Thai Prime Minister General Prayut Chan-o-cha shows the way to US Secretary of State Rex Tillerson during a meeting at Government House in Bangkok on August 8, 2017. Photo: Reuters/Rungroj Yongrit/Pool
Thai Prime Minister General Prayut Chan-o-cha shows the way to US Secretary of State Rex Tillerson during a meeting at Government House in Bangkok on August 8, 2017. Photo: Reuters/Rungroj Yongrit/Pool

Thai shares, lagging the region with a 12% MSCI Index gain through July, shrugged off a breakthrough post-ASEAN summit visit by US Secretary of State Rex Tillerson. The meeting ended the ruling military’s bilateral pariah status since seizing power in 2014, as Tillerson and Prime Minister Prayut Chan-o-Cha addressed a range of economic and diplomatic issues.

The two talked trade as a possible successor framework to the Trans-Pacific Partnership dropped by Washington is considered, and with ASEAN (Association of Southeast Asian Nations) foreign ministers’ meeting’s focus on North Korea sanctions, Bangkok promised to crack down on front companies and banks allegedly setting up shop to get around the moves against Pyongyang.

General Prayut was invited for a reciprocal visit to Washington and held to his junta’s vague “roadmap to democracy”, without further prodding from Tillerson’s team, for a first election phase next year after constitutional reforms got royal sign-off in April.

Foreign investors in Thailand had already become net sellers in July with economic growth in the lackluster 3% plus range, and the International Monetary Fund warning of financial-stability risks in a May Article IV report and recommending “macro-prudential” moves to combat soaring household debt, now at 80% of gross domestic product.

The IMF update cited political uncertainty and the rural-urban income divide as the backdrop for worsening inflation, investment and employment performance the past five years. On the positive side, currency flexibility, high international reserves and manageable public debt have offered “policy space”, with officials launching infrastructure project-led fiscal stimulus.

However, population aging, the large underground economy, and lagging education and productivity remain “structural bottlenecks” aggravating increased bad loans and “regulatory arbitrage” in the financial system, the review argued. It put this year’s growth at the same 3.2% as in 2016, subject to global interest-rate and trade corrections, as below-1% inflation and a 10%-of-GDP current account surplus seem “entrenched”.

The Thai government countered in August that a combination of public spending, exports and private consumption would enable 3.5% growth, but retail confidence and industrial output fell in July as rice-land flooding in the north and east caused an estimated US$300 million worth of damage.

Meanwhile the $1 billion-a-month trade surplus, along with foreign direct investment such as a recent Taiwanese bank takeover of stock exchange-listed LH Financial Group, have sparked a 7% appreciation of the baht despite central bank intervention.

The headline fiscal deficit is small at 1% of GDP, but the ailing state pension system represents a long-term contingent liability and public-private partnerships are not well designed, according to the IMF. The benchmark 1.50% policy interest rate has been on hold, but the Fund  also urged monetary easing to moderate the currency surge and elevate inflation to the 1-2% target.

Financial-sector weakness is “contained”, but commercial-bank indicators have deteriorated among a proliferation of unregulated “shadow” credit providers and a spike in real-estate prices to accompany outsize household debt.

Annual lending growth has slowed to 5%, as the non-performing-loan ratio approaches 4%, with small-business exposure especially souring. Return on assets declined to 1.3% in the first half, according to Fitch Ratings. Moody’s pointed to the same uptick in restructured personal and enterprise lines, but maintained a “stable” medium-term banking outlook provided Tier 1 equity capital stays healthy.

The central Bank of Thailand, after all these salvos, finally stepped in to introduce new curbs on credit cards and unsecured individual loans effective September, with the maximum card rate to be cut from 20% to 18%, but as with the North Korean squeeze the action may be too late and too limited to forestall threats.

Cambodia banks under scrutiny

In Cambodia, banks are also under the microscope, as authorities try to ease annual credit growth to 15% and French and Japanese groups establish local operations. The National Bank of Cambodia recently increased minimum capital requirements, with bad loans at 3.5% of portfolios, and tightened rules for microfinance firms.

Economic growth should come in again at 7% this year, but garment exports were up only 4% in the first half, versus 9% in 2016, when the current-account gap was over 8.5% of GDP.

China, which has allocated $15 billion as the largest foreign investor in Cambodia, may be hedging new Belt and Road commitments including a high-speed railway after the ruling party, in power for three decades under strongman Hun Sen, was drubbed by the opposition in June local elections ahead of 2018’s national contest.

Corporate bonds may soon launch to join the few stocks available, but bungled banking policies will continue to hurt the subregional balance sheet.

Gary Kleiman

Pioneer and recognized expert in the field of global emerging economies and financial markets. Founder of first consulting firm dedicated to providing independent analysis and advice to public and private sector clients in 1987, and research coverage and firsthand experience covers 75 countries in all developing regions. Advisor on financial vulnerability issues, risk management, portfolio allocation, and financial sector and capital markets strategy and development.