Thailand: Banks buffered

Opinions vary on how great an impact Thailand’s floods will have on the country’s banking sector. While optimists believe Thai lenders will be left relatively unscathed by the natural disaster, others are less positive, fearing an increase in non-performing loans and a general slowing down of the economy.

On October 18 the finance minister, Thirachai Phuvanatnaranubala, said the flooding would cut economic growth this year, reducing expansion by 1-1.7%, though he also added the impact could be more extensive if the flooding continued and the situation could not be brought under control quickly. Similarly, the National Economic and Social Development Board’s (NESDB) forecast that GDP would increase by 3.8% in 2011 has now been reduced to 2.1%.

The Bank of Thailand (BoT) has adopted a wait-and-see approach with regard to the longer-term effects of the flooding on the economy, with its Monetary Policy Committee (MPC) announcing on October 19 that it was leaving its key one-day bond repurchase rate unchanged at 3.25% after nine increases since July 2010; however, this is also due to uncertainties regarding the euro crisis and general global slowdown.

The committee said that the current policy rate level is appropriate in addressing upcoming inflationary pressure and supporting economic adjustments, especially as the flooding was not yet over.

While the floods would substantially curtail economic growth in the remaining part of the year from that previously projected, the BoT’s assistant governor Paiboon Kittisrikangwan said the central bank needed to take care to ensure inflation did not get out of hand. “The upside risks to inflation from higher public and private spending as the floods recede would need to be monitored,” he said.

Though the decision to leave rates unchanged was welcomed by some, Thailand’s finance minister felt the lack of action by the BoT was unhelpful, with more needed to encourage lending to the private sector.

“This is not the time to worry about inflation or an overheating economy,” Thirachai said on October 19. “Though we didn’t get help on monetary policy, I am ready to go ahead and use fiscal policy to revive the economy.”

However, BoT governor Prasarn Trairatvorakul is one of those who believe that the country’s banking sector will ride out the present storm. On October 18 he said that while he expected the cost of repairing the damage would amount to more than earlier estimates of $3.27bn, the flood crisis would not have a significant impact on the Thai banking industry.

Outstanding loans owed to banks by the operators of five industrial estates affected by the floods amounted to $1.9bn. This represented just 0.75% of total lending, according to Prasarn.

Frederic Neumann, the co-head of Asian economic research at HSBC in Hong Kong, could see the merit of both arguments. “Given the devastating impact of recent floods, especially on the manufacturing sector, a rate cut would have provided a nice psychological boost,” he said in a report issued on October 19. “But, at the same time, ultimate reconstruction spending will likely stoke price pressures.”

As early as October 13, before the floods reached their peak, the BoT issued an advisory to banks to take any necessary precautions to guarantee security and to make sure they could maintain operations by having a supply of cash on hand should demand increase.

More recently, the BoT said that the Thai banking system has sufficient liquidity and also called on commercial banks to help those customers affected by the flooding by applying a moratorium to some debt repayments and by offering soft loans to those in need of short-term finance.

At least some of Thailand’s lenders appear to have heeded the call. On October 20, when announcing its third-quarter results – results which saw profits up by 22% over the same term in 2010 – Bangkok Bank’s president, Chartsiri Sophonpanich, said the bank would “take appropriate measures to help alleviate the suffering and difficulties faced by affected customers and communities, now and going forward”.

Chartsiri also told shareholders that the bank was closely monitoring the impact of the flooding, though it was likely they would affect the lender’s performance in the run up to the end of the year.

“Economic conditions in the fourth quarter of this year are expected to be tainted by the effect of prevailing flooding problems in certain parts of Thailand, which both directly and indirectly impact on the operations and well-being of businesses and consumers in the flooded neighbourhood,” he said.

The extent of the damage to the Thai economy, and how deeply it affects the banking sector, remains to be seen. With floodwaters still inundating much of Bangkok and the country’s northern industrial heartland, the full cost of the disaster to the country and the financial sector will take some time to calculate.

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