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Asia-PacificJanuary 8 2007

Technocrats target banking reform

A measured optimism is taking hold in the post-coup environment, as bankers expect new regulations and heightened competition. Simon Montlake reports from Bangkok.
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The bloodless military coup of September 19, 2006 that ousted prime minister Thaksin Shinawatra after five eventful years in office looks set to reverberate for some time. As Thailand’s new rulers attempt to reconstitute its shaky democracy, investors are watching for signs of a smooth transition this year amid fears of further political bumps.

Given Thailand’s coup-littered political history, it should not have come as too much of a surprise to see tanks rolling on the streets of Bangkok. The decisive blow against Mr Thaksin, a former police colonel turned billionaire telecommunications magnate, ended several months of political fighting and policy paralysis. The military coup leaders justified their action by accusing Mr Thaksin of rampant corruption, incompetence and dividing society. An interim government appointed in October has begun investigating his assets for alleged graft.

Coup-inspired rally

The overnight coup caught many observers off-guard, but there was no doubt about the market response to the swift handover of power. “I’ve never seen a stock market rally, a currency rally and a bond rally on the back of a coup, but that’s exactly what happened. It underlines the strong economic fundamentals in Thailand,” says Gary Newman, managing director of Citibank in Thailand.

The short-term relief that the political uncertainty had ended has since given way to a more measured optimism. A strong export performance in 2006 is expected to bring economic growth for 2006 to 4.5%, and economists are forecasting a similar range in 2007. With inflation on a lower trend in the fourth quarter, many bankers are hoping for rate cuts in the next few months that, together with a pump-priming government budget, should help to sustain lending growth of 7% or more.

“The stress in the economy on the retail side will come from increased competition on credit cards and consumer loans. There’s going to be more demand on the liabilities side as institutions fund their future growth,” says Marcus Hurry, CEO of HSBC in Thailand.

However, while there is praise for the interim government’s economics team, led by deputy prime minister Pridiyathorn Devakula, the well-regarded former governor of Bank of Thailand (BoT), many doubts remain about the political process and its impact on the economy. Prime minister Surayud Chulanont, a retired army commander, has promised to hold elections after a new constitution is written later this year. With the fate of Mr Thaksin and his enfeebled Thai Rak Thai party still up in the air, the transition to democracy could stir up political tensions again.

“We can’t just look at the next 12 months. Beyond that, there are many question marks. Drafting a constitution is always a complicated process in any country because it spells out the rules of the game for sharing and exercising power,” says Vichit Surapongchai, chairman of Siam Commercial Bank.

New regulations

Bankers are also braced for a rash of new regulations governing the financial sector, after a legislative log-jam slowed the enactment of a long-awaited Financial Services Master Plan during Mr Thaksin’s parliamentary term. An interim parliament dominated by Bangkok’s traditional elite, including a block of retired army and police officers and bureaucrats, is seen as more favourable to passing the necessary legislation.

Mr Pridiyathorn, who as BoT governor often sparred publicly with the finance ministry, now has that ministry in his portfolio, paving the way for a concerted push on several fronts. These include long-delayed bills on deposit insurance to replace the current blanket guarantee, new accounting standards on loan provisioning and changing the way in which the BoT governor is appointed.

Independent regulator

Mr Pridiyathorn has also proposed separating the supervisory function of the BoT from its monetary role to create an independent regulator modelled on the UK’s Financial Services Authority.

“I think we’re going to see the biggest changes we’ve seen since the 1990s in Thai banking. There’s no other sector that’s facing such dramatic changes,” says Andrew Stotz, head of equity research at Citigroup.

Changes are also afoot in the ownership of Thailand’s banks, raising the possibility of consolidation. GE Money has agreed to buy a 25% stake in private lender Bank of Ayudhya, which already has a joint venture with GE providing credit cards and personal loans. This deal is closely followed by the entry of TPG Newbridge, which plans to acquire a 31% stake in state-owned BankThai, diluting its government ownership. TPG Newbridge is part of Texas Pacific Group, a US private equity firm.

Sharper competition

Thai bankers say that new entrants into the sector will sharpen competition, favouring banks that can build a successful consumer brand while developing their corporate, and small and medium-sized enterprise (SME) business. “Competition is already very high and to compete you have to invest in your people and your IT system. These are the most important foundations for your operations. You need economies of scale. If not, you can’t afford to invest,” says Prasarn Trairatvorakul, president of Kasikornbank.

Foreign banks already operating in Thailand are hamstrung, though, by a single-licence policy that many see as a deterrent to acquisitions. Under the policy, foreign banks must give up any existing banking licence in the country before they can acquire another financial institution. Should the marriage fail, as many do, the foreign operator would be left out in the cold. For example, GE is required to surrender its stand-alone consumer banking licence when it acquires Bank of Ayudhya.

Cooler climate

The climate for foreign businesses in Thailand has also been chilled somewhat by the bruising campaign against Mr Thaksin. Last year, he infuriated critics by selling his family-owned Shin Corporation for $1.9bn to Singapore’s Temasek Holdings. The deal was structured to reduce the tax liabilities of Mr Thaksin’s family, and allegedly used local nominee shareholders to skirt a cap on majority foreign ownership. The ensuing row has forced the new government to announce a review on the widespread practice of using nominees in foreign-run operations.

Mr Thaksin’s privatisation programme, which included floating a state-owned electricity generator, also came under attack from Thai nationalists, casting a shadow over future state sales. “It’s a setback. People no longer trust the way politicians privatise state assets,” says Narongchai Akrasanee, president of Thailand’s Export-Import Bank.

The uncertainty over the rules on foreign ownership could dampen foreign direct investment in 2006, which Kasikornbank forecasts at $3bn. But most bankers predict that Thailand will find a compromise solution that keeps the economy open to international capital, as a new political order is forged from the ashes of Mr Thaksin’s five-year rule.

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