Are Thai SMEs ready for rate hike trauma? 

Economy March 07, 2018 01:00

By   SPECIAL TO THE NATION 

IT HAS BEEN 34 months since the Bank of Thailand’s Monetary Policy Committee (MPC) decided to reduce a benchmark interest rate from 1.75 per cent to 1.50 per cent.



Due to prolong subdued inflation, sluggish economic recovery and external uncertainty, the MPC have maintained the interest rate at 1.5 per cent for 22 consecutive policy meetings. 

The interest rate at almost historically low level (the lowest level was 1.25 per cent during 2008 Global Financial Crisis) is a double-edged sword for Thai businesses. On the bright side, the Bank of Thailand successfully alleviated debt burden on Thai businesses and helped them grow at low cost of financing, but on the other side, many businesses could be addicted to low-interest rate environment and could be unprepared for interest rate regime shift which already happens in the US and some Asian peers like Malaysia and South Korea. Almost all analysts expect the Bank of Thailand to maintain the interest rate at 1.5 per cent. Throughout 2018 due to unhurried stance from the Bank despite stronger economic outlook and external pressure as the Federal Reserve plan to increase their interest rate for 3 times this year. However, it is arguable that the bank should at least reload their monetary gun to encounter adverse situations which stem from world-wide tightening monetary policy and roaring US political risk and trade policy uncertainty.

According to S&P Global Ratings, there would be significantly high numbers of defaults by heavily indebted companies due to tightening credit conditions. Record low-interest rate and easy liquidity have spiked up the number of highly leveraged firms since the global financial crisis. Therefore, if central banks finally drain out “easy money punch bowl”, it could trigger the next default cycle which could worsen business sentiments and eventually slow down overall economic progress. In addition, the US trade policy during president Trump could spark a new round of global trade protectionism. If other countries start to follow the US’ moves, trade protectionism as well as anti-globalisation movements could put an end to the robust growth in global trade. This situation would be a nightmare for many exporting countries like Thailand. 

To boost the economy amid harmful environments, an easing monetary policy such as lowering interest rate may be required. Without ample bullets, firepower from the monetary gun will probably not be sufficient. 

If the Bank of Thailand do decide to reload their gun and raise interest rate by 0.25 per cent. It will obviously affect many companies’ cost of borrowing and their abilities to repay debts. The most worrying business will definitely be SMEs as their loan outstanding was over 4.86 trillion baht at the end of 2017. Moreover, most of SMEs’ loans are floating rate loans which typically use Minimum Retail Rate (MRR) and Minimum Overdraft Rate (MOR) as benchmarks. 

The MRR and MOR interest rates are sensitive to changes in the Bank of Thailand’s policy rate. From historical statistics, a 0.25 per cent policy rate hike will increase MRR and MOR about 0.13%. This means If the Bank of Thailand raise their policy rate by 0.25 per cent, SMEs’ interest repayment burdens will increase by Bt6.24 billion. 

Though SMEs could face such large increases in interest burden from the BoT’s rate hike, interest payments only account for 3.4 per cent of total SMEs’ operating costs. Additionally, rising purchasing power from resilient Thai economy and lowering SMEs’ NPL ratio could reflect improving SMEs outlook and lessen concerns over impacts from the higher interest rate. 

Nevertheless, from the 4th quarter SME sentiment index by TMB, more than 47 per cent of surveyed SMEs expressed their concerns over rising cost. Even if the government recently issued some measures to help Thai SMEs, they inevitably need to adapt themselves by integrating and applying more technology into their business operations to effectively reduce cost. For instance, SMEs could access more customers via numbers of online channels which incur lower cost compared to typical branch expansion. 

Thus, Thai SMEs should not only prepare for rising interest rate environment but also embrace digital economy and utilize IT system to ensure their survivability and grow their business sustainably. 

Contributed by DUANGRAT PRAJAKSILPTHAI and Poon Panichpibool. They can be reached at tmbanalytics@tmbbank.com

Views expressed in this article are those of the author and not necessarily of TMB Bank or its executives.