Deloitte warns of imbalances

A substantial rise in household debt and non-performing loans (NPLs) are the major cause of financial imbalances for Thailand’s banking sector, says financial research and consultancy Deloitte Touche Tohmatsu Jaiyos Advisory Co.

Somkrit Krishnamra, Deloitte’s Bangkokbased partner for enterprise risk services, said household debt generated from purchases of vehicles and houses caused a tangible financial imbalance in Southeast Asia’s second-largest economy as the debt ratio has climbed considerably.

Thailand’s household debt rose to 10.7 trillion baht or 80.6% of GDP in the second quarter, up from 10.6 trillion baht or 79.9% in the first quarter, reported the Bank of Thailand.

“Banks have to remain cautious as an uptick in NPLs indicates financial problems among small and medium-sized enterprises and large corporates,” he said.

Overall NPLs in the third quarter rose to 2.78% valued at 360.5 billion baht, up from 2.38% worth 311.6 billion from April to June, central bank data showed.

A further slowdown in China’s economy and domestic political instability could trigger undesirable effects associated with financial imbalances here, said Mr Somkrit.

In comparison, Thailand’s real estate boom before the 1997 financial crisis was the main financial imbalance during that period, while factors triggering a domino effect related to the financial meltdown were comprised of debt over-leverage in the domestic banking sector and the baht’s rapid devaluation, he said.

Cybersecurity in the banking sector also remains an “emerging risk” as risks associated with malware are being generated every day, said Mr Somkrit.

But Thailand’s banking sector outlook remains stable because of greater risk management and high capital buffers set aside to cushion against bad loans, he said.

Huge US dollar-denominated debt shouldered by Thailand is a possible variable causing financial imbalances in the country’s stability, said Tsuyoshi Oyama, Deloitte’s Tokyo-based partner for risk management strategy. The US Federal Reserve’s rate hike causing financial volatility, China’s significant economic slowdown, and domestic political unrest could trigger further financial imbalances in Thailand, he said.

Factors used for a stress test in the financial system include bubbles occurring in property or stock markets, a country’s current account deficit or fiscal deficit, and NPLs in the banking sector, said Mr Oyama.

Japanese financial institutions usually conduct stress tests twice a year, but the routine is now insufficient as newer risks emerge on a daily basis, he said, such as a cyberattack or a terrorist attack.