Interview: Kannikar Chalitaporn

What are the current risks to Thailand’s financial stability, and are banks expanding their counter-cyclical provisions to hedge against uncertainties?

KANNIKAR CHALITAPORN: The possibility of the US Federal Reserve continuing to scale down its asset purchase programme and the associated risk-off sentiment have already caused foreign capital to flow out of emerging market countries, including Thailand. But even with sizeable capital outflows, Thailand’s favourable financial conditions imply that we are not at risk of a balance of payments crisis like we experienced in 1997.

Our foreign exchange reserves are almost three times the size of short-term external debt. Moreover, external debt is now only 39% of GDP, in contrast to 65% of GDP in 1997. Banks’ foreign debt is currently around 10% of GDP, versus 23% of GDP in 1997. Also, the possibility of further quantitative tapering has reminded us that extremely low interest rates in the advanced economies will not be around forever, and banks have to begin preparing for a world of higher borrowing costs. Banks will thus need to prepare for the possibility that their customers will be negatively impacted by the rising interest rates. Furthermore, although the banking sector has seen a slight increase in non-performing loans in the first half of 2013, growing future uncertainties have already caused banks to make higher precautionary provisions for a counter-cyclical buffer.

How has the Bank of Thailand’s monetary policy impacted the banking sector in 2013?

KANNIKAR: With a very low risk of damaging capital outflows, the Bank of Thailand’s policy interest rate will be tied to price stability and economic growth. Currently, on the one hand, inflationary pressures are very mild, as oil prices have tended to stabilise on the back of weak global demand and increased oil production of the non-OPEC countries. On the other hand, since the beginning of 2013, we have seen a significant slowdown in private consumption, including that of non-durable goods. Should this continue, the possibility of the Bank of Thailand pursuing further monetary loosening will increase. However the monetary policy committee will also have to take into account the strong competition for deposits among financial institutions.

This tightness of demand in the deposit market has made it difficult for banks to lower their interest rates in response to policy interest rate cuts.

In what ways will the formation of the ASEAN Economic Community (AEC) impact loan growth in the Thai banking sector?

KANNIKAR: The impact of the AEC on loan growth cannot be accurately quantified at this stage. However, it is likely that the AEC will have a positive impact on domestic investment as local corporates and small and medium-sized enterprises (SMEs) look to expand their domestic production capacity or expand regionally to capture increasing intra-regional trade activities and to penetrate into new markets.

One clear benefit of such a regional trend is the uplift in cross-border trade activities between Thailand and its neighbours. This will greatly benefit SMEs which will in turn need banks’ support for trade facilities and further expansion of their working capital and production capacity. Another source of growth would be from foreign direct investment, which is expected to pick up, as many foreign investors view Thailand as a centre of their regional supply chain. We expect to see increasing levels of funding needs from this trend. SMEs that are part of manufacturing supply chains are also expected to experience additional growth.

The AEC will provide an opportunity for Thai banks to expand their overseas business, as Thai companies become more regional. When we look at the AEC, there is an upper region and a lower region. The upper region consists of emerging economies along the Mekong River, whereas the lower region represents more mature economies. Generally speaking, there are more significant business opportunities for Thai banks in the emerging markets, but they also come with greater risk.