2.2 Remarkable increases of net capital inflows into almost every region (except Africa) in the first half of 1990’s are immediately evident in Table 3. Asia kept on capturing the largest portion (42%) of developing country’s net private capital flows. Another distinguished feature of Asia is that its net capital inflows in the form of short-term credits, listed under the category “other net investment,” represented the biggest among all continents’. This verifies that Asian countries attracted strong attention from international investors and financial intermediaries in the early 1990’s. That is particularly so in ASEAN-4. Table 4 demonstrates that ASEAN-4 absorbed rising net private capital flows. Within all members of ASEAN-4, Thailand was the most reliant (10.2% of GSP in 1989-95) and debt commitments far overwhelmed both foreign direct investment and portfolio investment.
2.3 Among the incentives encouraging borrowings from abroad was capital account liberalization, relatively high domestic interest rates by international standards, and exchange rate policies that appeared to provide assurance that the price of foreign currency would not increase to outweigh interest differentials. Burgeoning capital inflows resulted in growing foreign exchange reserves, increasing commercial banks’ liquidity and foreign liabilities. Any country’s foreign exchange reserves should then be measured not just in terms of import spending but also foreign liabilities. For instance, Thailand’s foreign exchange reserves more than doubled between early 1992 and early 1996 (reaching the peak at US$ 38 billion), while during the same period its commercial banks’ foreign liabilities grew from US$5 billion to US$ 46 billion, or from 6% to 24% of their total liabilities.
2.4 One salient feature of the Thai economy, which is similar to some of its Asian neighbors, is the prevalence of family businesses. This tightly knit family relationship is applicable to a large number of business segments in Thailand, including local public companies listed in the stock market. Along the growth path, even though these family businesses were considerably dynamic, they always tried their best to retain management authority within their families. That is an underlying reason why both domestic and foreign debts were hinged upon to a much larger extent than equity as a source of finance. Even among non-financial firms listed in the equity market, their average debt-to-asset ratios surged from 1.58 in 1994 to 1.98 in 1996. In the meantime, their debt servicing capacity, as measured by the ratio of before-tax and before-interest revenue to debt outstanding, fell from 14.2% to 10.7%.
2.5 Family businesses did not neglect tapping funds from the local stock market. But the funds mobilized from such source were not meant to substitute for debs. Instead, they were intended to serve as a stepping stone for further borrowing via debt instruments.
2.6 Two other reasons favor debt financing. First, similar to those in several other countries, Thailand’s tax system allow private corporations to deduct interest payments, but not dividends, as expenses before tax computation. Such allowance gives a privilege to debt financing (over equity) in lowering the overall cost to borrowing entities. Moreover, this tax distortion is also resorted to as a means to evade tax burden. For instance, instead of directly utilizing their own funds as equity, private companies deposited such funds at financial institutions and borrowed the same amount back so as to gain tax deduction. Second, tedious procedure of raising funds via equity and the absence of bond markets encourages borrowers to count upon debts as a primary source of financing.
2.7 Access to offshore funds or BIBF corresponded well to the preference of Thai family businesses, as low foreign interest rates together with minimal exchange risks (due to basket-pegged exchange rate policy) helped reduce their operating costs but not their management control. It is thus unsurprising to find that private non-bank entities accounted for most of the colossal increase in the country’s external debt outstanding after the authority liberalized capital account.
