As Thai bankers packed their bags for the holiday season in December, everyone was braced for a busy start to 2005. After all, there is a general election to look forward to. Thai voters go to the polls on February 6 and incumbent prime minister Thaksin Shinawatra is strongly favoured to form the next government.
But the Indian Ocean tsunami that pummelled south Asia on December 26 was a reminder that the business of forecasting is not something at which economists excel. More than 10,000 people in Thailand were injured by the catastrophic waves and thousands of foreign holidaymakers were among the victims. The tragedy has cast a shadow over the country and set a muted tone for this month’s election campaign.
Tsunami aftermath
Given that tourism has been among the strongest sectors of the economy in recent years, economists say that losses are inevitable; however, the losses are unlikely to dent growth for 2005, which is estimated at 4.5%-5.5%. Reconstruction projects are already under way at many affected coastal resorts and might inject a short-term economic boost, even as the trauma lingers.
In response to the devastation left by the tsunami, several Thai banks banded together to set up a Bt3bn recovery fund to buy shares in hotels and tourist businesses affected by the disaster. The government also stepped in with credit schemes aimed at rebuilding resort areas, as well as offering debt relief through state-owned banks.
Private lenders are now weighing up their options to carry forward loans to affected resorts. Bordin Unakul, executive vice-president of the Bangkok Bank, says that his bank’s exposure to businesses affected by the disaster is minimal. He predicts a silver lining for Thailand. “The tragedy has pulled the nation together. We expect more joint initiatives between the public and private sectors. The banks are supporting the recovery process and helping small and medium enterprises to get moving again,” he says.
Optimism remains
After such a tumultuous start to the year for Thailand’s financial community, there is still plenty of optimism about the medium-term outlook, especially given buoyant spending on public works. Mr Thaksin has promised substantial infrastructure expenditure after the next election – assuming that his majority holds. His initial plans point to more than Bt1000bn in new expenditure on railways, roads and the energy sector. Bankers say that this will translate into the opportunity to make loans to private companies, which follows several years of deleveraging in the corporate sector.
“There are some very large infrastructure projects coming up that will keep many private companies occupied, especially construction firms and building material firms,” says Jada Wattanasiritham, president and CEO of Siam Commercial Bank. “Therefore, there will be a huge spillover from this into the private sector. That will generate employment and income, and in turn generate growth in the economy.”
Reform under way
The new government is also expected to press on with an ambitious financial sector reform plan that is already beginning to bear fruit. Under the plan, which is the brainchild of finance minister Somkid Jatusripitak, financial institutions will be separated into two categories: retail banks and universal banks.
The policy sets out to eliminate specialised finance companies and mortgage lenders, which will instead be able to obtain a banking licence. Seven new licences have been awarded in the past year, bringing new players into the banking world, although most are too small to register much excitement outside Bangkok.
Foreign banks must choose either to operate a stand-alone facility or to invest in local banks. Faced with this choice, ABN AMRO decided to sell its stake in Bank of Asia last May to Singapore’s United Overseas Bank, which itself already owned a smaller Thai bank. It is no coincidence that the other major deal in the financial sector involved Singapore’s largest lender, DBS, which bought into Thai Military Bank and merged it with Thai Danu. The combined entity now ranks among Thailand’s top five banks by assets.
Consolidation hold-up
This year, however, there is unlikely to be another round of mergers and acquisitions (M&A), even though the finance ministry’s plan calls for consolidation in the banking sector. Observers say that major banks that have steadily rebuilt their capital since the Asian financial crisis have little incentive to merge. Likewise, there is little to encourage foreign players to take a bet on Thailand.
“Probably you can see mergers among the smaller players, especially the former finance companies, but I don’t see much opportunity right now for foreign banks to come in,” says Kittipong Urapeepatanapong, a principal at Baker & McKenzie in Bangkok and an adviser on the DBS-Thai Military merger.
Part of the problem, he says, is that many takeover targets are in government hands and there is no clear plan for divestment. “The biggest player is the government. It must set a precedent and show its intention by selling stakes to the private sector,” he says.
Funding sources
One factor that might prompt a rethink by the government is the need to finance its generous spending plans. Mr Thaksin has barely explained how he intends to pay for the new infrastructure, although his aides insist that there are no new taxes in the pipeline once the election is out of the way.
One way out could be to offload stakes in the banks that were recapitalised during the crisis – most eyes are on Siam City Bank and BankThai. But until the government gives a strong signal, investment bankers are not getting too excited. Many are focusing instead on M&A activity in other sectors, with consumer spending still a key commercial driver.
Thailand could also try to tap international debt markets, particularly if its improving economic strength can be translated into a ratings upgrade over the next year or so. But this approach, say analysts, will require further action on a rash of non-performing loans (NPLs) in the financial sector, many of which are old loans and the subject of protracted restructuring and legal claims.
The Bank of Thailand has called on banks to cut their NPL ratio from 12% at present to 2% by the end of next year. Bankers say that they are waiting for the new government to outline a proposed debt buy-out scheme under the auspices of the Thai Asset Management Company, which was set up in 2001 to remove NPLs from state-owned banks’ books. It has since restructured Bt767bn in impaired debt and rehabilitated about 15,000 borrowers.
The alternative is to seek redress through bankruptcy proceedings, a constant source of frustration for lenders. But some observers believe that critics of the legal route might have overlooked the mileage in the argument, particularly given the amount of debt overhang from the crisis.
“There’s been a tremendous [number] of bankruptcy cases. Not many countries have done what Thailand did. It put the court in place after a crisis, and debt [equal] to one-fifth of the economy has gone through the system,” says Andrew Stotz, head of research at Macquarie Securities in Bangkok.
Debt problems
Although Thailand’s banks have overhauled their risk management systems in recent years – in a bid to avoid a repeat of the debt crisis – the latest blow to the tourist industry is an uncomfortable reminder of the risks that remain. In January, the president of Phuket’s tourist association estimated that the loss of income is costing the island $10m for every day that foreign tourists change their holiday plans.
But Siam Commercial’s Ms Jada is unfazed by that as she combs through her loan book for exposure to the tsunami damage. “We are hopeful that a place like Phuket can return to its former glory. It could even be an opportunity to make it a better place. We may lose a year or two, I don’t know. But I think in the end a place like Phuket will rehabilitate,” she says.
