The loan extended to Thailand from the Exchange Fund during the crisis of 1997 is being repaid on time by an increasingly creditworthy borrower.
My colleagues routinely give me a situation report on the loan extended to Thailand in 1997. Readers are I am sure aware of the background leading to the assumption of this unusual credit exposure by the Exchange Fund - a correct decision taken by the then Financial Secretary. In view of the highly contagious nature of financial crises, with the rapid globalisation of financial markets, this was the least we could do to contribute to financial stability in the region and in Hong Kong. We participated, along with other economies in the region, in a financial package for Thailand, through agreeing to extend credit of up to US$1 billion. In the event, between October 1997 and July 1999, US$862 million of the facility was drawn, and this was arranged, for convenience and for risk management purposes, in the form of US dollar/Thai baht swaps between the Bank of Thailand and ourselves.
As expected, payments of interest and repayments of principal have been on schedule. So far, US$528.25 million has been repaid, leaving an outstanding amount of US$333.75 million, or 38.7% of the amount drawn, to continue to be repaid by instalments, as scheduled, in the next two years. The entire loan will be repaid by July 2004.
When a commercial banker routinely reviews a bank loan, he examines, among other things, the loan servicing and repayment records and the latest financial standing of the borrower. We do the same. The borrower is a country whose debt servicing record is very good, as our experience shows. It is also growing at around 4% per annum, which is, for us, enviable. It is running a balance of payments surplus equivalent to over 4% of the GDP. It has been accumulating foreign reserves, amounting at the end of June 2002 to around US$36 billion, equivalent to 7.5 months of imports, which is a lot higher than at the time when the loan facility was agreed. It is running a budget deficit of less than 4% of GDP, a little higher than in the last two years, but an entirely appropriate fiscal response, having regard to the world economic downturn last year. And it is, in any case, a lot less than that at the time when financial crisis broke. Importantly, short-term external debt has come down significantly. When measured against exports, this represents about 20%, which is much lower than before. More impressive is the improvement seen in the ratio of non-performing loan to total loans of the banking sector. This is now down to around 10%. Although still high by our standards, at the height of the crisis, the ratio exceeded 50%. Significant progress has been made in financial restructuring.
As a lender, we continue to be happy with this "unusual" credit exposure we entered into in 1997. The amount has, in any case, been reducing and the creditworthiness of the borrower has been improving. We shall, of course, continue to monitor this exposure closely. The situation in Thailand, along with that of others in the region troubled by the Asian financial turmoil, has been gradually improving, as necessary reforms have proceeded with great determination.
But the geographically diverse region, with fragmented financial markets, remains vulnerable to the risks associated with globalisation. There have been fine domestic efforts, involving hard decisions, to buttress the financial system and to pursue sound economic policies. In a few economies, defensive restrictions, principally on the availability of the domestic currency for activities of doubtful purposes, have also been put in place. In a way, these restrictions can be seen as stepping back, if only a little, from globalisation, but they are obviously justifiable in the circumstances. I do not see the possibility of a major breakthrough in the foreseeable future in the pursuit of global or regional arrangements for the effective management of the risks faced by small and open markets. I hope these efforts to strengthen the financial systems are enough to pre-empt another debilitating financial crisis in the region. Happily, there are, at least so far, no worrying signs of the rejuvenated region (some say still a little fragile) being disproportionately affected by troubles in Latin America, the major downward adjustment in the US stock market or the volatility in the G-3 currencies.
Joseph Yam
8 August 2002
Click here for previous articles in this column.
Document in Word format
