Fiddling While Thailand Bubbles

[webfact]

OVERDRIVE

Fiddling while Thailand bubbles

Thanong Khanthong

BANGKOK: -- There had not been the slightest hint that the Bank of Thailand would cut its short-term rate at yesterday's meeting of its monetary policymaking body. Also, there were hardly sufficient grounds for it to opt for the surprise rate cut, given the inflationary pressure (3.38 per cent in September), highest credit growth in Asia-Pacific and high projected economic growth rate (5.7 per cent in 2012).

Last Saturday, Dr Prasarn Trairatvorakul, the Bank of Thailand governor, signalled that current monetary policy was appropriate and that an interest rate cut was not on the table. There had also been confusing reports over the Bank of Thailand's assessment of the property market. The governor's speech in the South hinted at a possibility of bubbles in the property market. Soon after, Krirk Vanikul, a deputy governor, came out to say that there were no signs of property market bubbles.

Let's examine some of the key indicators:

1 In spite of the global downturn, Asia's growth for 2012 has been revised downward by the International Monetary Fund from 7.1 per cent to 6.7 per cent.

2 The Thai economic growth rate has been projected at 5.7 per cent for 2012.

3 Inflation in September stood at 3.38 per cent - higher than the central bank's repurchase rate of 3.0 per cent before the interest rate cut yesterday.

4 According to the Asian Banker (September 30, 2011) Thailand's banking sector saw Asia-Pacific's highest increase in loan-to-deposit ratio - 16.8 per cent to 114.8 per cent. A loan-to-deposit ratio of more than 100 per cent means that the Thai banks have to rely on local and international funding beyond their normal deposits to extend loans.

5 China's growth rate slowed to 7.4 per cent in the third quarter, though over the whole year the world's second-largest economy should achieve a soft landing of 7.5 per cent.

6 The global growth rate is 3.3 per cent this year.

From the central bank's perspective, the 25 basis-point cut was made as a pre-emptive measure against the global downturn, aggravated by the euro-zone crisis and the US's "fiscal cliff", or political gridlock in Washington DC. It believed that an early rate cut would also serve as an insurance to protect economic growth and employment.

However, by the cutting the rate, the central bank is also taking part in competitive devaluation. The pressure for baht appreciation has been reduced for the time being - though not for too long.

The US Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England have all adopted an ultra-loose monetary and money printing policy. This sets the stage for asset bubbles and hyperinflation to appear down the road.

Brazil and China, in particular, have claimed that the quantitative easing undertaken by the US will create bubbles in their home markets and undermine their exports. "Easy money" will also flood the Thai market. Lower rates might stem baht appreciation in the short term but as long as the Fed is determined to maintain a zero interest rate policy until at least 2015, foreign capital will continue to flow into Thailand en masse to create asset bubbles.

The central bank's economic indicators and its policy action are not in tandem. If it believes that the worst is yet to come, it should start to think about defensive measures now - from capital control measures, gold accumulation, a cap on credit growth and tighter bank supervision to asset diversification.

-- The Nation 2012-10-19

[Thai at Heart]

According to the Asian Banker (September 30, 2011) Thailand's banking sector saw Asia-Pacific's highest increase in loan-to-deposit ratio - 16.8 per cent to 114.8 per cent

Now that is a scary statistic

[Payboy]

There had not been the slightest hint that the Bank of Thailand would cut its short-term rate at yesterday's meeting of its monetary policymaking body.

Some "lucky" investors on the SET had a windfall the past 2 days, I'm sure.

[Moruya]

According to the Asian Banker (September 30, 2011) Thailand's banking sector saw Asia-Pacific's highest increase in loan-to-deposit ratio - 16.8 per cent to 114.8 per cent

Now that is a scary statistic

There's plenty scary I in there. The banks are also owed large sums of money by the government for unsold rice.

Loans for houses and cars, unemployment on the rise, minimum wage to kick in in January

[MaxLee]

So here's the short version of explaining the situation:

Thailand is growing deeper and deeper into debt because of corruption that is going on in the government. Politicians abd their department agencies rip Thai society and the clueless International business entrepreneurs off and use their tax money to enjoy their well being at the taxpayer's expense.

So Thailand may soon be in a real Greece alike crisis, but corruption goes on and is gonna get worse...

[NeverSure]

According to the Asian Banker (September 30, 2011) Thailand's banking sector saw Asia-Pacific's highest increase in loan-to-deposit ratio - 16.8 per cent to 114.8 per cent

Now that is a scary statistic

It's worse than it looks. Loan to deposit ratio is a skewed number. Suppose the ratio was limited to only about 80% as in the US.

1. A new bank opens. John opens an account with $100. The bank can now lend Joe $80.

2. Joe borrows the $80 and it's deposited into his account. The bank now has $180 in deposits and can lend $144, or another $64 to Pete, all on John's original $100.

And on it goes.

Yet the bank has a L/D ratio of 80%

Sure, someone will withdraw, but more will deposit.

[noitom]

There had not been the slightest hint that the Bank of Thailand would cut its short-term rate at yesterday's meeting of its monetary policymaking body.

Some "lucky" investors on the SET had a windfall the past 2 days, I'm sure.

And you can bet that there was some high class information changing hands 3-4 days ago.

[noitom]

According to the Asian Banker (September 30, 2011) Thailand's banking sector saw Asia-Pacific's highest increase in loan-to-deposit ratio - 16.8 per cent to 114.8 per cent

Now that is a scary statistic

It's worse than it looks. Loan to deposit ratio is a skewed number. Suppose the ratio was limited to only about 80% as in the US.

1. A new bank opens. John opens an account with $100. The bank can now lend Joe $80.

2. Joe borrows the $80 and it's deposited into his account. The bank now has $180 in deposits and can lend $144, or another $64 to Pete, all on John's original $100.

And on it goes.

Yet the bank has a L/D ratio of 80%

Sure, someone will withdraw, but more will deposit.

The Ponzi Scheme at work.

[chiang mai]

Perhaps one of you conspiracy theorists would care to spell out a little more precisely how this anouncement made some people rich etc, be aware however that THB strengthened on the news, not weakened!

[asiawatcher]

The decision to cut rates is directly related to the irresponsible fiscal mismanagement and overspending by the Thai Govt who is trying to re-kickstart their damaged results of such things as the rice scam. Lowering rates entices borrowers to take risks and flow more money through the economy, increasing tax revenues but as already stated - it is a Ponzi. The Govt spending is way out of control, a billion for this a billion for that and losing hard fought market share. The BOT following suit, is all connected.

[Naam]

Perhaps one of you conspiracy theorists would care to spell out a little more precisely how this anouncement made some people rich etc, be aware however that THB strengthened on the news, not weakened!

you don't expect an answer CM, do you? any announcement or moves by Thai authorities are met by the professional Thai bashers with negative comments and claims out of thin air, mostly without stating a reason or combined with completely ridiculous claims.

[chiang mai]

The decision to cut rates is directly related to the irresponsible fiscal mismanagement and overspending by the Thai Govt who is trying to re-kickstart their damaged results of such things as the rice scam. Lowering rates entices borrowers to take risks and flow more money through the economy, increasing tax revenues but as already stated - it is a Ponzi. The Govt spending is way out of control, a billion for this a billion for that and losing hard fought market share. The BOT following suit, is all connected.

I rather think it was aimed at trying to weaken THB thus making exports more attractive - you mention overspending resulting from financial mismanagement, remind me, what's the current account deficit at present? And if you read the article carefully you'll see that the loan to deposit ratio of Thai banks is very high thus there is no need whatsoever to increase the amount of money flowing through the system.

Edited October 19, 2012 by chiang mai

[Thai at Heart]

The decision to cut rates is directly related to the irresponsible fiscal mismanagement and overspending by the Thai Govt who is trying to re-kickstart their damaged results of such things as the rice scam. Lowering rates entices borrowers to take risks and flow more money through the economy, increasing tax revenues but as already stated - it is a Ponzi. The Govt spending is way out of control, a billion for this a billion for that and losing hard fought market share. The BOT following suit, is all connected.

I rather think it was aimed at trying to weaken THB thus making exports more attractive - you mention overspending resulting from financial mismanagement, remind me, what's the current account deficit at present? And if you read the article carefully you'll see that the loan to deposit ratio of Thai banks is very high thus there is no need whatsoever to increase the amount of money flowing through the system.

Pretty sure you are correct about the baht. But the increase in the loan ratio is quite astonishing

[chiang mai]

The decision to cut rates is directly related to the irresponsible fiscal mismanagement and overspending by the Thai Govt who is trying to re-kickstart their damaged results of such things as the rice scam. Lowering rates entices borrowers to take risks and flow more money through the economy, increasing tax revenues but as already stated - it is a Ponzi. The Govt spending is way out of control, a billion for this a billion for that and losing hard fought market share. The BOT following suit, is all connected.

I rather think it was aimed at trying to weaken THB thus making exports more attractive - you mention overspending resulting from financial mismanagement, remind me, what's the current account deficit at present? And if you read the article carefully you'll see that the loan to deposit ratio of Thai banks is very high thus there is no need whatsoever to increase the amount of money flowing through the system.

Pretty sure you are correct about the baht. But the increase in the loan ratio is quite astonishing

FYI, here some details of the Thai current account balance over the past few years, compares quite favorably to the US and other miscreant countries I reckon!

http://www.indexmundi.com/g/g.aspx?c=th&v=145

[Konini]

I imagine many others like me are reading this thread with some knowledge of economics and global trade and forex and finances and politics - some knowledge, but enough to be fully informed.

So, I put my hand up to be the one to ask what others like me are probably wondering. What does this mean for us - us as in expats, working but mostly retired with income from overseas? Short and long term.

Layman's language please

Edited October 19, 2012 by Konini

[hellodolly]

The decision to cut rates is directly related to the irresponsible fiscal mismanagement and overspending by the Thai Govt who is trying to re-kickstart their damaged results of such things as the rice scam. Lowering rates entices borrowers to take risks and flow more money through the economy, increasing tax revenues but as already stated - it is a Ponzi. The Govt spending is way out of control, a billion for this a billion for that and losing hard fought market share. The BOT following suit, is all connected.

I rather think it was aimed at trying to weaken THB thus making exports more attractive - you mention overspending resulting from financial mismanagement, remind me, what's the current account deficit at present? And if you read the article carefully you'll see that the loan to deposit ratio of Thai banks is very high thus there is no need whatsoever to increase the amount of money flowing through the system.

Pretty sure you are correct about the baht. But the increase in the loan ratio is quite astonishing

FYI, here some details of the Thai current account balance over the past few years, compares quite favorably to the US and other miscreant countries I reckon!

http://www.indexmund...aspx?c=th&v=145

FYI Those figures were accurate as of January 1 2011. All most two years old.

[davejones]

According to the Asian Banker (September 30, 2011) Thailand's banking sector saw Asia-Pacific's highest increase in loan-to-deposit ratio - 16.8 per cent to 114.8 per cent

Now that is a scary statistic

It's worse than it looks. Loan to deposit ratio is a skewed number. Suppose the ratio was limited to only about 80% as in the US.

1. A new bank opens. John opens an account with $100. The bank can now lend Joe $80.

2. Joe borrows the $80 and it's deposited into his account. The bank now has $180 in deposits and can lend $144, or another $64 to Pete, all on John's original $100.

And on it goes.

Yet the bank has a L/D ratio of 80%

Sure, someone will withdraw, but more will deposit.

There is nothing at all wrong with that. It's how banking works. Many people are in debt because their borrow to buy homes. But that is generally a good thing not a bad thing. In your scenario above the bank makes good money on the interest that it gets from the load money. If the bank didn't lend the money that people deposit, then no-one would be able to get a mortgage. This is the whole point of banking - take deposits and then lend that money to other customers. There wouldn't be any point in opening a bank if you didn't lend the money to people.

[davejones]

I imagine many others like me are reading this thread with some knowledge of economics and global trade and forex and finances and politics - some knowledge, but enough to be fully informed.

So, I put my hand up to be the one to ask what others like me are probably wondering. What does this mean for us - us as in expats, working but mostly retired with income from overseas? Short and long term.

Layman's language please

It doesn't mean anything to you. Life carries on as normal, exchange rate will fluctuate like it always has. Don't listen to scare stories or doomsday scenarios. Just get on with your life. You don't have any control over inflation, exchange rates, etc, so don't worry about it. Just live.

[blazes]

I imagine many others like me are reading this thread with some knowledge of economics and global trade and forex and finances and politics - some knowledge, but enough to be fully informed.

So, I put my hand up to be the one to ask what others like me are probably wondering. What does this mean for us - us as in expats, working but mostly retired with income from overseas? Short and long term.

Layman's language please

It doesn't mean anything to you. Life carries on as normal, exchange rate will fluctuate like it always has. Don't listen to scare stories or doomsday scenarios. Just get on with your life. You don't have any control over inflation, exchange rates, etc, so don't worry about it. Just live.

Yes, there's not an awful lot we schmucks can do about these things. However, there is the problem of competitive devaluation, going on all over the world at the moment. If by some random chance the THB were to strengthen considerably against your "home" currency, and you were dependent on a fixed income, then "just living" might not be as simple as all that.

You might consider a move to a (temporarily) cheaper country......until there, too, the exchange rate became unfavourable...eventually we all die, and if we are in luck perhaps we will be running just slightly ahead of the game when the whistle for full-time blows.

[farang000999]

I dont see the logic in a rate cut because China is only growing at 7% or because Europe may collapse or the US may go over the fiscal cliff. If the last two were to happen, there will be a global recession. How is creating asset bubbles and encouraging more borrowing and debt accumulation ahead of a potential recession a good idea? If these things concern Thailand, belt tightening is the proper reaction

[farang000999]

Brazil and China, in particular, have claimed that the quantitative easing undertaken by the US will create bubbles in their home markets and undermine their exports. "Easy money" will also flood the Thai market. Lower rates might stem baht appreciation in the short term but as long as the Fed is determined to maintain a zero interest rate policy until at least 2015, foreign capital will continue to flow into Thailand en masse to create asset bubbles.

Maybe they should try allowing their currencies to appreciate instead of printing more money and buying more dollars to keep the export advantage.

[chiang mai]

FYI Those figures were accurate as of January 1 2011. All most two years old.

Perhaps you can find some newer and more up to date ones!

[chiang mai]

I imagine many others like me are reading this thread with some knowledge of economics and global trade and forex and finances and politics - some knowledge, but enough to be fully informed.

So, I put my hand up to be the one to ask what others like me are probably wondering. What does this mean for us - us as in expats, working but mostly retired with income from overseas? Short and long term.

Layman's language please

It doesn't mean anything to you. Life carries on as normal, exchange rate will fluctuate like it always has. Don't listen to scare stories or doomsday scenarios. Just get on with your life. You don't have any control over inflation, exchange rates, etc, so don't worry about it. Just live.

If by some random chance the THB were to strengthen considerably against your "home" currency, and you were dependent on a fixed income, then "just living" might not be as simple as all that.

It would be a much greater chance than random, if the BOT was to do nothing the baht would strengthen of its own accord hence much effort is put into weakening the baht and keeping it at a level where exports remain competitve.

[chiang mai]

I imagine many others like me are reading this thread with some knowledge of economics and global trade and forex and finances and politics - some knowledge, but enough to be fully informed.

So, I put my hand up to be the one to ask what others like me are probably wondering. What does this mean for us - us as in expats, working but mostly retired with income from overseas? Short and long term.

Layman's language please

I think what it means is that until something changes, credit will remain easy and the risk is that the Thai banks will over extend themselves, (that in itself was the root cause of the 1997 Asian crisis along with the bad debt that went with the high levels of lending). It also means that exchange rates are going to stay broadly where they are, for the time being and until something changes, the risk I think is that THB will continue to strengthen and that there will be very little the BOT can do about it, apart from introduce foriegn currency controls or switch their reserves into Gold, perhaps.

Longer term the risk has got to be on currency values, GBP in particular I think has to fall against THB, USD movement depends on how the lections work out and on the reaction to the "financial cliff". Perhaps the most important aspect of what this means to us is that the BOT and the MPC seem not to care about inflation, that reduction in rates is a green light for people to increase their prices I'm afraid so inflation will increase.

Finally, an up to date current account picture!

http://www.bot.or.th/Thai/Statistics/Graph/Pages/CurrentAccount.aspx

Edited October 19, 2012 by chiang mai

[chiang mai]

Brazil and China, in particular, have claimed that the quantitative easing undertaken by the US will create bubbles in their home markets and undermine their exports. "Easy money" will also flood the Thai market. Lower rates might stem baht appreciation in the short term but as long as the Fed is determined to maintain a zero interest rate policy until at least 2015, foreign capital will continue to flow into Thailand en masse to create asset bubbles.

Maybe they should try allowing their currencies to appreciate instead of printing more money and buying more dollars to keep the export advantage.

Then nobody buys their exorts because they're too expensive.

[NeverSure]

According to the Asian Banker (September 30, 2011) Thailand's banking sector saw Asia-Pacific's highest increase in loan-to-deposit ratio - 16.8 per cent to 114.8 per cent

Now that is a scary statistic

It's worse than it looks. Loan to deposit ratio is a skewed number. Suppose the ratio was limited to only about 80% as in the US.

1. A new bank opens. John opens an account with $100. The bank can now lend Joe $80.

2. Joe borrows the $80 and it's deposited into his account. The bank now has $180 in deposits and can lend $144, or another $64 to Pete, all on John's original $100.

And on it goes.

Yet the bank has a L/D ratio of 80%

Sure, someone will withdraw, but more will deposit.

There is nothing at all wrong with that. It's how banking works. Many people are in debt because their borrow to buy homes. But that is generally a good thing not a bad thing. In your scenario above the bank makes good money on the interest that it gets from the load money. If the bank didn't lend the money that people deposit, then no-one would be able to get a mortgage. This is the whole point of banking - take deposits and then lend that money to other customers. There wouldn't be any point in opening a bank if you didn't lend the money to people.

I think you missed the point. We put our money in a bank for safekeeping. We expect to get it back. If the bank winds up with twice as much money loaned out as it has on deposit, it has no cushion if too many people want their money at once. In the US during the Great Depression, many, many banks went broke because they couldn't allow people to withdraw their money. They didn't have it because they had loaned it out and people couldn't repay.

That happened again about 7 years ago. Some banks went broke, and the government bailed some out with ugly and huge federal deficit spending.

Banking is a Ponzi scheme designed to make money for the bankers.

[Dr Robert]

"Three members assessed that maintaining the policy rate at 3.0 percent per annum was appropriate on the basis that: (1) a policy rate reduction could not directly compensate for the adverse impact of weaker external demand on export. Meanwhile, domestic demand remained robust and sufficient to support economic growth; (2) monetary conditions remained accommodative and already supportive of economic activity with continued strong expansion in private credit. Given high growth rates in certain types of credit, close monitoring was warranted to guard against potential imbalances and a policy rate reduction may exacerbate such risks; and (3) the global economy remained susceptible to tail risks and it was important to preserve the room for monetary policy to act quickly should global economic conditions deteriorate rapidly." Edited Minutes of the Monetary Policy Committee Meeting Bank of Thailand

5 September 2012

Publication Date: 19 September 2012

This was a 3/2 decision by the board

So not all doom and gloom then ...sensible, conservative economics with hands on the levers and an eye to the future. Quite a bit more believable than the article above which distorts statistics and lends itself more to a political rather than economic comment.

[asiawatcher]

The decision to cut rates is directly related to the irresponsible fiscal mismanagement and overspending by the Thai Govt who is trying to re-kickstart their damaged results of such things as the rice scam. Lowering rates entices borrowers to take risks and flow more money through the economy, increasing tax revenues but as already stated - it is a Ponzi. The Govt spending is way out of control, a billion for this a billion for that and losing hard fought market share. The BOT following suit, is all connected.

I rather think it was aimed at trying to weaken THB thus making exports more attractive - you mention overspending resulting from financial mismanagement, remind me, what's the current account deficit at present? And if you read the article carefully you'll see that the loan to deposit ratio of Thai banks is very high thus there is no need whatsoever to increase the amount of money flowing through the system.

Pretty sure you are correct about the baht. But the increase in the loan ratio is quite astonishing

FYI, here some details of the Thai current account balance over the past few years, compares quite favorably to the US and other miscreant countries I reckon!

http://www.indexmund...aspx?c=th&v=145

It is all relevant in that the Thai Baht is not getting stronger by itself, it is the other currencies which are weakening creating an artificially strong Baht. By the Baht remaining strong hurts exports of course. Figures at 2011 showed results up to and including post coup and prior to riots and seizure of the city. The management of the Thai economy at that time was not under red-rule and some stoppers had been put in place against the clan cronies and milking - by no means all. But since then - compare apples with apples.

And right up to the point where I know from my industry which locally was responsible for some 1.6Bn in revenues, has only just broken around 2-300M Baht p.a. since, for the past two years. When and if accurate figures (as much as we can believe them) are obtained then we can see the direction of the Thai economy and I bet we will go below 30 Baht to the USD in the not too distant future unless the world cries enough and dumps the US as the reserve currency, especially when the rice market for Thailand dries up and they are forced to dump stock at lower than present market rates, which Thailand is trying to commandeer in excess of USD100 a tonne over going price! What idiots.

But then you also have the situation where if Thailand follows the sheeple and takes USD as the main currency and the USD tanks, (printing to pay creditors is an act of bankruptcy) their losses will be compounded greatly.

[chiang mai]

It's not so much about being sheeple as it is about not having any choice, payment for exports are settled in USD.

[NeverSure]

According to the Asian Banker (September 30, 2011) Thailand's banking sector saw Asia-Pacific's highest increase in loan-to-deposit ratio - 16.8 per cent to 114.8 per cent

Now that is a scary statistic

It's worse than it looks. Loan to deposit ratio is a skewed number. Suppose the ratio was limited to only about 80% as in the US.

1. A new bank opens. John opens an account with $100. The bank can now lend Joe $80.

2. Joe borrows the $80 and it's deposited into his account. The bank now has $180 in deposits and can lend $144, or another $64 to Pete, all on John's original $100.

And on it goes.

Yet the bank has a L/D ratio of 80%

Sure, someone will withdraw, but more will deposit.

There is nothing at all wrong with that. It's how banking works. Many people are in debt because their borrow to buy homes. But that is generally a good thing not a bad thing. In your scenario above the bank makes good money on the interest that it gets from the load money. If the bank didn't lend the money that people deposit, then no-one would be able to get a mortgage. This is the whole point of banking - take deposits and then lend that money to other customers. There wouldn't be any point in opening a bank if you didn't lend the money to people.

No, this is much of what caused the banking collapse in the US in 1929, if not in the past decade. Read my little basic scenario of how it works. There is only really $100, but much more on deposit due to loans. When people panic and want their money, it simply isn't there. It's all a paper manipulation. The bank has no prayer of paying money which was created on paper but doesn't exist.

It is a house of cards which can quickly collapse.

The very fact that the Thais just lowered interest rates again is absolute proof that they believe the economy is in trouble. When we've seen these signs before, it was a precursor to a possible collapse which the central bank was trying to avoid.