RETAIL BANKING | Staff Reporter, Thailand

3 reasons why Thailand's high household debt is not a threat for banks

New regulations aimed at reining in credit card debt is one.

BMI Research analysts do not expect the heavily indebted nature of Thai households to pose a significant risk to financial stability or economic growth over the coming years. The surge in household credit does not appear to reflect major economic distortions, new regulations will likely limit any further increase in unsecured lending among the most vulnerable borrowers, and microeconomic reforms spearheaded by the government should ensure continued profit opportunities for the banking sector.

"While rising oil prices pose a risk to disposable incomes and debt repayment abilities, any surge in oil prices would likely be met with some form of government-led financial assistance given that elections are likely to be held over the next 12-18 months," said BMI Research.

Thailand's household debt remains high from both a historical perspective and relative its peers, begging the question of whether there is a day of reckoning ahead for the banking system and the economy. BMI Research does not believe that the continued high level of household debt poses a risk to the economy or the stability of the banking system for three main reasons:

No Major Economic Distortions: Firstly, while total household debt continues to grow in absolute terms, it has fallen as a share of GDP to 77% in Q217 from a peak of 81.2% at the end of 2015 and overall growth in household debt is growing at its slowest pace since the Global Financial Crisis. The slowdown in credit growth in recent years has actually coincided with a pick-up in real GDP growth.

Household deleveraging on its own tends not to pose major risks to real GDP growth unless it reflects an unwinding of major distortions within the economy such as speculative house price bubbles or overcapacity in a particular area, and our view is that this is not the case. We have not seen a bubble in house prices, while the autos sector is unlikely to suffer from any reduction in domestic demand given the large external market.

New Regulations To Rein In Credit Card Debt: Secondly, newly-implemented regulations by the Bank of Thailand (BoT) should prevent a further build-up of debt among the most vulnerable borrowers that began in 2011 following former Prime Minister Yingluck Shinawatra's policies aimed at providing tax breaks for vehicle and home purchases.

On September 1, the BoT tightened consumer loan regulations in a bid to slow the growth of unsecured lending, particularly to low-income borrowers, by increasing income requirements for obtaining a new loan or credit card.

Microeconomic Reforms To Support Profitability: Thirdly, we maintain our view that policy continuity afforded by the current government, and its pursuit of microeconomic reforms should help support productivity growth over the coming years. This should allow real wage gains to support consumers' ability to repay debts while providing banks with other profitable lending opportunities in  the business sector.

In the World Bank's 2018 Doing Business Report,Thailand's position rose to 26 globally from 46 in the 2017 report reflecting the impact of the impressive eight new reforms over  he course of the past year in areas such as starting a business by streamlining processes. The junta's strong grip on power appears to have supported such reforms in line with the progress  made in dealing with corruption since coming to power.

The main risk comes from the ongoing surge in oil prices, which could seriously eat into disposable incomes. Oil prices have risen considerably over the past year and Thailand is among the most energy dependent countries in Asia and low-income households are particularly at risk given the larger share of disposable income spent on energy.

With the government announcing last month that elections are scheduled to be held in November 2018, though we would expect low income households to receive government assistance in the event that energy prices spike, thus negating the short-term negative impact on the banking sector.

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