Continuing political turmoil in Thailand is slowing economic activity and could challenge the Thai 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- and the principal-opposition party.
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 which ousted then-Prime Minister Thaksin Shinawatra, 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 its GDP growth which Fitch estimates has averaged 3.0% between 2009 and 2013 – slightly higher than the ‘BBB’ peer rating group median of 2.7%. In the meantime, there was no significant deterioration in the intrinsic creditworthiness of major banks.
Nonetheless, prolonged weakening of activity since the onset of anti-government protests in November 2013 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% of GDP in 3Q13, up from 60% 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% of risk-weighted assets, up from 11.3% in 2009. But as profit growth slows and credit costs rise, the recent build-up of loss-absorption buffers could come under greater stress.
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 2 February elections. Meanwhile, the Bank of Thailand has signaled 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. As such, they could limit the economic fallout, but are unlikely to avert growing credit risk in the banking sector.