With the global economy stuck in recession, exports declining and new investment stalled, state spending was ramped up considerably over the year, both to give the economy a much-needed short-term boost as well as to carry out the government's expansive restructuring programmes.

Yet while most economists agree that fiscal stimulus is needed, any additional deficit spending must also be balanced against the country's deteriorating long-term financial position, as public debt has continued to climb to around 60% of gross domestic product.

But with non-performing loans stubbornly high due to delays in corporate restructuring, banks have remained reluctant to lend given economic uncertainties and credit risks.

The People's Bank provides small loans that assist small entrepreneurs.

To break the vicious cycle, the government has adopted a multi-prong approach. To address the bad debt problem and spur corporate restructuring, the Thai Asset Management Corp was set up to take over some one trillion baht in bad loans from private and state banks. By consolidating claims with a single agency, authorities hope that restructuring talks will gain speed and efficiency.

The transfers also significantly reduce the burden on balance sheets for state banks, which in turn have been given a strong mandate to expand their lending, particularly to the retail property sector, small and medium-sized enterprises and strategic industrial sectors.

The Government Housing Bank in the fourth quarter announced a new home mortgage service for civil servants in conjunction with the Government Pension Fund.

Fund members could take out mortgages offering terms of up to 30 years, amounts of up to 65 times monthly earnings and annual interest fixed at 4.5% for the first three years.

Demand for the programme has outstripped all expectations. As of mid-December, some 70,800 applications for loans worth 52.5 billion baht have been received, nearly six times the nine billion baht originally budgeted under the programme.

Fiscal spending jumped sharply during 2001 from the implementation by the government of several grassroots development programmes.

Over 70 billion baht, for instance, is expected to be used to finance new one-million-baht revolving investment funds nationwide, to be used by communities to finance new business startups and budding entrepreneurs.

A three-year debt suspension for some 2.25 million farmers by the Bank of Agriculture and Agricultural Co-operatives, involving some 90 billion baht in loans, is expected to cost the state development bank at least six billion baht a year for the life of the project.

The government's 30-baht per visit national health-care programme is estimated to cost up to 100 billion baht a year, including existing expenditure.

The policies have had mixed results to date, with some questions about accountability mechanisms and whether funds would have the long-term development impact conceived by policy makers.

TAX INCENTIVES

At the same time, the Finance Ministry has implemented tax measures aimed at boosting consumption and reducing costs for the corporate sector.

Newly listed companies on the Stock Exchange of Thailand or the Market for Alternative Investment can qualify for lower corporate tax over the next five years under a measure aimed at spurring the capital markets.

Finance Minister Somkid Jatusripitak has ruled out any lift in value-added tax until recovery fully takes hold. Small and medium-sized enterprises have also been offered corporate tax deductions, as well as companies looking to set up regional headquarters in Thailand.

While economists agree that fiscal measures are needed to maintain growth as exports have slowed due to the global economic downturn, concerns are growing that long-term fiscal sustainability was being increasingly threatened due to deficit spending.

The fiscal 2002 budget calls for a record deficit of 200 billion baht on spending of 1.03 trillion. Policy makers insist that public debt can be maintained below 60% of gross domestic product over the next few years, although original projections of a return to a balanced budget position are expected to be delayed beyond 2006.

Failure to maintain budget discipline has ominous repercussions for the future, as interest service costs would begin to eat into funds for new investment and the overall debt burden compounds.

One difficulty faced by the Finance Ministry now is that while the overall direction on how to address the various structural problems faced by the economy have been set, obstacles in implementation remain considerable.

Delays in budget disbursement of the 58-billion-baht emergency stimulus programme, for instance, could dent hopes of a pickup in growth by mid-2002.

Similarly, the main task of the TAMC remains ahead, namely corporate and industrial restructuring to help firms resume operations.

With options limited, preliminary planning for the fiscal 2003 budget, which begins in October 2002, looks to maintain deficit spending and continued support for key development programmes such as national health-care.

From the perspective of the government, cutting back stimulus spending prematurely would be equally dangerous for public debt management, as failure to maintain economic growth would have its own negative effects, through falling tax revenue and a rise in the overall proportion of debt to GDP.

As it stands, policymakers had to revise growth projections for this year down to around 1.6% from 2.5%, and from 4-6% for 2002 to around 3%.

The impact of Sept 11 could have further repercussions, particularly on tourism and exports.

But no matter the efficiency and targetting of fiscal stimulus programmes, many private economists agree that dealing with the problems of the banking sector and stalled investment is a bigger threat, especially considering the constraints on new debt and the much smaller size the public sector plays in the economy relative to the private sector.

Two factors could help reduce pressure on policy makers in managing the debt. First would be state enterprise privatisation, as successful offerings would help raise new funds for the government.

PRIVATISATION

Some 16 state enterprises are scheduled for privatisation by 2003. For 2002, agencies which are set to launch initial public offerings include the Telephone Organisation of Thailand, the Communications Authority of Thailand and the Government Housing Bank, among others.

Preliminary projections have the Finance Ministry raising some 50 billion baht from share sales in 2002 from privatisations.

The privatisation of state enterprises, including Thai Airways International will help raise new funds for the goverment. Some 16 state enterprises are scheduled for privatisation by 2003. For 2002, agencies which are set to launch intitial public offerings include the Telephone Organisation of Thailand, the Communications Authority of Thailand and the Government Housing Bank.

A recovery of the share market and an increase in investor confidence could raise returns, thus reducing the overall budget deficit.

The second factor potentially helping debt management would be passage of a new public debt management law. The new law would significantly ease the task of the Finance Ministry in refinancing existing debt obligations to take advantage of changes in the interest and currency markets.

For fiscal 2002, some 25.6 billion baht is budgeted for principal payments for the public debt, amounting to 2.5% of the overall budget. Under the new law, the Finance Ministry would be able to refinance loan principal as needed, helping to buy time in servicing the debt until fiscal and economic conditions improved.