Thailand's non-performing loan pile is likely much larger than regulators acknowledge. Image: Twitter

BANGKOK – Covid ambulance sirens are ringing out in Bangkok as the kingdom continues to grapple with record-breaking daily caseloads.

But it’s the warning bells sounding around Thailand’s banks that are potentially the greater cause for alarm in one of Asia’s worst pandemic-hit and slowest recovering economies.

Ratings agency S&P Global recently downgraded top Thai lenders Siam Commercial Bank, Kasikorn Bank and Krungthai Bank’s creditworthiness citing rising “systemic risk” and a “fragile” economic recovery.   

In a blunt assessment that raised questions of official transparency and data quality, S&P said it saw “no immediate fix” to plaguing “structural issues” and that there is “an increasing divergence in economic reality and reported asset quality ratios.”

That assessment is rooted largely, though not entirely, on Thailand’s decimated tourism industry, which pre-pandemic contributed as much as 20% to gross domestic product (GDP) when related ancillary industries and services are counted.

Despite last year’s high hopes for a high season bounce, fourth quarter arrivals were only 3% of the number of travelers who visited the kingdom in the same quarter of 2019, the last quarter of Thailand’s once seemingly sky-is-the-limit tourism boom.

The market and investors now clearly believe that Thailand’s economic prospects hinge heavily on a tourism revival, witnessed in recent vacillations of the baht depending on whether authorities have more recently announced a loosening or tightening of tourist entry requirements.

But those gyrations may also reflect new market concerns about Thailand’s deteriorating financial transparency since Covid-19, including around banks’ reported non-performing loans (NPLs) and their related exposure to unsalvageable tourism assets.

A lone tourist walks past deck chairs along an almost-empty Patong beach in Phuket on October 1, 2020. Photo: AFP / Lillian Suwanrumpha

Official data shows just 3% of Thai bank loans are exposed to hotels, resorts and restaurants – a figure that may be significantly understated considering the pre-pandemic boom in hotel and resort-building to accommodate fast surging foreign arrivals, once but no longer driven by ever-growing numbers of Chinese tourists.

Foreign tourist arrivals surged from 24.8 million in 2014 to 40 million in 2019, a breakneck expansion in numbers that saw massive new investment in hotels and other tourism infrastructure nearly nationwide, making an accurate counting of the pandemic’s asset devastation difficult – particularly as many independent foreign analysts have shied from visiting the kingdom due to ever-changing entry restrictions.    

S&P says Thai banks’ “indirect exposure to tourism-related activities is likely to be much higher” than the official 3% figure. Indeed, a ghost town walk through any Thai resort town – from the south’s beachside Hua Hin to the mountainous north’s Chiang Mai – reveals seemingly immeasurable shuttered devastation.

Regulatory forbearance and a relaxation of loan classification norms, S&P says, have and will delay the “recognition and crystallization” of underlying bad loans. Bank of Thailand (BoT) data implausibly shows system NPLs have stayed steady at 3% during the pandemic, a figure that many observers see as understated.

That 3% figure allows Thai banks to claim exceptionally high capital-adequacy ratios of 20%, which at 1.6 times systemwide NPLs is much higher than comparable markets and signals to markets sufficient provisions to absorb a potential uptick in bad loans.

But the 3% figure has been massaged by debt moratorium schemes that officially show 14% of bank loans now face “relief measures”, which S&P notes is “very high compared to other emerging markets” and that it expects a large portion of which will eventually “migrate to comprehensive debt restructuring.”

In a statement, the BoT said in response to the downgrades that Thai banks remain “resilient with high levels of capital buffer to withstand future risks and uncertainties” and that a “continued recovery of the Thai economy will help improve income and debt serviceability of borrowers as well as the loan quality of banks.”

It said the number of debtors in “relief” has fallen from 30% during the height of Covid lockdowns in July 2020 to 14% at present. An S&P analyst involved in the research told Asia Times that the BoT did not directly contact the rating agency after the big bank downgrades were announced.     

Still, there are plenty of indications that Thailand is putting off the moment of financial reckoning for Covid-hit tourism assets that stand little to no chance of revival or survival, particularly as authorities give new voice to old plans to move the industry up-market to “elite” travelers and away from the mass market epitomized by low-budget Chinese tour groups.

Chinese tourists wearing face masks while visiting the Grand Palace in Bangkok, January 29, 2020. Photo: AFP / Lillian Suwanrumpha

If so, that means many of the hotels, hostels and markets built specifically for the low-end Chinese market will likely never revive and that bridging loans keeping their lights on are funds down the drain. Nor is it clear China will dispatch its nationals overseas any time soon in light of its “zero tolerance” Covid policy and talk of “dual circulation” domestic-driven growth that could deter spending overseas.

Thai government policy has so far envisioned a quick trip back to the future. A state subsidy program known as “We Travel Together”, which pays as much as 50% of traveling Thais’ hotel bills, gave the industry a needed fiscal infusion last year, but could only boost occupancy rates to 14%, underlining how crucial foreign tourists are to the wider industry.

Analysts say the state-funded program is unsustainable even in the short-term and because most Thais opted to stay in high-end hotels and resorts they wouldn’t and couldn’t normally afford, the subsidies helped big hotel corporations like the Central Group more than the small-scale tourism operators in more dire need of help.

One big financial unknown, however, is exactly how the decline in tourism has impacted high and rising household debt levels, which were already among the region’s highest at 80% of GDP before Covid-19 and have officially risen since to what S&P sees as an “unsustainable” 90%.

That figure is no doubt way higher when informal lending, including from loan sharks and other underworld lenders who often charge usurious rates with hard-knuckled repayment terms, is taken into full account.

Compounding that lack of transparency are questions about how much bad credit is being pumped through specialized financial institutions such as savings cooperatives beyond the BoT’s regulatory purview.   

Untold millions of middle-class Thais have lost their well-paid hotel and tourism-related jobs to the Covid crisis, precisely the segment that banks have in recent years extended mortgage and personal loans for big-ticket consumer purchases such as automobiles and computers.

This, some financial analysts suggest, is at the ripple effect core of the Thai banking sector’s rising systemic risk. Meanwhile, political considerations are and will complicate an efficient and timely unwinding of bad debts that could allow problems to fester and grow in the banking system, particularly as US interest rates rise in the months ahead, the same analysts say.   

That includes the royally-owned and recently downgraded Siam Commercial Bank, which S&P notes has “higher” exposure to tourism than others. Other analysts say its lending practices are comparatively “aggressive” among the kingdom’s big three banks, the other two being Kasikorn Bank and Bangkok Bank.

Siam Commercial Bank is more exposed to tourism-related loans than other Thai banks. Image: Twitter

That’s seen in the fact that 17% of Siam Commercial Bank’s loans are now in so-called “comprehensive debt restructuring”, making it the first bank to adopt the classification move from pandemic “relief” loans. Bangkok Bank, the kingdom’s largest lender, does not publicly disclose the percentage of its loans that are in “relief.”

Thailand’s palatially and politically connected big banks are too big to fail and the kingdom’s rich stock of US$245 billion in foreign reserves provides a buffer the country didn’t have at the advent of the 1997-98 financial crisis, when the BoT mismanaged the national reserves literally to zero and NPLs ballooned to 48%.

No one is predicting a similar type of financial collapse, even amid 1997-like concerns about the kingdom’s underlying financial health and transparency. But without a quick and strong bounce in new tourist arrivals, the Covid ambulance sirens ringing out in Bangkok could portend a health-turned-financial emergency.