Stepping into the unknown
Owners and operators are braced for the central bank’s long-awaited rate hike, write Post reporters
The perks of cheap loans and low debt-servicing ratios are set to gradually diminish amid tangible hints that the Bank of Thailand’s Monetary Policy Committee (MPC) will embark on interest rate normalisation soon.
On Nov 14, the seven-member panel kept the policy rate unchanged at 1.5%, where it has stood since a 25-basis-point cut in April 2015, but three voted for a quarter-point increase, up from two votes at September’s meeting and one in August and June.
The growing discrepancy in monetary policy deliberation adds to the likelihood that the first rate hike in more than seven years could occur at the MPC’s next meeting on Dec 19.
While insisting on its data-dependent approach before making any move on interest rates, the MPC minutes explicitly stated that the need for loose monetary policy has gradually lessened and financial vulnerabilities have started to become more widespread, in part because of the prolonged lowinterest-rate environment.
“For next year, it’s too late for a rate hike, given the [expected] slowdown,” said Naris Sathapholdeja, head of TMB Analytics. “The central bank has been too slow on policy interest rate [normalisation].”
The US central bank’s benchmark rate is expected to be raised to 3% next year, with Thailand’s policy interest rate projected at 2%, according to TMB Analytics.
The wider interest gap will result in foreign capital outflows from Thailand’s capital market, Mr Naris said.
GROWING MISCONCEPTIONS
Although there are different camps arguing for the policy rate to be raised or to remain unchanged, the central bank chief told the Bangkok Post that fears of continuous rate hikes are overblown.
Bank of Thailand governor Veerathai Santiprabhob said people have misconceptions that the policy interest rate will be raised at a fast pace and cause suffering.
Unlike in the US, where interest rates have been normalised from an ultra-loose monetary policy, Thailand’s economy has been recovering gradually and there is fragility in some areas amid uncertainties that lie ahead, Mr Veerathai said.
Any rate hike will be implemented at a gradual pace, he said.
In his view, the country’s excessive financial liquidity and intensifying competition among lenders will prevent a sharp increase in domestic interest rates.
Moreover, a cap in the personal loan rate and mortgage loan introductory rate will help alleviate impact from future rate hike, the central bank chief said.
“I have tried to warn people not to be too complacent, as a hike in the interest rate is approaching,” Mr Veerathai said. “My warning about the rate hike does not mean that the rate will be raised continuously, but we want them to be cautious.”
Policy space is an issue that the MPC is increasingly focused on amid growing uncertainties.
“There are high uncertainties going forward,” Mr Veerathai said. “Policymakers need to have tools to manoeuvre when anything unexpected happens, but our policy space is very limited.”
Uncertainties acting as headwinds to Thailand’s economic growth include the contentious US-China trade row, tightening global financial conditions and foreign exchange fluctuation.
On the other hand, the central bank’s mandate to preserve domestic financial stability is a reason for a rise in interest rates. Financial vulnerabilities have emerged, especially in the property sector, where search-for-yield behaviour is prevalent.
As an attempt to address this risk, the central bank has imposed tighter regulations on mortgage lending by reducing loan-to-value (LTV) ratios for certain categories of purchasers in an effort to curb mortgage lending and property market risks and improve housing loan quality.
Effective from April 1 next year, these new measures will favour firsthome buyers with genuine demand, as opposed to buy-to-rent investors with multiple outstanding mortgages who are searching for yield.
Krungthai Bank senior vice-president Phacharaphot Nuntramas said the central bank has sent a signal for an imminent rate hike in order for every sector to be prepared, while Thailand’s improved economic recovery is a factor affirming the move.
For next year, Thailand’s inflationary pressure is expected to remain low, contributing to lower pressure for continuous rate hikes when compared with neighbouring countries, Mr Phacharaphot said.
After implementing an anticipated rate hike in December, the MPC is expected to adopt a waitand-see stance before executing another round of rate hikes, he said.
PAIN IN THE MAKING
With non-performing loans at 4.65% and rising, small and medium-sized enterprises (SMEs) will be at the forefront of enduring higher financial costs when interest rates rise.
Supant Mongkolsuthree, chairman of the Federation of Thai Industries, said business operators are concerned about an imminent rate hike, as they believe the central bank will begin raising interest rates some time next year.
“Once the policy interest rate increases as expected, many financial institutions will make the decision to increase their interest rates immediately, and many business operators cannot avoid a negative impact from higher financial costs,” Mr Supant said. “Local SMEs are expected to suffer more than other business operators. Most of them are also customers of commercial banks with low financial capabilities, as opposed to large companies, which can manage changes in operating costs.”
He said the single account system will be another factor affecting SMEs, as they don’t have much knowledge about consolidating many existing accounts into a single one.
Judging from these two negative factors, it will be a daunting task to develop SME efficiency and competitiveness as the government wishes to do.
“The FTI is also calling for the government to have
some remedy measures to help SMEs, which are considered the backbone of Thailand’s economy,” Mr Supant said.
Chaiwat Hansomwong, chairman of the Thai SMEs Council, agreed that a rise in interest rates would have a huge impact on operating costs shouldered by SMEs.
“Before the central bank makes a decision on a rate hike, it should ask for cooperation with commercial banks to postpone or slow down increasing loan rates for SMEs,” Mr Chaiwat said.
There are roughly 3 million Thai SMEs nationwide, according to Mr Chaiwat. Of these, just 460,000 are engaged in loan activities with financial institutions.
Some 130,000 SMEs use their company name to apply for loans, with interest rates of 7-8%, while the other 330,000 opt for personal loans with rates of 9-11%.
“SMEs with personal loans will suffer much from a rate hike in 2019,” Mr Chaiwat said.
A hike in the policy rate would also have a direct impact on auto loan businesses using fixed-rate charges for auto loan products, said Apinant Klewpatinond, chairman and president of Kiatnakin-Phatra Financial Group.
Kiatnakin Bank (KK) has prepared for the situation by improving funding cost management.
The bank has a locked-in cheap cost for long-term funding to match auto loan maturity, as well as diversified investments to maintain a good yield.
“Lower yield when interest rates increase is a normal situation of business segment,” Mr Apinant said. “So businesses need to improve funding cost management to keep a positive yield.”
KK will adopt a wait-and-see stance to assess the market situation, particularly pricing competition, before making a decision to increase auto loan rates.
Separately, a source at a leading auto loan provider said the bank has been monitoring policy rate developments and preparing for funding cost management.
Auto loan providers have increased interest rates from the second half of the year, reinforcing signs that local interest rates are creeping up.
“Banks have paid more attention to cost management and kept positive yields at their auto loan businesses in preparation for the policy rate hike,” the source said. “With this scenario, the players are focused on service quality rather than pricing competition at the 2018 Motor Show exhibition.”
PROPERTY SLOWDOWN
The property sector is typically among the hardest-hit segments whenever there is a rise in interest rates, and concerns of a slowdown are building among property gurus.
Vichai Viratkapan, acting director-general of the Real Estate Information Center (REIC), said an uptrend in interest rates will be one of the risk factors challenging the 2019 property market, which is expected to slow by 10-20%.
“Interest rates will be raised at least twice, as the difference between the Bank of Thailand’s policy interest rate and that of the Federal Reserve is quite wide,” Mr Vichai said. “An increase in interest rates will weaken purchasing power.”
Atip Bijanonda, president of the Housing Business Association, said an upward trend in interest rates will cut home purchasing power by 4% for every 0.5-percentage-point increase.
“Bank mortgage rejection remains a key factor causing a slowdown in the property market,” Mr Atip said. “Next year’s economy will be unfavourable, as exports are forecast to slump and be weakened by the trade war. Tourism is also expected to ebb due to a shrinking number of Chinese tourist arrivals.”
From this quarter to the first quarter of next year, a large number of homebuyers will speed up housing transfers to avoid an increase in interest rates, driving up monthly instalments, said Phattarachai Taweewong, senior manager at property consultant Colliers International Thailand’s research department.
This will add a further burden to homebuyers amid elevated housing debt, which remains a drag on consumer spending and debt-servicing ability.
A rise in interest rates will also affect investment homebuyers, as they will need to think twice about buying a residential unit for rent via mortgage loan.
Mr Phattarachai said rental yield is now just 3.55%. If interest rates rise, buying a unit for rent will not be a worthwhile investment.
This scenario would have an impact on the condo absorption rate in the middle to lower-end segment in which most buyers borrow to buy, he said.
But property expert Surachet Kongcheep said the impact on the property market from a rise in interest rates will be minimal if the rate hikes are executed at a gradual pace, as homebuyers have probably priced in the trend.
“Developers and banks are likely to notify customers about the uptrend in interest rates, urging them to get a unit transfer before the rate rises,” Mr Surachet said. “Some have made an agreement with banks to lock in the rates until project construction is completed.”
Peerapong Jaroon-ek, chief executive of SET-listed developer Origin Property Plc, said upward interest rates will have an impact on homebuyers whose mortgage lending contracts were signed three years ago and are now in floating rates.
“These buyers got a fixed rate for the first year and up to three years,” he said. “They need to refinance. New customers will likely see no impact from a rise in interest rates. Although the rate could be raised by 25 basis points, interest rates for housing loans will not rise at the same level.”
Once the policy interest rate increases as expected, many financial institutions will make the decision to increase their interest rates immediately. SUPANT MONGKOLSUTHREE FTI chairman