Govt banks crowd out private investment

Govt policies funded by off-budget accounts & govt banks likely to keep interest rates high.

bank vault

This long survey of developments in Thai banking increasing competition in this sector has three parts:

1. Government bank crowding out of private investment and high interest rates.
2. The likely consequences of the FATF blacklisting of Thailand for failure in anti-money laundering efforts.
3. Increased regulatory costs for commercial banks including the FIDF levy to pay off the 1997 crisis debt
4. The upcoming reduction in the deposit guarantee at banks from 50 million baht to 1 million.

Only the first part is included below. Read the full article here:

Photo above of a bank vault (Source: Wikipedia)

Click button to listen to Govt Banks Crowding Out Private Investment to download
Economics
BEHIND THE NUMBERS

What's keeping thai bankers awake at night

2/03/2012
TMB Analytics

bank depositsIf you think Thai banks have been competing fiercely in the past few years, you are absolutely correct. But no, their toughest competitors have not been Asean banks seeking dominance as the Asean Economic Community draws closer in 2015. Nor have they been Chinese banks looking to expand into this region. Surprisingly, the most unforeseen, yet aggravating, competitors are those that have shared home turf with Thai commercial banks for almost 100 years: the government-backed specialised financial institutions (SFIs). 

These state-backed institutions have been growing at a breathtaking rate. Back in 2003, commercial banks' loans were 4.6 times those of the SFIs and deposits were 4.8 times. Eight years later, the same figures were 2.7 and 2.6 times, respectively. These figures translate to a 27% share for SFIs in the loan and deposit market at the end of 2011 compared with 18% back in 2003. That's a 50% increase in their market share. So, it's not Malaysian, Singaporean or Chinese banks that keep Thai bankers up at night.

Among the six government banks, the Government Savings Bank (GSB) is in the forefront, with a phenomenal growth rate that puts the phrase "eat my dust" into perspective. The GSB's average annual loan growth rate over the past three years was a whopping 28%. In 2009 alone, when most banks slowed lending due to the sub-prime crisis, the GSB loan book grew by almost 40%, expanding in all directions.

GSB deposits, meanwhile, averaged 29.5% annual growth in the past three years and 31% in 2009. Compare those figures with 7.4%, the best loan growth of a commercial bank in 2009 or 13%, the maximum deposit growth in the same year. Even in the banner year of 2010, maximum loan and deposit growth rates for commercial banks were 32% and 14%, respectively.

The exceptional growth rates of the SFIs have redefined one fundamental economic concept, the crowding-out effect. Conventional wisdom holds that expansionary government policy, i.e. more spending and more deficits, will draw out loanable funds in the financial markets, causing market interest rates to be sticky, or at worst, to rise. Lately, more and more Thai government policies have been funded through "off-budget" accounts, SFIs included. So looking at government deficits alone for evidence of the crowding-out effect is so 1980s. We must now take into account the competition SFIs pose in the loanable funds market.

In 2011, the GSB's deposits increased by 345 billion baht, while total SFI deposits increased by 535 billion. These numbers are equivalent to a full year of government bond issues. The planned budget deficit for fiscal 2012 is 400 billion baht and possibly another 300 billion in 2013. Even though the government is trying to reduce its deficit, GSB deposits could absorb more funds at an increasing rate. Assuming the average growth rate persists, we could be looking at 450 billion baht in 2011 and 580 billion in 2012 of fund absorption by the GSB. So during this downward interest rate cycle, do not expect market rates to automatically move with the policy rate. When funds are tough to find, interest rates must remain high. Simple as that.... [Read rest of article here]

TMB Analytics is TMB Bank's economic analysis unit. Behind the Numbers is co-authored by Benjarong Suwankiri, head of TMB Analytics, and Naris Sathapholdeja, head of market risk models. They can be reached at tmbanalytics@tmbbank.com

(Source: Bangkok Post, Economics, BEHIND THE NUMBERS, What's keeping thai bankers awake at night, 2/03/2012, TMB Analytics, link

Banking Vocabulary

commercial banks - the usual privately owned banks (Kasikorn, Siam Commercial, TMB, etc) that most families and businesses keep their money in and get loans from

government-backed specialised financial institutions (SFIs) - government banks that "specialize" in making certain kinds of loans often attached to government policies (Read ADB report)
Government Savings Bank (GSB) - the oldest government run bank started in 1913 (See history)

backed - supported ให้การสนับสนุน
government-backed - supported and helped by the government
institutions - large and important organizations, such as universities or banks สถาบัน
financial institutions - banks and other organizations that are like banks (give loans, accept deposits)
specialised - working in a "special" area (here: only gives loans for certain activities or purchases such as agriculture or for homes)

crowding-out  - when increased government spending (expansionary fiscal policy) causes interest rates to rise thereby reducing investment spending in the private sector (privately owned companies) (See Wikipedia)

keep awake at night - something that you worry about so much that you cannot sleep

What's keeping thai bankers awake at night

fiercely - very strongly อย่างรุนแรง, อย่างดุเดือด
competing fiercely - competing with great strength
fierce competition -
very strong competition
absolutely
- completely
absolutely correct - completely correct
dominance - being more powerful than others
Asean Economic Community (AEC) - when ASEAN countries join together as planned in 2015 into one economic community without tariffs and eventually free labour markets
draws closer - will happen soon
expand - to become larger ขายตัวออกไป
unforeseen - something that happened that you could not predict or see happening in the past
aggravating - causing the biggest problems
turf - the territory or things that you or your group controls
shared home turf - they operate in the same area or market (here they are often trying to get same depositors and make loans to same people)

If you think Thai banks have been competing fiercely in the past few years, you are absolutely correct. But no, their toughest competitors have not been Asean banks seeking dominance as the Asean Economic Community draws closer in 2015. Nor have they been Chinese banks looking to expand into this region. Surprisingly, the most unforeseen, yet aggravating, competitors are those that have shared home turf with Thai commercial banks for almost 100 years: the government-backed specialised financial institutions (SFIs). 

state
- government รัฐ
state-backed institutions - institutions that are supported and helped by the government
breathtaking - extremely surprising, impressive or beautiful, takes your breath away when you see it งดงามตระการตา
growing at a breathtaking rate
figures - statistics, numbers describing the economy
loan - an amount of money that a person, business, or country borrows, especially from a bank เงินกู้
translates to ... - means or can be described or explained as ...
figures translate to a 27% share for SFIs in the loan and deposit market
share - to have or use something at the same time as someone else ใช้ร่วมกัน
market share - the percentage of purchases or customers in a market that a company has

These state-backed institutions have been growing at a breathtaking rate. Back in 2003, commercial banks' loans were 4.6 times those of the SFIs and deposits were 4.8 times. Eight years later, the same figures were 2.7 and 2.6 times, respectively. These figures translate to a 27% share for SFIs in the loan and deposit market at the end of 2011 compared with 18% back in 2003. That's a 50% increase in their market share. So, it's not Malaysian, Singaporean or Chinese banks that keep Thai bankers up at night.

Government Savings Bank (GSB) -
See above
in the forefront - among the first in this area
phenomenal - very great and unusual
phenomenal growth rate - very fast growth rate
eat my dust! - a hateful thing that the winner of a race might say to the loser of a race, the winner has created dust behind him by moving fast and the loser can eat it (See Wiktionary)
perspective - opinion, view on an issue มุมมอง ทัศนะ a particular way of thinking about and considering something ทัศนคติ
put into perspective - when a problem is compared with similar problems (and this shows that the problem is not as bad as thought)  
annual - happening once a year ประจำปี
annual loan growth rate
whopping - very big ก้อนโต ขนาดใหญ่
lending - giving money to someone who agrees to pay it back in the future การให้ยืม
crisis - an urgent, difficult or dangerous situation วิกฤตการณ์ วิกฤต
prime - of the best quality ที่ดีที่สุด
sub-prime - below the best quality
sub-prime crisis - the 2008 financial crisis in the US that started a global crisis, takes its name from 'sub-prime loans' made to borrowers who could not afford to pay the money back and when real estate values and incomes began falling these loans failed and banks lost lots of money (See Wikipedia)  
loan book - all the loans that a bank has made (and have not been paid back yet)

Among the six government banks, the Government Savings Bank (GSB) is in the forefront, with a phenomenal growth rate that puts the phrase "eat my dust" into perspective. The GSB's average annual loan growth rate over the past three years was a whopping 28%. In 2009 alone, when most banks slowed lending due to the sub-prime crisis, the GSB loan book grew by almost 40%, expanding in all directions.

maximum - the most possible ที่สูงสุด ที่มากที่สุด
banner year - a very good year for a business or other organization

GSB deposits, meanwhile, averaged 29.5% annual growth in the past three years and 31% in 2009. Compare those figures with 7.4%, the best loan growth of a commercial bank in 2009 or 13%, the maximum deposit growth in the same year. Even in the banner year of 2010, maximum loan and deposit growth rates for commercial banks were 32% and 14%, respectively.

exceptional - much greater than usual, especially in skill, intelligence, quality, etc; unusually good ยอดเยี่ยม, ดีเป็นพิเศษ, ดีเด่น
exceptional growth rates
fundamental - very important and essential พื้นฐาน รากฐานที่สำคัญ
concept - a principle or idea ความคิด
fundamental economic concept - one of the important ideas in economics
crowding-out
 - See above
wisdom - knowledge gained over a long period of time from experience
conventional wisdom - what most people (or here most economists) believe to be true
conventional wisdom holds that  
policy - a plan of action to guide decisions and achieve outcomes (See Wikipedia) นโยบาย
deficits - when spending is greater than money coming in (must be financed by borrowing and increased debt)

expansionary government policy - more spending and more deficits,
funds - money to be used for special purposes   เงินทุน
loanable funds - money that a bank can use to make loans with (this can come from deposits or from financial markets
loanable funds market - the market for the use of money for a period of time (loan) where the price is the interest rate
draw out - take out, remove
draw out loanable funds in the financial markets
interest - payments made for the use of another's money for a period of time
causing market interest rates to be sticky - not move up or down (the way you would expect them to move given changes in demand and supply for loanable funds)
funded - given money บริจาค money provided for operation of a business or organisation ให้ความช่วยเหลือทางการเงิน ให้เงินลงทุน
budget - the amounts of money that an organisation has available to spend on different things during a period งบประมาณ (See Wikipedia)
off-budget - outside of the official government budget
off-budget accounts - money spent by the government that is not in the official government budget (which means: if you want to know how much the government is really spending you have to look at more than the budget)
government deficits - when the government spends more than it receives in taxes so must borrow money to pay the difference
evidence - information that shows and proves something to be true หลักฐาน
accounts - the accounting records of a company, the records of money paid, received or owed over a period of time by a company
take into account - include some fact or situation in your decision or argument
pose - cause something, especially a problem or difficulty เป็นเหตุให้

The exceptional growth rates of the SFIs have redefined one fundamental economic concept, the crowding-out effect. Conventional wisdom holds that expansionary government policy, i.e. more spending and more deficits, will draw out loanable funds in the financial markets, causing market interest rates to be sticky, or at worst, to rise. Lately, more and more Thai government policies have been funded through "off-budget" accounts, SFIs included. So looking at government deficits alone for evidence of the crowding-out effect is so 1980s. We must now take into account the competition SFIs pose in the loanable funds market.

equivalent - the same as เท่าเทียมกันกับ
bond - an agreement by a government or an organization to pay back the money an investor has lent plus a fixed amount of interest on a particular date; a document containing this agreement (See Wikipedia)
bond issues - when bonds are made available to the public for purchase
deficit - when you spend more than you receive (has to be financed or funded by borrowing)
budget deficit - when the spending in the budget is more than money received
fiscal - related to government spending; connected with the government budget, i.e., public money เกี่ยวกับงบประมาณ
fiscal 2012 - the calendar year of 2012 that the government uses for spending
absorb - 1. to take in something 2. to take in a liquid, gas or other substance form the surface or space around ซึมซับ ดูดกลืน
GSB deposits could absorb more funds
persists -
continues, does not stop or end
fund - money provided for some purpose เงินทุน กองทุน
fund absorption - the taking in of funds or money
cycle - to go up and down; a series of events repeated over and over again (in the same order)
downward interest rate cycle - a period of time when interest rates are falling in an economy (they go up and down over time)
tough - difficult ยากลำบาก
tough to find - difficult to find

In 2011, the GSB's deposits increased by 345 billion baht, while total SFI deposits increased by 535 billion. These numbers are equivalent to a full year of government bond issues. The planned budget deficit for fiscal 2012 is 400 billion baht and possibly another 300 billion in 2013. Even though the government is trying to reduce its deficit, GSB deposits could absorb more funds at an increasing rate. Assuming the average growth rate persists, we could be looking at 450 billion baht in 2011 and 580 billion in 2012 of fund absorption by the GSB. So during this downward interest rate cycle, do not expect market rates to automatically move with the policy rate. When funds are tough to find, interest rates must remain high. Simple as that....

risk - danger, how likely or possible it is for a bad event that causes harm and damage ความเสี่ยง
models - a system, a simple description of how a system works (to help you understand it)
market risk models - (See Wikipedia)

TMB Analytics is TMB Bank's economic analysis unit. Behind the Numbers is co-authored by Benjarong Suwankiri, head of TMB Analytics, and Naris Sathapholdeja, head of market risk models. They can be reached at tmbanalytics@tmbbank.com

About the author

columnist
Writer: Jon Fernquest
Position: Online Writer