Credit pressure could ease impact from political deadlock
Continuing political turmoil in Thailand is slowing economic activity and could challenge the banking sector, says Fitch Ratings.
A degree of political instability is already factored into the ratings. But emerging credit pressure could rise in spite of the recent imposition of a state of emergency, which will help manage the fallout from, but not resolve, the underlying political deadlock between the ruling party and the main opposition.
Political turmoil is not new, and credit conditions have remained resilient against a series of political upheavals and a major flood in late 2011.
Since the military coup that ousted Thaksin Shinawatra as prime minister, Thailand’s political rupture has triggered large-scale street protests by competing political factions in 2008, 2009 and 2010. The Thai economy has withstood these shocks reasonably well, and this is evident from the growth of its gross domestic product, which Fitch estimates has averaged 3.0 per cent between 2009 and 2013 – slightly higher than the “BBB” peer rating group median of 2.7 per cent.
In the meantime, there was no significant deterioration in the intrinsic creditworthiness of major banks.
Nonetheless, prolonged weakening of activity since the onset of new anti-government protests last November is raising the likelihood of asset-quality pressure at the banks. The financial system’s vulnerabilities have risen because it is more highly leveraged than before, and the household sector’s indebtedness in particular has risen sharply to 80 per cent of GDP in the third quarter 2013, up from 60 per cent at end-2009.
These trends have heightened credit sensitivities to a downturn, and are largely reflected in Fitch’s “negative” outlook on the overall sector this year (“stable” in 2013). Specialised financial institutions would be relatively more exposed, while commercial banks are not immune to the build-up of leverage, alongside a pick-up in concentration risks in the corporate sector.
Banks’ buffers would also be tested should the operating environment and asset quality worsen. On a system-wide basis, Thai banks have improved their Tier 1 capital ratio to 12.4 per cent of risk-weighted assets, up from 11.3 per cent in 2009. But as profit growth slows and credit costs rise, the recent build-up of loss-absorption buffers could come under greater stress, Fitch said.
The imposition of the 60-day emergency from Wednesday seeks to limit the risk of widespread violence by political factions in the run-up to – and in the aftermath of – the February 2 elections.
Meanwhile, the Bank of Thailand has signalled the maintenance of accommodative policies to support monetary and credit conditions amid heightened political uncertainty.
However, these measures will not resolve the underlying political deadlock, Fitch noted.
As such, they could limit the economic fallout, but are unlikely to avert growing credit risk in the banking sector.