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Asia-PacificMay 6 2007

Harsh lessons learned amid economic uncertainty

Thailand seemed to be ushering in a golden age of financial security, until high-level political scandal and terrorist attacks sent its fragile economy crashing back down to earth. Simon Montlake reports.
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The assumptions about Thailand’s economic stability and its openness to foreign capital have been turned on their head since last September’s military coup and the suspension of constitutional safeguards. Bankers say the next few months could be decisive in restoring business confidence in the military-installed interim government and providing a framework for a return to democratic rule.

Bangkok’s capital markets initially cheered the dramatic removal of two-term prime minister Thaksin Shinawatra after months of uncertainty and legislative log-jam. Bankers took hope from a team of technocrats appointed to the interim administration who pledged to restore stability and keep the economy humming. A budget stimulus was promised, as well as a kick-start to long-delayed infrastructure projects for Bangkok.

But a series of policy blunders, including capital control measures introduced in December, have hurt investor sentiment at a time of slowing economic output. An investigation of Shin Corp, the telecommunications group that Mr Shinawatra sold for $1.9bn last year to Singapore’s Temasek Holdings, and revisions to foreign ownership laws, also jolted foreigners who thought they had a handle on Thailand. Foreign bankers say their phones were “ringing off the hook” as customers wanted to understand how capital controls impacted their local currency dealings.

Terror attacks

Adding to Thailand’s woes, a series of deadly co-ordinated bombings shook Bangkok on December 31. Police have yet to pinpoint who was behind the blasts, though the military government blamed ousted politicians. More turmoil followed when Pridiyathorn Devakula, the former central bank governor who was seen as the architect of the controversial capital controls, resigned abruptly in February as finance minister. His replacement, Chalongphob Sussangkarn, a director of an independent economics research centre, has tried to strike a more conciliatory tone than his predecessor, who had advocated sweeping financial sector reforms. These reforms, including the separation of the supervisory function of the Bank of Thailand to create an independent regulator, appear to be on the legislative backburner for now.

Amid the political bumps, bankers drew some comfort from the government’s announcement in April that parliamentary elections would be held in December under a new constitution being drafted by a handpicked assembly. But the risk of a political upset is enough to keep many participants on their toes. Opposition rallies against the military government have begun to build up, setting the stage for a showdown over the fate of Thai Rak Thai, the political party founded by Mr Shinawatra, which is being investigated for alleged electoral fraud. “The political situation is highly uncertain in the next two months and anything could happen. If we survive this period, then we could [have cause for] optimism, the key is the survival of this government. If they can survive, that’s a positive,” says Supavud Saicheua, an economist and managing director of Phatra Securities.

Diminishing returns

Slowing output in recent months has prompted economists to revise forecasts for Thailand’s 2007 growth rate to less than 4%, well behind regional rivals such as Indonesia and Vietnam. That slowdown is putting a dampener on targets for loan growth and raising doubts over the quality of bank assets, particularly in highly leveraged sectors such as residential property in Bangkok. First-quarter loan growth fell below 5% in most categories, and isn’t likely to pick up until the second half of 2007.

“I think this is going to be a tough year for the banks. Despite the political troubles last year, most banks recorded solid results. But if you look at the fourth quarter of last year, the slowdown is starting to impact,” says Vincent Milton, managing director of Fitch Ratings in Thailand.

Amid the negative headlines over capital controls and the perception that rules on business ownership are being changed to squeeze out foreign players, there has been little relief for foreign bankers in Bangkok. Market chatter last year of a “wall of money” looking for a home in Thailand has given way to a more sanguine assessment of foreign appetite for fixed assets, as well as competition from other Asian economies.

Foreign bankers say much will depend on how the business laws are revised, and whether the whiff of protectionism is dispelled. In the meantime, they are keeping a close eye on existing portfolios. “We expect there to be stresses on balance sheets. We’re much more guarded than we were a year ago on signs of deterioration and inability to pay back – the normal warning signs,” says Marcus Hurry, CEO of HSBC in Thailand.

Testing times

Local bankers say the slowdown could be a test for risk-management systems that were overhauled after the 1997-98 recession, when bad loans overwhelmed the banking industry. Some asset categories are holding up, though overall loan growth is slowing as many companies put capital investment programmes on hold.

“We’re seeing more non-performing loans, but not to a serious extent. We’re quite cautious on this. We’re migrating our overdue customers to longer terms of repayment,” says Prasarn Trairatvorakul, president of Kasikornbank.

Local bankers reject claims that Thailand is closing its doors to foreign capital after decades of liberalisation. Some of the confusion is the result of inexperienced government ministers failing to communicate their policies, while trying to cope with inflows of speculative funds. Far from trying to block foreign investors, the revised business act is designed to clarify the rules on which sectors are open to full or partial ownership. A final version is being debated by an interim legislative assembly. “There is no indication of any fundamental shift of country policy away from openness. I don’t think the capital controls will be a permanent shift. Some measures have already been reversed, and now it’s just a symbol, not really substantial,” says Mr Prasarn.

Overseas investment

One sign that Thailand is still open to foreign investment came in March, when Canada’s Bank of Nova Scotia agreed to pay about $200m to acquire 25% of Thanachart Bank, ranked ninth in assets among local lenders. Bankers say Scotia paid a substantial premium on the book value for Thanachart, which is a leading auto financier and has more than 140 branches. The deal, due for completion in June, follows GE Money’s 25% acquisition late last year of mid-sized Bank of Ayudhya, and US private equity investor Texas Pacific Group’s entry into state-owned BankThai.

As these small and mid-sized banks partner with foreign lenders, Thai bankers are watching to see how they perform in a competitive market, particularly with the cost of compliance with Basel II requirements by 2008. Holding on to a market niche may not be viable in an era of universal banking where economies of scale are crucial to efficient output.

“I think the message will not be lost on smaller banks. They’re starting to ask what will happen next. Thanachart is in survival mode, because niche banks today face a difficult future,” says Vichit Suraphongchai, chairman of Siam Commercial Bank, which recently celebrated its centenary.

One answer may be merger and acquisition activity among local lenders to build up their capital base and shift their competitive focus. “I think the sector is approaching a period of shake out. This is the first sign of probably more to come in terms of consolidation, particularly among smaller banks,” says Fitch’s Mr Milton.

Retail lenders are keeping a close watch on credit card receivables after the Bank of Thailand raised the minimum monthly repayment in April to 10%. That may put a dampener on consumer spending at a time when retailers are suffering a slowdown in sales, particularly in Bangkok, where the New Year’s Eve bombings deterred shoppers from visiting malls. To boost consumer spending, the government has agreed to defer a planned raise in VAT to 10%, from the temporary level of 7%.

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