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THAILAND FINANCE & BANKING 2008

SITUATION

The Financial situation in Thailand is somewhat in the dark at the moment of writing. June 2008 to date there has been speculation on the Thai Baht and with the Government spending on mega projects using Bonds there does not seem to be an alarms ringing. Some Banks have overloaded on their sub primes as this has not been exemplified out yet so Banks are not really saying what their present situation is like. In the meantime construction costs keep rising and there appears to be no slowness in spending or borrowing from Banks

Pulling a financial smokescreen over FIDF investment in bank thai
source: The Nation/By MR Pridiyathorn Devakula June 16, 2008

During the past ten days, I noticed some peculiar articles on the capital increase by Bank Thai in January, in which the Financial Institution Development Fund (FIDF) also put in additional investment, according to its right as a shareholder.

The articles tried to indicate that by carrying out this capital injection, FIDF would incur a loss as high as Bt2,215 million and suggested setting up a team to investigate the conduct of the Bank of Thailand in this matter. I am bewildered by the context of these articles since I do not think that this transaction could easily lead to such a high loss within so short a period of time.

It also appears that during the same period there is news of another appointment of the recruitment committee, under the newly-amended Bank of Thailand Act, whose responsibility is to recruit the chairman and members of the board,as well as the governor of the Bank of Thailand. This has been criticised by some columnists in regard to the doubtful qualification of some members of the committee.
I sense that these two pieces of news, released more or less at the same time - even though the former came outfive months ago - might have a certain common agenda. I therefore sniffed around and luckily ran into one source of information that happened to hear a conversation among a group of a few elderly men. The gist of the conversation went something like this: this governor is quite tough-minded and will not easily follow orders. If we remove her and put … as a replacement, many issues would easily be implemented.

Hearing this, it is crystal clear why news of Bank Thailand's capital increase was released at the time that the recruitment committee under the amended BOT Act was appointed. It seems to me that the committee was appointed not only to select the chairman and members of the board of the BOT, as required immediately by the Act, but also to select the new governor which is not required now.

I do not see what this governor may have done that might have caused the finance minister any dissatisfaction. The implementation of monetary policy and fiscal policy seem to be in conformity. There was only one issue where the governor did not go along with the finance minister's wishes and that was the appointment to the bank's board of an adviser to the finance minister.

The governor obstructed this because the person in question was subject to legal action as well as being under investigation over cases involving alleged financial misconduct.

However, to get rid of the current governor is not so simple under the newly amended BOT Act. Clause 28/19 (4) and (5) empower the Cabinet to vote out the governor if he or she was guilty of gross misconduct or fraud or at the recommendation of the BOT's board if the governor was deemed incompetent or was guilty of gross misconduct. This means that before putting a proposal to the Cabinet to vote out the governor, there must be convincing evidence that the governor had committed gross misconduct. This is why the story of a possible huge loss due to the capital injection for Bank Thai by the FIDF was fabricated. In looking into this allegation, I have studied the facts and figures that Bank Thai reported to the Stock Exchange of Thailand (SET) and found that the capital increase was intended for existing shareholders only and not for outsiders at the price of Bt1.36 for shares allocated proportionately to all shareholders, and at Bt1.38 for additional shares left unsubscribed by some shareholders.

The shareholders' meeting resolution to this effect was on November 29, 2007, the day the stock's book value was Bt2.17 per share. It can be seen that the price offered to existing shareholders was not higher than the book value and thus not intended to cause a loss to shareholders. After that, it took more than a month to seek approval from the SET and Securities Exchange Commission and the actual capital injection was done in January 2008. The FIDF invested Bt2,841 million at the above mentioned price in January 2008 when the book value as shown in the financial statements was still Bt2.17 per share. This is the evidence that on the date of the cash injection for the capital increase, the price of shares purchased was lower than the book value. There is no evidence of misconduct to cause a loss in this transaction. The book value thus was finally reduced to Bt0.30 per share and was made known to shareholders only after February 29, 2008 - after the auditors completed their work and proposed additional loss provisioning on the investment in sub-prime debt instruments, as the situation in the market for sub-prime debt instruments had changed rapidly.

The question that follows is whether this reduction of the book value to Bt0.30 per share would cause a loss to FIDF as high as Bt2,215 million as predicted by the unknown informant. The answer depends on the actual price of Bank Thai shares traded on the SET. At the time that this article was written, Bank Thai's share price posted by the SET was Bt1.26 per share. If the FIDF sold all its newly-acquired Bank Thai shares, the total loss would be around Bt200 million, and not Bt2,215 million as predicted.

However, the reason for this capital increase was for Bank Thai to have an adequate capital base to continue its operations with the intention of eventually selling all the shares held by FIDF to competent private financial institutions. In doing so, Bank Thai would become totally privately owned, which could help improve its financial position as well as prevent any political interference.

It appears that a number of private financial institutions have shown interest and due diligence has been performed by outside financial advisers. Amidst all these developments, the market price of the stock is still Bt1.26 per share,indicating that these private financial institutions and the market did not perceive that the financial position of Bank Thai was too weak as implied by a lower book value. It is also possible that the final price of the share sold by the FIDF may be higher than the price it paid in January and may make a profit instead of a loss as was prematurely forecast. Lastly, according to my experience as ex-chairman of the FIDF, I would like to explain to the reader that any decision on such an important matter is not normally made solely by the governor in her capacity as FIDF chair. It is normally a collective decision by the FIDF board, which includes two or three senior officials from the Finance Ministry, representatives from the Office of the Council of State and Attorney-General's Office. I believe that with all these personalities present, any decision should be made with prudence. If the Finance Ministry would go to the extent of setting up a committee to investigate the conduct of the FIDF board on this issue, please bear in mind that the Administrative Court is always dependable to provide justice to the accused. And if, in the end, the FIDF does sell the newly-acquired shares at a profit, where would you hide your face?

MR Pridiyathorn Devakula is a former Bank of Thailand Gov (May 2001). The many points he raises are both slightly alarming and very valid.

BoT rules out urgent meeting
source: Bkk Post June 17 2008

July 16 is next rate date despite inflation The Bank of Thailand says there is no need to call for an emergency meeting to review monetary policy, even with inflation at a 10-year high. Tarisa Watanagase, the central bank governor, yesterday brushed aside the need for the Monetary Policy Committee to hold a supplementary meeting ahead of its current schedule. The MPC's next meeting is scheduled for July 16. Analysts expect the committee to push for an interest rate hike due to growing inflationary pressure. The consumer price index rose to a 10-year high of 7.6% year-on-year in May, driven primarily by higher fuel and food prices. ''If the MPC meeting is held out of schedule without a necessary cause, it will lead to market panic. And there will be suspicion that there is some unanticipated information [forcing action],'' said Dr Tarisa, who chairs the MPC. ''We will stick to the rules of the game that the MPC meets every six weeks. Market participants have already anticipated what the MPC's move will be at the next meeting.''

Local banks, including Bangkok Bank and Siam Commercial Bank, have raised loan and fixed-deposit rates earlier this month in anticipation of rising BoT rates. At its last meeting on May 21, the MPC kept the one-day repurchase rate unchanged at 3.25% but clearly adopted a more hawkish bias in light of rising inflation. Policy rates have been maintained at 3.25% since mid-2007. Dr Tarisa, who is facing growing criticism that the central bank has been slow to respond to rising prices and their impact, said inflation could break double digits at some point this year, depending on global oil prices. But average inflation for the whole year was expected to remain under 10%, she said. The consumer price index for the first five months of the year rose 5.8% from the same period last year. ''If oil prices continue to increase, it is possible that inflation could reach double digits at some point. But that depends on the base as well. There is some chance, but I think an insignificant one,'' Dr Tarisa said. She said that a mix of monetary, fiscal and foreign exchange policies was needed to address inflation. Fiscal policy, she said, should focus on improving the country's infrastructure to reduce the country's dependence on imported oil, while monetary policy targeted price stability.

Policy interest rates were already the lowest in the region, according to Dr Tarisa, and were actually in negative territory if inflation was included. Public debt, meanwhile, at around 38% of gross domestic product, was relatively low and offered room for increased public investment. Dr Tarisa said fears that rising interest rates would undermine economic growth were exaggerated. ''If the MPC has to raise interest rates, there will not be much impact on spending and economic growth. We are fortunate that there is room in both monetary and fiscal policies. We have no problem with either the level of public debt or monetary sustainability,'' she said. Dr Tarisa noted that logistics and transport expenses consumed around 24% of gross domestic product compared with 10% for other countries, showing the large potential savings for the private sector if transport infrastructure was improved. Interest rates, meanwhile, represented only a small component of overall costs for companies, she said.

Baht set to weaken as US talks up the dollar
By Thiti Tantikulanan/The Nation June 17, 2008

In my article last month, I said the baht would likely weaken to 33 to the US dollar within a month. I mentioned the stabilising US economy and improving overall dollar sentiment as the reasons.
Since then, I have become even more bearish about the baht. I expect it to weaken in both the short and medium terms.

Last week, three top US policy-makers - US Treasury secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke and President George Bush - commented on the dollar with one essential objective: to give it a boost. Paulson said he would not rule out the use of intervention to support the weak dollar. Bernanke said he did not want a weaker dollar, because of the consequently higher commodity prices, particularly that for oil. For good measure, he added that the Fed would not hesitate to hike interest rates to fight higher inflation. Finally, in an interview for a European newspaper, Bush said succinctly: "We want the dollar to strengthen".

Why the sudden and unanimous verbal intervention? The reason is the price of oil, which moves in inverse relationship with the dollar. For instance, as the dollar got substantially weaker in last year's fourth quarter, the price of oil exploded.

In the US economy, domestic consumption contributes 60 per cent of growth in the gross domestic product. US retail sales figures show the economy is currently enjoying the benefit of tax rebates; consumers are spending their tax-rebate cheques, thus helping stabilise the US economy. Policy-makers are now concerned that once the tax rebates are spent, if oil prices are still high, consumers will have less disposable income, and the US economic recovery will derail.

This situation may seem to give sufficient grounds to predict a stronger dollar and a weaker baht. But it is not a sure bet, because the foreign-exchange market is too big for any one country to dictate what happens, so the US policy-makers may fail in their attempts to "talk up" the dollar.

So why am I more bearish about the baht? There is now a more threatening factor that should cause regional currencies to weaken: inflation. Recent economic data coming out of regional economies are showing Consumer Price Index numbers higher than most expected: Indonesia, 10.3 per cent; the Philippines, 9.6 per cent; India, 6.02 per cent; South Korea, 4.8 per cent; Singapore, 7.5 per cent; and Vietnam, 25.2 per cent. The sell-off of currencies due to inflation concerns is a relatively new theme but one you can expect to hear quite often as the main influence in the direction of the baht in the short and medium terms. In fact, I would not be surprised to see inflation and commodity prices become the No-1 priority of international policy-makers ahead of any financial crisis.

While the above factors may be screaming out about a weaker baht, the manner of the currency's weakening may be quite orderly. Last week, The Bank of Thailand (BOT) confirmed it had been intervening in the market to keep the baht from weakening too rapidly. The Thai central bank is not alone. The Bank of Korea, the Monetary Authority of Singapore, the Bank of Indonesia - to name only a few - have also been in the market to keep their currencies from weakening too quickly. We expect the BOT to do more of the same, especially since it bought so much US currency at the beginning of the year. Net foreign reserves are up US$20 billion (Bt667 billion) so far this year, so the central bank's ammunition for intervention remains plentiful. Therefore, I expect the baht to weaken slowly, initially to 34.20 against the dollar, with the central bank intervening along the way.

Thiti Tantikulanan is head of capital markets at Kasikornbank in Thailand.