Thai central bank warns on deteriorating debt serviceability

The Bank of Thailand has warned of deteriorating debt serviceability for certain business sectors, small and medium-sized enterprises (SMEs) and households.

In a meeting summary, published on June 19, the BoT said debt serviceability is deteriorating despite signs of domestic economic recovery. The trend reflects both “the uneven nature of the ongoing recovery” and “the structural changes and competitiveness issues faced by SMEs”.

For the housing market, the BoT said there is oversupply in certain areas and price ranges, but there is “no sign of widespread speculative bubbles” as new project launches have appeared to slow down.

Given the low interest rate environment, search-for-yield behaviour by institutional investors and savings co-operatives is the main source of speculation, the BoT noted. Thus, the supervisory framework needs further strengthening to ensure proper risk management, the central bank continued.

“Institutional investors continued to invest in risky assets to generate higher returns expected by customers,” the central bank said. Foreign investment by Thai entities, especially through foreign investment funds, grew steadily and, though generally targeted at investment-grade sovereigns, was “somewhat concentrated”.

In the bond market, the issuance of unrated bonds and the growth of accredited investor mutual funds started to decelerate, following some recent default events, the BoT said.

Looking ahead, the BoT said the uncertainty in global macro-financial conditions and the uneven domestic growth could weigh on some corporates’ and households’ ability to service debts, and also could add to rollover risks, especially for businesses relying on short-term borrowing and bond issuance for financing.

Loan concerns

In its monetary policy committee meeting held last month, the BoT said the expansion of commercial bank loans remained low and concentrated in some business sections. Also credit quality continued to deteriorate as reflected in the rising levels of non-performing loans (NPLs).

According to the latest data from the BoT, banks are struggling with the rise in NPLs. The gross NPL ratio at the end of March was at 2.94%, up from 2.83% at the end of 2016.

Household loans to GDP stood at 79.9% in 2016, retreating slightly from the 81.2% in 2015 but still high. In order to relieve the high levels of household debt, the BoT joined forces with 16 commercial banks and asset managers to set up “debt-solving clinics” earlier in June to clear up non-collateral debt.