thegreglowe.com

By GREG LOWE
IN BANGKOK

THAILAND’S banking sector can weather the global credit crunch, but domestic political instability continues to threaten its economy, finance observers said yesterday.

The industry’s sound credit fundamentals, net external debt position, and strong capitalisation will allow it to ride out the global slowdown, speakers at rating agency Fitch Thailand’s annual conference said. However, the credit crunch will cause the Thai economy to slow in 2H08.

Political turmoil continues to mar investor confidence despite Prime Minister Samak Sundaravej’s resignation on Tuesday. ‘We’re concerned with the political risk and the political developments here,’ said Fitch Ratings Hong Kong managing director and head of sovereigns Asia Pacific James MacCormack. ‘The lack of political leadership results in a lack of economic policy leadership. Our concern is that economic policy stagnates, which is a risk.’

Public arguments between the Ministry of Finance and the Bank of Thailand (BOT) also showed that policy makers are not working effectively, he said.

These problems are compounded by the fact that more than US$1billion of capital has flowed out of the country in five of the past eight months. Thailand is also the only country in Asia where each of the six annual World Bank Governance Indicators is getting worse.

‘That may affect economic performance, which we may need to reflect in ratings,’ said Mr MacCormack. ‘We want to see some eventual resolution in Thailand. Right now it’s not evident where that is going to come from.

‘Normally in a political situation like this we see two steps forwards, and one step back. Here it’s one step forward, one step back. So nothing really seems to change.’

On the finance front, Thailand’s positive indicators include the government’s debt/GDP ratio, which sits in the middle of the BBB+ rating. It is also the only significant net external debt creditor in its band, with a stronger position than Russia.

‘Those are two very sound reasons why Thailand can maintain its BBB+ rating,’ said Mr MacCormack.
Thai banks’ minimal investment in US government-sponsored enterprise securities, low non-performing loan/asset ratios, and strong reliance on domestic deposits help insulate the industry from the credit crunch, said BOT deputy governor Bandid Nijathaworn. Improvements in risk management, asset quality and international standard supervisory structures have bolstered the sector’s resilience.

‘The Thai banking sector is strong enough to weather the global turmoil,’ said Dr Nijathaworn. ‘Low oil prices and monetary prices that focus on inflation should provide the stable price environment conducive to both domestic demand and export competitiveness.’

Thailand has one of the strongest capitalised banking systems in the region, according to Fitch Thailand managing director Vincent Milton, but some impact from the credit crunch is inevitable, he said. ‘As global growth slows, particularly in the US, we will see a sharper impact on the growth outlook for the Thai economy.’

Political instability, tight liquidity and a rise in interest rates led Fitch to forecast Thailand’s GDP to slow down to 4.6 per cent by the end of this year.

Yesterday, Finance Minister Surapong Suebwonglee told reporters that political unrest may prevent 2H08 GDP from hitting its 6 per cent target.

Published September 11, 2008
© The Business Times