Bank Tiff Brews In Thailand

[bmw]

If you're wondering about the health of Thailand's economy, rising tensions between the prime minister and the central bank governor may offer some ominous clues. Prime Minister Thaksin Shinawatra ordered the Finance Ministry to study "reform" of the Bank of Thailand's supervisory role, according to the Post Today newspaper. The idea is to reduce the central bank governor's authority, splitting his role as regulator from that of deciding monetary policy.

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All this may sound pretty innocuous. It's not like Thaksin is looking for a bigger say in interest rate decisions. Well, not yet at least. Investors could be excused for wondering if this is the first step toward Thaksin wresting some control over monetary policy away from independent central bankers.

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Thaksin is used to getting his way, as any strong-willed former CEO might. His history - self-made, larger-than-life billionaire - made him Asia's answer to Silvio Berlusconi, a tycoon who leveraged his business success to become prime minister of Italy. Thaksin, like Berlusconi, also has been accused of using public office to advance his private business interests.

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Yet as both men amply demonstrate, one's prowess in the corporate boardroom can count for little when running a country or an economy. Thaksin's efforts to rein in the central bank may prove to be an example of that phenomenon - one that could have dismal implications for the nation's bond market over time.

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The very underpinnings of Thailand's economic boom in recent years may be unraveling and debt has much to do with it. The saga over at the state-owned Krung Thai Bank is a case in point. It's also at the heart of Thaksin's rift with the governor of the Bank of Thailand, Pridiyathorn Devakula.

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Earlier this month, the central bank revoked the reappointment of Krung Thai's president, Viroj Nualkhair, after the lender announced that it had added 46 billion baht, or $1.1 billion, of bad loans in the second quarter. It alleged that Viroj, who was selected by Thaksin's finance minister in 2001 to run the bank, was "lax" in supervising lending. Viroj denied the allegation and asked the government to investigate.

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"The Pridiyathorn-Viroj conflict has dragged on for weeks, undermining confidence in Thailand's financial sector management," Thitinan Pongsudhirak, an economist at the London School of Economics, wrote in a report for IDEAglobal.

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One reason, Thitinan notes, is that "it now appears that Pridiyathorn's days are numbered irrespective of how the tussle between him and Viroj turns out." Yet at the same time, Thitinan says, Thaksin must consider how risky it would be to fire a respected central bank governor at a time of growing uncertainty about the economy.

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The government last month cut its 2004 growth forecast to 6 percent from 8 percent at the start of the year. Thailand's SET index is down 14 percent the year, and the currency, the baht, is down more than 4 percent. Along with the growth outlook, investors are looking at a resurgence of bird flu and violence related to Muslim separatists in Southern Thailand.

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Krung Thai has been a key player in Thaksin's strategy to domestic growth. The strategy, know as "Thaksinomics," was always more hype than substance - old-fashioned pump priming dressed as something new and revolutionary. And banks like Krung Thai were there to help things along, pumping credit into the economy to stimulate consumption and investment.

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"The state banks are being used by the government as a source of off-budget financing and are being told to lend to politically important sectors," The Economist Intelligence Unit said in an Oct. 19 report. "The private banks have been forced to match state bank lending. There is a real risk that in the event of a sharp rise in interest rates, non-performing loans in the financial sector would soar and the government might be forced to bail out the state banking sector."

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All this raises a question: Wouldn't the lack of an independent central bank regulating banks only increase these risks?

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It may be just an unfortunate coincidence that all this is occurring at a time when the Thai central bank is tapping the brakes more aggressively than its peers in Asia. Last week it raised its benchmark interest rate by a quarter point for the second time in two months to 1.75 percent.

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While low short-term rates are a key element of Thaksinomics, the central bank had little choice. Consumer prices last month rose 3.6 percent from a year earlier, the fastest pace in almost six years. If policy makers don't tighten credit conditions, bond traders will do it for them with higher yields. Yet the government can't be happy, especially ahead of national elections in February.

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A central banker in your pocket has always been a good thing to have in Asia. Prior to the Asian financial crisis, close ties between monetary powers and governments were the norm. The arrangement kept money too cheap, financial risks unmanaged and fueled the speculative bubbles that burst so spectacularly in 1997.

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There's been a very visible effort since then to create firewalls between monetary policy and politics. One can only hope Thaksin isn't looking to turn back the clock on central bank independence. If he does, investors should be quick and fierce in their punishment.

http://www.iht.com/articles/2004/10/24/blo...rg/sxpesek.html

[midas]

This is all very interesting.... and the debt you refer to couldnt be piling up at a worse time ..look at the USA and the property bubbles in the USA, UK and Australia.......??

Sometimes I think there a perfect economic storm gathering.........

[Dickie]

This is all very interesting.... and the debt you refer to couldnt be piling up at a worse time ..look at the USA and the property bubbles in the USA, UK and Australia.......??

Sometimes I think there a perfect economic storm gathering.........

<{POST_SNAPBACK}>

House prices in UK have faltered and in London have started to come down. There is usually a timelag of six months between the counties and London, so expect a similar downward move in the rest of the country unless prices in London stabilise.

[dr_Pat_Pong]

This is all very interesting.... and the debt you refer to couldnt be piling up at a worse time ..look at the USA and the property bubbles in the USA, UK and Australia.......??

Sometimes I think there a perfect economic storm gathering.........

<{POST_SNAPBACK}>

House prices in UK have faltered and in London have started to come down. There is usually a timelag of six months between the counties and London, so expect a similar downward move in the rest of the country unless prices in London stabilise.

<{POST_SNAPBACK}>

Aren't UK property prices at artificially high levels anyway Dickie ?

[Dickie]

This is all very interesting.... and the debt you refer to couldnt be piling up at a worse time ..look at the USA and the property bubbles in the USA, UK and Australia.......??

Sometimes I think there a perfect economic storm gathering.........

<{POST_SNAPBACK}>

House prices in UK have faltered and in London have started to come down. There is usually a timelag of six months between the counties and London, so expect a similar downward move in the rest of the country unless prices in London stabilise.

<{POST_SNAPBACK}>

Aren't UK property prices at artificially high levels anyway Dickie ?

<{POST_SNAPBACK}>

They are certainly at the highest multiple of average earnings ever seen in the UK; something like 6x or 7x. Everyone has been agreeing for a while that it can't last but, for some reason, it has. Varous theories abound, most making some sense, which is a first.

[axl]

A story for reflection...

[somtaamgaiyang]

Having seen the way friends and acquaitances have been able to get hold of financing for houses and cars, we are heading for another bubble.

The article points out that the government doesn't want to put up interest rates before the election, however, the rates have crept up twice in a month. If they don't go up , the baht is heading to 50, if he does, the level of households defaulting on new mortgages and car repayments will be massive.

In the space of one month, fifteen people in my office financed new pick-ups with 5% downpayment financed over 5 years. I asked one woman in the office what her repayment was. She stated 4,500 baht. I know for a fact that her and her husbands combined salary is 22,000. How on earth can a bank see this as good business.

The thai economy is on a knife edge at the moment, unfortunately, either side of the blade is disaster, and it is more likely that the country will probably stab itself to death in the middle of next year. Hold on to your forex!!!