Installed last year after a military coup in September, Thailand’s interim government is limping to the end of its term, shaken by resignations, a weak economy and declining business confidence. Prime minister Surayud Chulanont, a former army commander, is due to hand over power early next year after parliamentary elections on December 23 that are predicted to produce a coalition government.
Amid the upheaval, Thailand’s gross domestic product (GDP) is expected to grow this year by about 4%, down from 5% in 2006, led by exports. Analysts say a modest second-half recovery in domestic demand, helped by a series of rate cuts by the Bank of Thailand, has put the economy on a firmer footing in 2008, when companies might be ready to jump-start capital expenditure on the back of government spending on long-delayed infrastructure projects.
In some emerging markets, a growth rate of 4% would be cause for celebration. But in Asia, where double-digit expansion is seen as an attainable goal, Thailand’s performance looks distinctly lacklustre. Fitch Ratings forecasts Thai growth at 3.8% in 2007, rising to 4.5% in 2008, and ranks Thailand behind all its regional competitors: Malaysia, Vietnam, Indonesia and the Philippines. As a result, real credit growth, adjusted for inflation running at about 2%, has been flat.
Domestic investment in Thailand has fallen to the lowest level since the 1997-98 Asian financial crisis, says James McCormack, head of Asia sovereigns at Fitch Ratings. “The only reason the economy continues to grow is trade. The fundamentals are weak in terms of domestic demand,” he told a recent banking conference in Bangkok.
Bankers in Thailand are hoping that a smooth election and handover of power to a government with a popular mandate will allow them to put a bumpy year behind them and move on. Most of the political parties competing for office favour broadly market-oriented policies. Adding to this sentiment is the fact that the frontrunner, Korn Chatikavanij, the Democrat Party’s economics chief, is a former JPMorgan banker.
“At this time, everyone wants to be seen as favouring an investor-friendly government. Political parties think it is important to attract foreign direct investment [FDI] and make Thailand a partner in globalisation,” says Charl Kengchon, deputy managing director of Kasikorn Research Centre, which predicts 2007 growth will equal or exceed 4.3%.
Foreign investment
One sign that Thailand is still attractive for FDI came in October when Ford and Mazda announced joint plans to build a $500m car plant. The two companies already produce pick-up trucks in Thailand for local and export markets, and their commitment is a sign that Thailand’s car industry has room for further growth.
While most banks struggled to grow their loan portfolios this year, net interest margins remained healthy and bad loan ratios appeared to be under control. Analysts say risk-management systems that were overhauled after the 1997-98 crisis swamped banks with non-performing loans (NPLs) are working well in alerting managers to trouble loans.
“In terms of asset quality, we’ve seen some cyclical deterioration, but thus far it appears to be manageable deterioration, and if we see the economy pick up next year as hoped for, then that should bring better asset quality,” says Alistair Macdonald, banking analyst at Macquarie Securities.
Some local lenders have outperformed the banking sector’s overall sluggish loan growth, says Mr Macdonald. Kasikornbank and Siam Commercial Bank benefited from expansion in small and medium-sized enterprises (SME) lending and targeted lending in retail segments such as mortgages. Property prices have probably already peaked in Bangkok, but demand for low-end apartments remains fairly buoyant.
However, the political risk that has shadowed Thailand since anti-government protests began in early 2006 has not gone away. Nor has the challenge posed by ousted prime minister Thaksin Shinawatra, who is living in exile in London. Mr Thaksin, who was twice elected by popular vote, has thrown his support behind the People’s Power Party (PPP) after the court-ordered disbanding of his former Thai Rak Thai party.
A strong showing by the PPP in December’s election would put the military and its political allies in a quandary, as they do not want to leave the door open to a comeback by Mr Thaksin, whom they removed for alleged corruption. Even if the PPP fails to win a majority of seats in parliament, it could prove an irritant to a coalition government that depends on small parties for support. In the 1990s, the average coalition government only lasted 18 months.
“The question is, will anything get implemented? We expect a weak government and strong opposition parties, assuming that the Democrats form the next government and PPP is in opposition,” says Nithi Wanikpun, head of research for Citicorp in Thailand.
Another risk factor for investors is the legal framework for policymakers in future administrations. Thailand’s new constitution – adopted after a referendum in August – gives unelected state officials greater leeway to block legislation, such as plans to privatise state companies or ease controls on foreign investment. Draft laws before the current interim legislature would also cap foreign ownership of Thai assets, including big-box retailers who have come under fire from local retailers.
“The new constitution limits what government leaders can do. This reflects the popular mood. Society and the bureaucracy want to restrain and restrict the market framework. This is the outcome of the Thaksin era when market forces were abused through so-called policy corruption,” says Narongchai Akrasanee, president of Thailand’s Export-Import Bank.
This shift in mood is understandable if Thailand is to focus on its long-term strengths, not just short-term growth rates, says Mr Wanikpun. “It is time to step back and look at what would help us to sustain economic growth, not just a shot-in-the-arm strategy. That means issues like education and competitive advantage that we must revisit.”
But risk spells opportunity for those prepared to take the plunge. The banking sector is no exception, as foreign players sniff around for openings in a market that has plenty of room for growth. GE Money was the first off the block, snapping up 25% of family-owned Bank of Ayudhya last year, a deal that was sealed in the aftermath of the coup. In July, that stake was increased to 31%.
Now ING Bank is poised to follow suit. In October, it proposed taking a 25% stake in TMB, a sizeable state-owned lender that has been weakened by a run of bad loans. Singapore’s DBS, which owns 16% of TMB, declined to inject more capital unless it was given greater management control. ING is expected to make similar demands before it commits to a recapitalisation of loss-making TMB.
Earlier this year, Canada’s Bank of Nova Scotia agreed to pay about $200m to acquire 25% of Thanachart Bank, the country’s eighth-largest lender and a leading car financier. Thanachart plans to expand its branch network next year from 60 to 100 and has already beefed up its treasury and trade finance divisions with Nova Scotia’s support.
As more foreign banks invest in Thailand, the competition is getting sharper, particularly in retail lending which currently stands at only 22% of total credits, compared with more than 50% in mature markets, says Tan Kong Khoon, president and CEO of Bank of Ayudhya. A veteran of consumer banking in east Asia, most recently with Standard Chartered, Mr Tan says Thailand’s banking sector will eventually move towards consolidation under the watchful eye of the Bank of Thailand.
“There is room for everyone to make gains right now, but that room is going to shrink in the future... It is getting tougher. Market consolidation will happen over time,” he says.
To grow its consumer book, Bank of Ayudhya is buying GE Capital’s car leasing company, which has a low default rate and offers a way to tap new bank customers. Having designated this as a transitional year after GE’s entry, management is poised for take-off, starting in the fourth quarter, Mr Tan says.
Small pearls
Foreign investors are also taking an interest in Thailand’s smaller, specialised lenders. ACL Bank, a consumer finance company part-owned by Bangkok Bank, Thailand’s largest lender, is on the block. Malaysia’s CIMB and China’s ICBC have both put in bids for Bangkok Bank’s stake in ACL, valued at about $40m. Thailand’s Finance Ministry owns a further 30% in ACL that investors are also hoping to acquire.
However, local appetite for banking shares, despite a market rally in September, was insufficient to support an offering from BankThai. The lender postponed a rights issue that would have raised Bt7.7bn ($243m). But executive vice-president Tada Charukitpaisarn has argued that small banks remain competitive and can be more flexible in adjusting to market conditions than top-heavy lenders, provided they have solid products.
“It is true that smaller banks need adjustment and development to increase business amid the greater competition. To compete with bigger banks and foreign banks, small banks need to focus on niche markets,” Mr Tada told Nation newspaper.
