Thailand's banks should brace themselves for a bad hangover. The economy is slowing faster than expected, increasing the political pressure on the central bank. If it cuts interest rates on May 29, local depositors will feel more foolish keeping their money in the bank, while borrowing will be stimulated. Frothy Bangkok property will become pricier, and banks' reliance on foreign funding will grow.
Thailand's GDP was down a worse-than-expected 2.2 per cent in the first quarter compared to the previous three months. Finance Minister Kittirat Na Ranong blamed the strong currency - the baht has surged a sixth against the US dollar in the past four years - and said the central bank should cut rates. But rate cuts will be futile and misguided in a country with an unemployment rate of just 0.6 per cent. Lopping 25 basis points off the Bank of Thailand's 2.75 per cent policy rate will buy the economy little additional protection from the $150 billion in new money that the US Federal Reserve and the Bank of Japan are printing every month.
Meanwhile, lower rates mean increased risks for the country's banks. Last quarter, loans reached 102 per cent of GDP - their highest level in 13 years. This was partly funded by borrowing $2 billion overseas.
For now, investors are happy that Thai lenders, which Nomura expects to report the strongest earnings growth in two decades over the next three years, are making the most of the credit binge. Shares in Bangkok Bank, the nation's largest lender, have risen 26 per cent since November. Shares of smaller rivals Krung Thai Bank and Kasikornbank are up 39 per cent and 23 per cent, respectively.
But slower growth is bound to lead to an increase in bad loans. And in the absence of deposit growth, lenders will increasingly depend on foreign investors to finance consumer credit growth - putting them at risk of a sudden hot money outflows.
It's time the government of Prime Minister Yingluck Shinawatra, which for the last two years has stuffed money into people's pockets by purchasing rice from farmers at inflated prices and offering generous subsidies to first-time car buyers, got serious about financial stability. To start with, that means easing up on the central bank.
