan. There are a variety
of explanations for the reluctance of the banks to extend new
money in addition to the lack of available collateral. These
include:
-Time required to renegotiate old loans and a new loan (two
separate negotiations)
- Borrowers waiting to decide on whether/when to rebuild
based on recovery outlook.
-Lack of clear title to land.
-Banks waiting to see strength of recovery before extending
new loans in the region.
-Banks waiting for insurance companies to complete their
settlements with borrowers before extending new loans.
- Bank's reluctance to extend loans based on 2 percent
margins (typical bank margins on commercial loans are at
least 4 percent.)
-Concern over reports of high levels of fraud, people
claiming the loss of their fishing boat several times over,
for example. As a result, there is some hesitancy among the
banks to respond to some types of loan requests.
The BoT is satisfied with these results given that the
stability of the banking system is the central bank's primary
concern. The conservative approach the commercial banks have
taken utilizing the soft-loan is seen as contributing to
tsunami recovery while apparently not increasing banking

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system exposure to high-risk borrowers.

The Special Purpose Banks


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8. Small and micro businesses (e.g. sidewalk vendors, taxis,
small restaurants, fisherman with a 12 foot boat, small-scale
merchants) typically don't have formal bank relationships.
Commercial banks view this business as high-risk and low
profit. The RTG has directed the GSB, BAAC and SME Bank to
service this sector and develop special programs to aid
tsunami victims.

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9. The GSB has three types of loan programs for tsunami
victims:
- Support loans for small businesses of a maximum Bt100, 000
(US$2400) with no collateral required but one
guarantor/co-signer.
-Using the BoT soft-loan program. No maximum amount for the
loan but the borrower must have sufficient collateral. This
has been used for existing GSB clients.
-SME support loans. Loans up to Bt300, 000 (US$7200) may be
extended without collateral but require two
guarantors/co-signers. Loans of more than Bt300, 000, up to a
maximum of Bt5 million (US$121,000) must be fully
collateralized.
The GSB reports that they have extended Bt100 million (US$2.4
million) to 900 existing customers and 100 new customers. We
note that since GSB says they have refinanced all existing
tsunami-affected customers, there was probably very little in

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the way of fresh credit extended under any of the bank's
programs. We are told a key problem is the need for
guarantors. A village leader told us that he could not act as
a guarantor since that person must be a civil servant. Others
told us that anyone could co-sign.



10. The SME Bank branches in Phuket and Phang Nga approved
433 loans post-tsunami, the vast majority for amounts ranging
from Bt50,000 (US$1250) to Bt500,000 (US$12,500) to those
affected by the waves directly (destruction or damage) or
indirectly (loss of business). For loans of this size, no
collateral is required but at least one guarantor. Most of
the borrowers are new customers of the bank, typically retail
or wholesale firms but also includes tour operators,
restaurants and small manufacturers. Total amount of the
loans extended to small clients (other than agriculture
-related which is the purview of the BAAC) has been US$4.5
million. Some larger new clients, mostly hotels, have also
been taken on by the bank, in cases where the client's
existing bank declined to make additional loans for
reconstruction. The SME Bank requires full collateral to
extend loans to these larger customers and for existing loans
to be restructured under the BoT program. Every commercial
bank and the other specialized banks p
ointed to the SME Bank as the only opportunity for those
without sufficient collateral to get a small loan. The small
number of loan applicants compared to the thousands of small
businesses affected was noted by the branch managers.



11. The Department of SME Promotion has also created a
"venture capital fund" to provide an alternative source of
capital for companies with capitalization of between
US$25,000 and US$5 million... Rather than take an equity
position, the fund takes a promissory note back from the
company carrying an interest rate of 1 percent yearly with a
five-year maturity. The fund has a total capital of US$125
million supplied by the SME Bank, the Stock Exchange of
Thailand and its listed companies and the Thai Bankers
Association. A private equity firm acts as the fund manager.
It has invested US$50 million in 14 medium-sized hotels in
Phang Nga. In order for the fund to invest, existing loans
must have been restructured under the BoT program and
sufficient collateral to back the note must be available.



12. The BAAC lends only to farmers, fisherman and the food
processing industry. BAAC officials told us that 6343 of
their customers had damage to physical property and/or loss
of income resulting from the tsunami with total outstanding
debt of Bt622 million (US$15.2 million). Of this, 112
customers died in the wave and their debt of Bt19.3 million
(US$472 thousand) was written-off. 5716 customers had their
loans restructured to require no principle or interest
payments for three years and no interest accruing during that
period. The Ministry of Finance is defraying the cost of
interest foregone by BAAC. The remaining 515 customers are
reportedly "in process." The BoT soft-loan program is used
for providing new loans to existing customers. To date, 2307
new loans totaling Bt194.5 million (US$4.7 million) has been
drawndown even though the BoT has provided Bt1 billion to
BAAC in pre-approvals. The maximum size of this loan is
Bt150, 000 (US$2037) with no collateral required but two
existing BAAAC customers to
act as guarantors. No new customers have yet been provided
loans, although the BAAC is considering making the BoT funds
available to this group of customers as well.

Where are the Customers?


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13. The apparent underutilization of the programs to provide
credit to the tsunami victims and their businesses is
ascribed to a variety of factors:
-The victims are too traumatized to understand what is
available or lack the energy to travel to the district
capitals (where these programs are typically administered) to
request the loan.
-The programs are poorly publicized. Even when people are
aware of their existence, there tend to be widespread rumors
about who is or is not eligible and what is required to
secure a loan.
-There is a high degree of effort required to comply with
Thai company law. This includes filing monthly tax
statements. Many small businesses prefer to simply operate on
an unregistered basis. This, of course, means that they have
no paper proof of their operations as having existed prior to
the tsunami. While the specialized institutions say they will
accept, in lieu of registration documents, the written
assurance of a village leader affirming that prospective
borrower had an operation before the disaster, we have heard
of very few examples where this process worked.
- Some sectors are simply written-off by the banks. Shrimp
hatcheries in particular are seen as un-creditworthy.
Commercial fishing boats (costing US$200,000 and up) are not
considered a fixed asset (they move) and so are not eligible
for loans without other, fixed, collateral.
-There is a culture of dependency forming in some villages.
With foreign NGOs rebuilding homes and supplying food,
medicine and often cash, "many people would prefer spending
their day waiting in line for a handout rather than out
fishing" as one Thai NGO official told us. This also reduces
efforts to get loans.
-Many businesses in Phuket, while registered as majority
Thai-owned, are in fact majority owned and operated by
foreigners. Thai banks are apparently unwilling to extend
their tsunami relief programs to foreigners regardless of the
official ownership registration.
- The number of NGOs providing free food and free fishing
boats has impaired the ability of commercial vendors of these
products to compete. These small businesses see no reason to
take on additional debt until the market reverts to normal.



14. The end result has been that in Phuket, one of the
nation's richest provinces with a long-standing tourist
industry and businesses that have had the opportunity to
build cash reserves over many years of operation, the need
for access to bank capital is less critical than in Phang Nga
where the tourist industry only really began in the late
1990s, many businesses were relatively smaller and the damage
was considerably more extensive. Commercial banks have
largely declined to make loans to entities that were not
customers before the tsunami; some banks will not consider
any new customers at all, preferring to await the results of
the tourist high-season before even considering the
possibility. The specialized banks have focused on small
loans. We believe that one reason there are so many more BoT
loan approvals than drawdowns is that the banks are not
making decisions on pending requests for new loans from
customers until after this tourism season. Even then,
sufficient collateral will be a requirement, not
an easy prerequisite since many businesses, especially in
Phang Nga, had borrowed close to the full value of the
collateral and land prices in that province are said by some
observers to have declined considerably in the wake of the
slow post-tsunami recovery.

Comment


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15. The provision of assistance and credit to
tsunami-affected individuals and businesses has been uneven.

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This is attributable to such universal factors as
bureaucratic error, coordination difficulties and oversight
in difficult circumstances and to cultural issues related to
hesitancy among some poor Thais to deal with the government
or other large organization that they find overwhelming. The
RTG effort to use existing credit institutions, both public
and private, to allocate capital and credit in the tsunami
region can be seen as a noble free market experiment under
which the government provided incentives for these
institutions to provide debt relief and new capital while
maintaining disciplined lending standards. Unfortunately,
Thai banks have never lent against cash-flow. Collateral and
"personal relationships" have always been the credit criteria
when evaluating credit risk. The downside of this approach is
clear in the aftermath of the tsunami. The strict reliance on
land and buildings as collateral
for the full value of any loan of more than a few thousand
dollars has prevented businesses, especially in Phang Nga,
from acquiring the means of restarting their business.
Further, with the decline in business, the value of real
estate collateral tends to decline and the situation further
deteriorates.



16. At some point, private equity will step in and purchase
the distressed assets. Meanwhile, the banks have used the BoT
soft-loan program to delay the day of reckoning for their
customers for three years. (When the BoT program ends). It is
clear that both the BoT and the banks have used this program
primarily as a way to avoid booking any loans as
non-performing rather than a real restructuring that examines
the viability of the loan going forward. If the borrowers are
able to find a way to get back on their feet during the
three-year loan term, all will be well; if not, then the
banks will deal with the issue at that time. In the interim
there is considerable frustration and a sense among small
businesses and individuals that, once again, the big and
powerful get what they need and the small get little. With
the RTG's pronouncements that it needed no foreign
assistance, that it has spent large amounts on reconstruction
already and questions about where the funds raised for
tsunami relief (by the "Prime Min

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ister's Fund" for example) have gone, one might think the
frustration level could reach a point of ignition. But Phuket
is coming back in any case, and Phang Nga is simply too poor
and its society too poorly organized to result in any sort of
real backlash, especially with the international NGOs on hand
to provide for people's needs. On September 6, the RTG
cabinet will hold a meeting in Phang Nga in response to the
slow recovery of that province.
ARVIZU