THE BANK of Thailand (BOT) yesterday warned investors about the risks posed by fixed-income funds invested abroad, while also flagging concerns over deposits placed with savings cooperatives and bonds issued by Thai conglomerates.
In a broad assessment of the potential hazards to the country’s financial stability, the central bank reiterated its concerns over the prospect of a glut in housing, with the BOT’s worries sharpened by the highly volatile global and local financial markets.
The risk assessment is an outcome of the joint meeting between the Monetary Policy Committee (MPC) and the Financial Institutions Policy Committee (FIPC) on December 21, according to a central bank statement issued yesterday. The BOT said that Thailand’s financial stability remained sound. Economic growth continued to gain traction, while banks and insurance companies have maintained high capital buffers. Thailand’s external stability remained solid given its high level of international reserves, continued current account surplus, and low external debt.
These factors helped cushion the spillover from recent bouts of volatility in global financial markets. However, there remained some pockets of risks that could have notable implications for financial stability, two of which were highlighted by the committees.
First, risks in the real estate sector were underlined. Despite some signs of improvement in the housing loan market, there continued to be a need to monitor banks’ lending standards, households’ debt serviceability, a possible slowdown in foreign demand notably from China, and a surge in supply due to new mixed-use projects, said the central bank statement.
Risks arising from intense competition in the housing loan market, which had led to lenient lending practices, were addressed to some degree by the new macroprudential measure on housing loans, said the BOT.
Foreign demand, notably from China, had been gaining significance in the condominium market over the past few years. This exposed the Thai real estate market to a possible drag from foreign demand due to China’s economic slowdown. For the supply side, office and retail space could pick up sharply due to new mixed-use projects especially from 2020 onwards, the committees warned.
Second, the search-for-yield behaviour, which could lead to underpricing of risks, continued to persist – especially in savings cooperatives and large conglomerates. Investment abroad by fixed income funds remained highly concentrated in a small number of destination countries and institutions. Although these countries and institutions possessed high credit ratings and foreign exchange risk was properly hedged, such concentration could make these fixed-income funds sensitive to country and counterparty risks, warned the BOT.
The search-for-yield behaviour via savings cooperatives continued to be present, as reflected in high growth of deposits and investments in securities.
In addition, some large savings cooperatives raised additional funds via short-term borrowings to invest in securities, which could translate into additional liquidity and market risks. The committees viewed that the draft of the Cooperatives Act, which had been approved by the National Legislative Assembly, would serve as a good starting point in enhancing the supervision of cooperatives. But the committees saw that further improvements were urgently needed in the areas of risk management and governance.
Large conglomerates had been raising funds actively during the period of low interest rates, and some of them appeared to channel more investment to non-core businesses and abroad. Such developments could make it difficult to assess risks related to large conglomerates, which could lead to underpricing of risks. Moreover, some conglomerates expanded their issuances of perpetual bonds to raise funds. The Office of the Securities and Exchange Commission has been monitoring this trend closely and emphasising that complete information on associated risks must be provided to investors.
In the committees’ view, risks related to large conglomerates must be monitored regularly, given their interconnections with the financial system at large due to their complex structure and growing funding activity via loans and debt securities, said the statement.
In the periods ahead, Thailand’s financial system could still face several risk factors. Chief among them are heightened volatility in global financial markets, uncertainties in G3 countries’ economic and monetary policies, trade protectionism measures, as well as geopolitical risks. The debt serviceability of households and SMEs in certain industries will be closely monitored, the statement added.