Hunt for yield, fragile property  market high on BOT watch list

Economy January 04, 2019 01:00

By   THE NATION

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THE Bank of Thailand (BOT) is keeping watch on risks to the financial system posed by factors ranging from investors’ search for yield and fragility in the property market to high household debts and increasingly large swings in capital movements.



However, the central bank notes that domestic financial institutions are strong and the overall financial system is stable.

The financial system’s stability - particularly on the external front – remains sound and this reflects a consistent current-account surplus and high foreign reserves, the BOT report said. Debt in proportion to the country's gross domestic product (GDP) is low, helping the Thai economy to deal with risks from global money-market fluctuations.

Thailand's financial institutions have strong finances, mirroring the high capital base of the commercial banks. This should help them cope with risks if there are more loan impairments, the report said.

However, the central bank is continuing to monitor some risks. The main one, it says, is investor behaviour driven by the search for yield, possibly leading to the underpricing of risks as a result of prolonged low interest |rates.

Investors’ search for higher yield through savings cooperatives is continuing, the BOT said in its report. 

These cooperatives recorded high growth in assets and deposits and risks to credit and liquidity remained and needed monitoring as some large cooperatives made more short-term borrowings for securities investment.

Also, firms' capital raisings through debt and equity instruments for overseas expansion could make their financial structure more complex and lead to the underpricing of risks, the BOT said.

On another front, the central bank is waiting to see the results of the new measures for residential loans that will come into force on April 1. In the lead-up, demand for homes may rise if buyers rush to make borrowings for second homes.

The BOT said that oversupply in the property sector was also on watch as, earlier, demand from foreigners for condominium units had risen. Caution in this sector may be required if the Chinese economy slows down more than expected, as the Chinese have been a key force in the ranks of foreign buyers.

Another risk lies in the high household debt even though it has declined slowly and prolonged low interest rates could help households to make new borrowings. 

This would likely reduce their ability for future repayments and lead to a reduced ability of households to deal with the economic uncertainties.

Some small enterprises, particularly those impacted from structural changes, have registered a weak financial status. 

They included rice mills and retail businesses. The situation was in line with the high level of commercial banks’ high non-performing SME loans, at 4.7 per cent.

Yet another risk relates to the higher volatility of capital movements on the back of a list of concerns ranging from the US trade sanctions, the US upward interest rate trend and uncertainty over Britain’s exit from the European Union. These factors could affect the cost of borrowings through bond markets and the extension of short-term debt instruments.

Although most firms have launched debt instruments with credit ratings of “A” or higher, the global upward trend for interest rates could trigger higher costs for borrowings through debt instruments. Some issuers that a low credit rating – most of which are in the property sector - may have to roll over their debts.