Update for September, 2018: The Federal Reserve already began hiking rates. Debt in Thailand has only increased since then. Time well tell whether both sides can maintain a careful balancing act. In the meantime, this post remains relevant and will be updated.

Rising consumer debt in Thailand is still a major source of risk for the Southeast Asian market.

Thai household debt accelerated rapidly between 2010 and 2013. This was mostly because of tax breaks on vehicle and housing purchases. More recently, growth in consumer lending has slowed to 6.5% for Thailand in 2014 from 18% in 2012.

Yet despite slower household credit growth over the past two years, consumer debt in Thailand remains among the highest in Southeast Asia at 86% at the end of 2014.

Fitch noted on the matter ”While the slowdown in household debt growth is positive, leverage is likely to stay high in the short to medium term as consumer loan demand is unlikely to be materially below GDP”.

High leverage leaves consumers sensitive to macroeconomic weakness. With challenging headwinds coming from China as the world’s second biggest economy takes a pause, this risk is unlikely to end at least for some time.

Further asset quality deterioration is likely. The degree will depend on the outlook for economic growth and unemployment with lower-income households being more vulnerable.

According to Fitch, large commercial banks are well-placed to weather any asset quality stress. This is because of their better-quality customer base, reasonable capital and asset quality buffers.

However, escalating delinquencies, exposure of to vulnerable low-income segments, along with weak economic growth have the potential to seriously disrupt the banking sector.

 

Fed Rates Prompt Outflow from Thai Banks

It’s also important to note that the Thai banking sector’s fate no longer depends on the Thai economy alone.

The US Federal Reserve decided to keep the zero interest rate policy unchanged at its last meeting. But analysts expect two rate rises of 25 basis points each before year end.

Onlookers have warned for a long time that the Federal Reserve’s zero-interest policy has seriously undermined the global economy. It launched in 2008, accompanied by massive money printing totaling $4 trillion,

Such policies are unprecedented. It’s still unknown how markets will react once the Fed decides to normalize rates. The Fed is wary of possible negative spillovers too, hence the delay in the hike.

Thailand, as an emerging market economy, would not be exempt from possible financial shocks. Higher US rates would certainly induce capital outflows.

The Bank of Thailand has brought down its short-term rate to 1.5 per cent. For now, the goal is to hold a low rate and to keep the Thai Baht weak while hoping it will help stimulate the economy and boost exports.

With the Fed about to raise rates for the first time since 2008, the Thai central bank will most likely have to follow along. But this will only put more pressure on the Thai banking sector.

 

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About Reid Kirchenbauer

Reid Kirchenbauer is the Founder of InvestAsian. He's an accomplished stock trader and property investor in Thailand, Cambodia, and many other places. He's been featured in publications such as Forbes, Nomad Capitalist, Property Report, and Seeking Alpha. Download his free investment guide by clicking here.

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