Thailand: Should state enterprise debt be counted as public debt?
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Thailand: Should state enterprise debt be counted as public debt?

This is the first of series of posts on public debt in Thailand. BP views that the size of Thailand’s public debt will be a politically important issue over the coming years.

Below is a chart, adopted from the Public Debt Management Office, showing Thai government public debt as % of GDP:

Source: PDMO, as of April 27, 2013 (the figures seem to slightly change – assume as there are slight recalculations to GDP figures).

NOTE: You can see a larger image with each month’s figures plotted – see here.

NOTE: This is gross public debt. If you were to look at net public debt, you would reduce the 44% figure to 36% as the government as has the cash equivalent of 8% of GDP deposited at private banks and the Bank of Thailand.

BP: Total debt is just over 5 trillion baht (US$170.3 billion), but just over 1 trillion baht of this is state enterprise debt. The level of public debt could be reduced by selling some shares in some state enterprises. This was a political issue at the beginning of last year. The Bangkok Post from January 2012:

Selling 2% of PTT to reduce govt ownership from 51% to 49% to erase govt debt so govt can borrow more to finance flood-prevention infrastructure.

The government is considering whether to reduce its stake in PTT Plc and Thai Airways International Plc (THAI) in order to cut public debt.

Virabongsa Ramangkura, chairman of the Strategic Committee for Reconstruction and Future Development, said the government may sell a 2% stake in PTT, the biggest listed company on the Stock Exchange of Thailand, to the state-controlled Vayupak Fund. The government currently controls 51% of PTT, with the Vayupak Fund holding 15%.

The energy giant reported total consolidated liabilities of 756 billion baht as of the end of September 2011, with company liabilities of 459 billion.

Reducing government ownership to 49% means PTT would no longer be a state enterprise and the company’s debt would not be considered public debt,” Dr Virabongsa said at yesterday’s CEO Forum at the BoI Fair

BP: So you could wipe out most of the state enterprise debt with this. This proposal was harshly criticized at the time even if some of the criticism was conspiratorial in nature. At the time, just-removed Finance Minister Thirachai also criticized the plan. The Nation:

On his Facebook page, Thirachai today reacted to the proposed selling of a 2 per cent stake in PTT to Vayupak Fund, to reduce the Finance Ministry’s stake to 49 per cent.

“In reality, will this reduce the government’s control? Is this a self-deceiving ploy or a ploy to deceive others? To accountants, this is window dressing – when the shop windows are decorated regardless of the mess inside,” he said.

He foresaw no change in government control following the transaction. Under an international accounting practice, as Vayupak is a pseudo government fund, PTT would remain a state enterprise and the government’s obligations to its debts remain.

He noted that Greece committed window dressing, to have the public debts hidden. Once the fact was revealed, the country has lost its creditability.

BP: This criticism seems odd since rating agencies, such as Fitch and Moody’s, exclude state-enterprise debts as part of Thailand’s public debt (hence why you see a 30% figure quoted). Their ratings would be unaffected, but Thirachai does have a point that selling a 2% share is window dressing. Nevertheless, isn’t this because of the perverse calculation of including the liabilities of a 51%+ government-owned state-enterprise debt as part of public debt?

NOTE: For now, the government hasn’t followed through with the sale of the 2% share.

In some countries, such as Vietnam and Korea, state-owned enterprise debt is not included as part of public debt. In the US some debts, such as for Fannie Mae and Freddie Mac as well as for guarantees for financial institutions, are not included. It is somewhat arbitrary. Obviously, you don’t want governments hiding liabilities in loss-ridden state enterprises but this is not the case for PTT. It is not as those selling the 2% stake would affect PTT’s rating. Very little would actually change.

As BP understands it, and as we are only looking at gross debt we are only* including liabilities and not assets, because the Thai government owns 51% of PTT 100% of the liabilities are included in the government’s public debt. So despite PTT doing very well – its profits continue to increase each year –  BP does wonder, would the government ever be tempted to intervene to stop PTT incurring more liabilities in order that public debt is not increased even if incurring the debt made financial sense? In many western countries such state enterprises have been privatised and hence the government gains money from the sale, but can also get the liabilities of the entity off the books although it does lose revenue as it won’t get its share of yearly profits (the latter doesn’t impact on public debt though). Therefore, you can see from the point of public debt, privatisation makes a lot of sense for governements.

Aside from completely excluding state-enterprise debt as Fitch and Moody’s do for Thailand, perhaps a better way is if the government owns 51% of the entity then when calculating the liabilities you only assign 51% of the liabilities to the government for gross public debt purposes. This reduces the incentive to sell a 2% share (or to completely privatise it and sell all the shares) to simply reduce public debt.

*Previous sentence incorrectly added an extra “not” “As BP understands it, and as we are only looking at gross debt we are not including liabilities and not assets”