Transcript Role of Monetary Policy

1
Corporate Adjustment and
Restructuring in Thailand
by
Dr. Yunyong Thaicharoen
Prapan Kiatikomol
2
Contents
1. Introduction
2. Corporate Adjustment and Performance
- Role of Monetary Policy
3. Links between Firm Balance Sheet Condition and
Investment: Panel Regression Analysis
4. Conclusions and Policy Recommendations
3
I. Introduction
Weakness in Corporate sector played a central role in the
Balance Sheet Crisis (e.g. Paul Krugman (1999))
Lack of Credit Flows
Weak FIs
FIDF
Baht
Depreciation
NPL
Leveraged
corporate
sector
High
public
debt
Deteriorated
confidence
Low Tax
Revenue
Investment
Collapse
Output
Crisis
4
Cross country evidence shows link between
initial high leverage ratio and subsequent output loss
5
Real GDP growth, deviation
from trend,
Taiwan
Philippines
-
Singapore
-
Hong Kong
-
Korea
Malaysia
Thailand
-
Indonesia
.
.
.
.
.
Corporate Debt/Equity Ratio,
Source: Strong (2000), Claessens et al. (1998)
.
.
While GDP has returned to the pre-crisis level in 2002, ….
*
Real GDP for Crisis-Hit Countries
130
120
1997q2 = 100
Index
110
100
90
80
70
Thailand
Indonesia
Malaysia
Korea
Philippines
60
Q1: 93 Q1: 94 Q1: 95 Q1: 96 Q1: 97 Q1: 98 Q1: 99 Q1: 00 Q1: 01 Q1: 02
Source: CEIC
* Real GDP (Seasonally adjusted)
6
7
Investment recovery has been slow, reaching only 57 percent
of the pre-crisis level, and lagging behind other countries.
Index
Investment Level for Crisis-Hit Countries
130
120
110
100
90
80
70
60
50
40
Q1: 93
1997q2 = 100
Q1: 94 Q1: 95 Q1: 96
Thailand
Indonesia
Philippines
Malaysia
Korea
Q1: 97 Q1: 98
Source: CEIC * Real Investment (Seasonally adjusted)
Q1: 99 Q1: 00 Q1: 01
Q1: 02
8
II. Corporate Sector Development
9
Data Issues
Source: ISIMS database form SET
Period: Quarterly data from 1994-2001
Type of data: Firm level data
- 371 Non-financial Public listed Companies
- Balance Sheet and Income Statement
10
Financial Ratios
Debt to Equity Ratio = Total Liabilities / Shareholders’ Equity
Return on Average Assets (ROAA)
= (Net Income / Average Total Assets) *100
Average Asset Turnover = (Sales / Average Total Assets)*100
Net Profit Margin = (Net Income / Sales) *100
Quick Ratio = (Current Assets – Inventories) / Current Liabilities
Interest Coverage Ratio (ICR)
= Earning before Interest and Tax (EBIT) / Interest Expense
Pre-crisis: During 1993-1996, GDP grew around 8 percent per annum,
driven by high investment financed mostly by bank debt.
Private Investment*
Private Credit Growth
Growth (LHS)
30
25
10
5
0
1993
1994
1995
1996
% of GDP (RHS)
12
10
8
6
4
2
0
33
32
31
1993
1994
Source: NESDB
Source: Bank of Thailand
34
1995
1996
30
* At 1988 price
External Debt*
60
External borrowing induced by:
- Domestic Interest Rate >
Foreign’ s
- Fixed Exchange Rate
40
20
0
1993
1994
1995
Source: Bank of Thailand * Private (non-bank)
1996
%
15
%
%
20
Bn US$.
11
12
Led to …
Liabilities and Equity
3000
Equity
2500
2000
Bn Bt
•
Lt lia
Cur lia
•
1500
1000
Total Asset rose quickly
High ratio of current liabilities to
Total liabilities
Liabilities grew faster than
Equity
500
0
1993
1994
1995
1996
Debt to Equity Ratio
2
X
1.5
1
D/E rose to almost 2 in 1996
0.5
0
1993
1994
Source: SET data and authors estimate
1995
1996
Liquidity and profitability had deteriorated well before the crisis, leaving
firms’ balance sheet position in vulnerable conditions.
Return on Average Assets (ROAA)
Average Assets Turnover
20
1.4
Mean
1.2
18
0.8
%
%
1
0.6
0.4
Mean
0.2
Median
Median
16
14
0
12
94q1
94q3
95q1
95q3
96q1
96q3
94q1
94q3
95q1
95q3
Quick and Interest Coverage Raitos
7
X
0.9
ICR (RHS)
6
Quick (LHS)
5
0.8
4
3
0.7
2
0.6
1
94q1
Source: SET data and authors estimate
94q3
95q1
95q3
96q1
96q3
X
1
96q1
96q3
13
14
The Effect on the Corporate Sector
1. Balance Sheet Effect
2. Collapse of Domestic Demand
Rising Debts
Increasing Interest
Expense
Closing Down
Restructuring
Contraction of
Sales and Profit
Lower
Equity
15
Crisis and beyond: Debt to Equity Ratio increased considerably in
1997. Since then it fell slowly, and speeded up in 2001.
Debt to Equity Ratio
6
49
5
Bt/US$
4
Median
44
39
3
34
2
1
29
0
24
94q1
95q1
96q1
Source: SET data and authors estimate
97q1
98q1
99q1
00q1
01q1
02q1
Bt/US$
X
Mean
16
The corporate sector has been continuously reducing its debt
burden and shifting to more long term maturity debt.
Liabilities and Equity
Bn Bt
3500
Equity
3000
Lt lia
2500
Cur lia
2000
1500
1000
500
0
1993
1994
Source: SET data and authors estimate
1995
1996
1997
1998
1999
2000
2001
17
Liquidity was worsened during the crisis…
Quick Ratio
Quick Ratio declined
rising current liabilities,
1
X
0.8
but has now improved thank to
0.6
•
•
Mean
0.4
Median
winding down liabilities
gradual recovery of demand.
0.2
94q1
95q1
96q1
97q1
98q1
99q1
00q1
01q1
02q1
Interest Coverage Ratio (ICR)
•
7
6
Mean
5
X
4
•
Increased costs esp. interest
expense
Falling domestic demand,
Median
3
2
1
0
-1 94q1
ICR fell because of
95q1
96q1
97q1
98q1
-2
Source: SET data and authors estimate
99q1
00q1
01q1
02q1
but has been improving,
though still susceptible to
economic uncertainty.
18
Profitability reached the lowest in 97q4 due to…
Return on Average Assets (ROAA)
Average Assets Turnover
10
22
Mean
20
5
Median
18
%
94q1
-5
-10
95q1
96q1
97q1
98q1
99q1
00q1
01q1
02q1
%
0
Mean
14
Median
12
10
-15
94q1
Net Profit Margin
•
60
40
20
0
%
16
-20 94q1
-40
-60
-80
95q1
96q1
97q1
98q1
99q1
00q1
01q1
-100
-120
Source: SET data and authors estimate
96q1
97q1
98q1
99q1
00q1
01q1
•
High interest expense and
depreciation
Weak domestic demand
•
•
ROAA improved thereafter
owing to
better economic condition,
but still volatile & vulnerable.
02q1
Mean
Median
95q1
02q1
Debt to Equity Ratio: Mode was around 1.2 in 1995, then…
Debt to Equity Ratio
0.12
0.1
Density
0.08
1995
0.06
0.04
0.02
0
-22 -19 -17 -15 -13 -11 -9 -6 -4 -2
0
2
4
7
D/E (X)
Source: SET data and authors estimate
9 11 13 15 17 20 22 24 26 28 30
19
20
…rose to 2.3 in 1997, while more distribution shifted to
more extreme values. (fat tails)
Debt to Equity Ratio
0.12
0.1
1997
Density
0.08
1995
0.06
0.04
0.02
0
-22 -19 -17 -15 -13 -11 -9 -6 -4 -2
0
2
4
7
D/E (X)
Source: SET data and authors estimate
9 11 13 15 17 20 22 24 26 28 30
Subsequently, in 2001, the mode declined to 1995’s level, but
still had fatter tails.
Debt to Equity Ratio
0.12
0.1
2001
Density
0.08
1997
1995
0.06
0.04
0.02
0
-22 -19 -17 -15 -13 -11 -9 -6 -4 -2
0
2
4
7
D/E (X)
Source: SET data and authors estimate
9 11 13 15 17 20 22 24 26 28 30
21
ROAA was quite low before the crisis then deteriorated dramatically in
1997. It improved gradually along with the economy , but is still fragile.
Return of Average Assets (ROAA)
0.07
0.06
1995
Density
0.05
0.04
0.03
0.02
0.01
0
-91
-83
-75
-66
-58
-50
-41
-33
-25
-16
ROAA (% )
Source: SET data and authors estimate
-8
0
9
17
25
34
42
22
ROAA was quite low before the crisis then deteriorated dramatically in
1997. It improved gradually along with the economy , but is still fragile.
Return of Average Assets (ROAA)
Density
0.07
0.06
1997
0.05
1995
0.04
0.03
0.02
0.01
0
-91
-83
-75
-66
-58
-50
-41
-33
-25
-16
ROAA (% )
Source: SET data and authors estimate
-8
0
9
17
25
34
42
23
ROAA was quite low before the crisis then deteriorated dramatically in
1997. It improved gradually along with the economy , but is still fragile.
Return of Average Assets (ROAA)
0.07
2001
0.06
1997
Density
0.05
1995
0.04
0.03
0.02
0.01
0
-91
-83
-75
-66
-58
-50
-41
-33
-25
-16
ROAA (% )
Source: SET data and authors estimate
-8
0
9
17
25
34
42
24
ICR deteriorated in 1997, then improved thereafter. However, as of 2001,
many firms remain relatively illiquid, even compared with 1995’s.
Density
Interest Coverage Ratio (ICR)
0.1
0.09
0.08
0.07
0.06
0.05
0.04
0.03
0.02
0.01
0
2001
1997
1995
-15
-12
-8
-5
-1
2
6
9
12
16
ICR (X)
Source: SET data and authors estimate
19
23
26
30
33
37
40
25
26
Uneven effects of the crisis and subsequent recovery across sectors….
Debt to Equity Ratio
Return on Average Assets
12
10
Trade
10
Ntrd
8
0
-5
6
1994
1995
1996
1997
1998
1999
2000
2001
%
X
5
4
-10
Trade
2
-15
Ntrd
0
-20
1994
1995
1996
1997
1998
1999
2000
2001
-25
Interest Coverage Ratio
4.0
3.5
•
Non-Tradable was more adversely
affected by the crisis.
•
Tradable Sector recovered more
quickly than Non-Tradable.
3.0
X
2.5
2.0
1.5
Trade
1.0
Ntrd
0.5
0.0
-0.5
1994
1995
1996
1997
1998
Source: SET data and authors estimate
1999
2000
2001
Though improving, many Thai firms remain vulnerable to
financial distress by Industry’s standard measure.
Ratios
Weight
ROA
3.3
Sales / Assets
0.999
Equity / Debt
0.6
Working Cap / Assets
1.2
Retained Earning
1.4
Z > 2.99
1.8 < Z < 2.99
Z < 1.8
Safe Zone
Gray Zone
Distress Zone
Altman's Z-Score
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2536
Source: SET data and authors estimate
2538
zsc_median_all
2540
2542
2544
zsc_median_no_rehab&delisted
27
28
Role of Monetary Policy: Sensitivity Analysis
Objective: Study the effect of Monetary Policy on the firm’s balance
sheet
Methodology: Sensitivity Analysis of 1st round effect of a reduction in the
policy rate by 1 percent.
Main Assumption
Deposit Rate
RP 14 day
Lending Rate
Macro Model
Exchange rate
depreciates
29
Other Assumptions

Deposit Rate

6 Months Time Deposit

Proportion of Distressed Assets to Total Loan

Proportion of Floating Rate Loans

Proportion of Domestic Floating Rate Bonds

Foreign Currency Denominated Debt
30
Role of Monetary Policy: Cont.
Results : 1st round effect of a cut in the policy rate
Interest receipt =
-1,732 Mn Bt (- 46.7%)
RP 14 day 1%
 Net Interest
= -6,702 Mn Bt
 Interest expense = -8,434 Mn Bt
(- 8.0%)
 ROA from 0.7
1.0
 Interest Cover
= 7.1%
The accommodative stance of monetary policy has helped facilitate
firm’s financial restructuring by providing liquidity and boosting
profitability at least in the short run.
31
III. Finance and Investment
Overall liquidity position improved, but a significant
number of Thai firms remains relatively illiquid …
(%)
50
40
30
20
10
0
32
Share of Listed Firms with Interest Coverage Ratio (%)
of Less Than One, 1998 vs. 2000
1998
2000
2001
Philippines
Malaysia
Indonesia
Source: Asian Economic Monitor (2001), ADB
Thailand
Korea
50
40
30
20
10
0
Similarly, with the pick up in the economy, more firms
registered profits, but many continued to pile up losses.
(%)
60
50
40
Percentage of Companies with Negative Returns,
1997 vs. 2000
1997
2000
2001
33
(%)
60
50
40
30
30
20
20
10
10
0
0
Philippines
Malaysia
Indonesia
Source: Asian Economic Monitor (2001), ADB
Thailand
Korea
Leverage ratio improved significantly, but still remains
relatively high, signaling further restructuring needed.
(%)
700
600
500
400
300
200
100
0
Debt/Equity Ratios, 1997 vs. 2001
(in percent)
1997
2000
2001
Philippines
Malaysia
Indonesia
Thailand
Korea
Source: Author’s calculations for Thailand; Asian Economic Monitor (2001), ADB for the rest.
34
(%)
700
600
500
400
300
200
100
0
35
Finance and Investment
• Traditional Models of Investment: Little role of financial factors
- Tobin’s q: Market value of assets / replacement cost of assets.
- M&M: Assume perfect market
 Investing and financing are independent.
• Market Failure: Asymmetric information and Agency Cost
- Asymmetric information: inability to differentiate good
and bad firms
- Agency Cost: potential conflict between owner, manager
and debt holders
36
Implications:
 Higher costs of external fund relative to internal
fund

Firms’ financial structure influences investment

Shocks to firm’s balance sheet / collateral value will
alter dynamics of investment (Bernanke & Gertler
(1989))
 These problems should intensify during economic
downturn.
37
Empirical Methodology:
Panel data regression using fixed effects methodology
for 187 listed non-rehab firms with non-missing data between
1994-2001
The estimating equation
 Cit 1 
 LAit 1 
 Dit 1 
 S it 
I it







   1qit 1   2 
 3
 4 
  5 



K it 1
 K it 1 
 K it 1 
 K it 1 
 K it 1 
where: I = investment,
K = capital stock,
q = Tobin’s ‘q’,
C = cash flows,
L = stock of liquid financial assets,
D = stock of outstanding debt,
and S = sales
38
Aggregated Results
Dependent Variable: Net Investment Rate (t)
Explanatory
Variables
All Period
(95-01)
(1)
All Period
(95-01)
(2)
Pre-Crisis
(95-96)
(3)
Crisis
(97-98)
(4)
Post-Crisis
(99-01)
(5)
0.083***
(0.010)
0.07***
(0.011)
0.166***
(0.031)
0.072*
(0.037)
0.108***
(0.025)
-0.024
(0.058)
-0.03
(0.058)
0.530
(0.395)
-0.105
(0.168)
0.001
(0.053)
Liquid Assets
(t-1)
0.219***
(0.065)
0.201***
(0.066)
0.47**
(0.191)
0.402**
(0.18)
0.364***
(0.137)
Debt
(t-1)
-0.195***
(0.032)
-0.178***
(0.033)
-0.014
(0.189)
-0.363***
(0.090)
-0.121***
(0.042)
Sales
(t)
0.131***
(0.017)
0.134***
(0.017)
0.391***
(0.058)
0.187***
(0.064)
0.104***
(0.025)
Tobin’s q (t-1)
Cash Flow
(t-1)
Cap. Util.
(t)
0.0014**
(0.0006)
(*,**,*** denotes 10, 5, and 1 percent significant level, respectively)
Disaggregated Results
39
Group by Leverage Ratio
• Higher leverage firms are more sensitive to both debt and
liquid assets than lower leveraged firms.
Group by Size
• Smaller firms are more sensitive to liquid assets than
larger firms, while debt is significant only for larger firms.
Group by Retention Rate
• Higher retention firms are more sensitive to liquid assets
and debt than lower retention firms.
Overall Results generally support the view that financial factors
influence investment and the impacts are varied by firm’s characteristics.
40
Extensions to other firms
• Within SET: Rehab firms vs. non-rehab firms
• Outside SET: firms tend to be smaller, less transparent,
inferior quality of data and more bank dependence.
Implications on Monetary Policy
• Evidence of “balance sheet” credit channel of monetary
transmission mechanism
• Impacts of monetary policy are uneven across firm groups.
• Though many factors influence investment, financial factors
matter and deleveraging efforts should receive priority.
41
IV. Policy Recommendations
42
Policy Recommendations
1. Accelerate high quality debt restructuring
2. Improve corporate governance
3. Speed up capital market development for alternative
funding sources
4. Enhancing corporate operational efficiency by improving
the competition framework as well as encouraging a more
active M&A markets
43
Strategy for Investment Recovery
Renewed Credit Flows
Strengthen
banking system
CG &
Structural
Reforms
Improve
confidence
Enhance
Efficiency
Deleverage
corporate sector
New Investment
Recovery
44
“In the end, the public determines the desirable sequencing of
policy change. A decision to realize the efficient reallocation of
resources all at once will be associated with significant pain but at the
same time, it could pave a way for faster recovery later. To the contrary,
a decision to realize reallocation in a gradual manner could avoid a
sharp downturn, but it could delay a sustainable recovery.
It is hard to say which approach is appropriate a priori. Having
said that…the fact that the economy has recorded a low growth for 10
years or so, the shortcomings of the gradual approach are becoming
more evident.”
Yutaka Yamaguchi, Deputy Governor of the Bank of Japan