Thai Banks Remain Strong Despite Crisis

UNCLAS SECTION 01 OF 02 BANGKOK 003530 STATE FOR EAP/MLS AND EB STATE PASS TO USTR TREASURY FOR OASIA SINGAPORE FOR FINATT BAKER SENSITIVE SIPDIS E.O. 12958: N/A TAGS: EFIN ECON EINV ETRD TH SUBJECT: Thai Banks Remain Strong Despite Crisis BANGKOK 00003530 001.2 OF 002 Sensitive But Unclassified. For Official Use Only. REFS: A) Bangkok 3519 B) Bangkok 2885 ¶1. (SBU) Summary: Despite the economic impact of Thailand's prolonged political stalemate, including the ongoing airport closure crisis (ref a),financial sector leaders in Thailand believe the local banking sector remains sound. Even though credit rating agencies have downgraded Thailand's credit outlook and that of many major Thai banks (although not/not Thailand's sovereign rating), financial leaders believe lessons learned from the 1997 financial crisis have prepared Thailand well for the current downturn. High levels of foreign reserves, low levels of debt, and strong oversight are some of the factors pointed to as evidence of a strong banking sector. Pressured by the Bank of Thailand, however, commercial banks are reducing loans to bolster their balance sheets, while the government would prefer to push credit availability to spur GDP growth. End Summary. ¶2. (SBU) The closing of Bangkok's two main airports by protesters is causing the nation's growth rate projections to be revised downward. Thai government and private estimates of GDP growth for 2009 are at or below two percent (ref a). When describing Thailand's moribund stock market, managers of two investment houses told Econoff December 1 that many foreign investors have sold off equities in the Stock Exchange of Thailand (SET) to reduce their exposure. Meanwhile, financial analysts report that Thai investors are fleeing the market for the relative safety of government bonds, contributing to the stock market's 50 percent plunge this year. As one put it, while there has not been any wholesale capital flight, there is increased risk aversion. ¶3. (SBU) Along the same lines, financial analysts opined that the baht's slow depreciation against the US dollar of late, and expected depreciation over the coming months, would be welcome since inflationary fears are down and exporters could use the help. The Commerce Ministry reported December 1 that inflation slowed to 2.2 percent in November from 3.9 percent in October, the largest decline since July 2002. The Bank of Thailand (BOT) is widely expected to cut the policy interest rate by at least 25 basis points on December ¶3. One investment bank forecasts the baht will depreciate to 37 per dollar within three months. Experts argue that with approximately USD 110 billion in foreign reserves, the Bank of Thailand (BOT) has more than enough capital available to defend the baht, even though it generally intervenes to do so less than any other nation in ASEAN (according to a UBS report, the BOT has spent an average of USD 2.5 billion per month to support the baht against the dollar since March). ¶4. (SBU) When asked specifically about the state of Thailand's financial sector, analysts are quick to point out it remains strong. One investment firm head, who has deep concerns about Thailand's political situation, insists that Thai banks are "stronger than ever," with plenty of liquidity, high capital to debt ratios, a blanket guarantee on deposits, low exposure to foreign debt, and in business with Thai corporations that also have low debt on their balance sheets (ref b). ¶5. (SBU) The head of a foreign bank in Bangkok expanded on this point with Econoff on November 25. He described the situation in Thailand today as not as severe as during the 1997 financial crisis. Leading to that crisis, Thai banks achieved growth through cheap foreign exchange debt whereas now they do so through local savings and debt. Banks that survived the 1997 crisis learned from the experience and manage their risk exposure accordingly, as does the Bank of Thailand, which is strict on its oversight of private banks and "sees everything through a 1997 lens." Also, the ongoing political crisis has prevented the bubble in asset values that has happened elsewhere. As one wryly put it, "the shorter the time at the party, the less the hangover." The question for banks is not how to stay alive, but how to grow in the current environment. ¶6. (SBU) Despite these bullish comments, challenges for the financial industry remain. Fitch Ratings and Standard and Poor's both revised Thailand's credit outlook downward from stable to negative, indicating an increased level of risk to Thailand's sovereign creditworthiness. Fitch also revised the outlook of nine of Thailand's major banks from stable to negative. (Note: According to S and P, a rating outlook assesses the potential direction of a long-term credit rating over the intermediate term, typically six months to two years. An outlook is not necessarily a precursor of a rating change. End Note). ¶7. (SBU) The general economic climate is also having an impact. Corporate clients of banks are and will continue to be affected by BANGKOK 00003530 002.2 OF 002 the general economic slowdown, first small and medium enterprises (SMEs) and then larger firms. Meanwhile, under pressure from the Bank of Thailand, financial institutions and banks are holding more cash and cutting back on lending to make sure their balance sheets remain solid. This trend is unfortunate from the Government's perspective, as bolstering credit in the market would help GDP growth.