Moody's sounds warning
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Moody's sounds warning

Personal, SME debt particularly worrying

An office worker smiles as she passes a bank advertisement offering savings. (EPA photo)
An office worker smiles as she passes a bank advertisement offering savings. (EPA photo)

Concerns are mounting over Thailand's individual and SME borrowers, as their debt leverage ratio and asset quality are seen to be increasingly vulnerable to the sluggish economic growth conditions, says Moody's Investors Service.

"We do have some concerns around the sectors of the economy that have been exposed to a low-growth environment for a while, which are relatively more vulnerable," said Gene Fang, Singapore-based associate managing director of the financial institutions group at Moody's.

"Although we do see household debt topping out or plateauing to some degree, we think that a continued spell of weak macroeconomic growth is going to put continued pressure on some borrowers who may be overleveraged."

He said non-performing loans (NPLs) in the personal loan segment had recorded the most growth in bad debts, greater than the corporate sector, as the slow economic environment had weakened consumer debt repayment ability.

Thailand's household debt swelled to 85.9% of GDP or 10.4 trillion baht at the end of last year from 84.7% or 10.2 trillion at the end of the third quarter, the Bank of Thailand reported.

The central bank recently said NPLs were expected to keep rising this quarter, particularly for SME and personal loans, due to the slow pace of the economic recovery and higher special-mention loans.

The consumer NPL ratio rose to 2.62% at the end of the first quarter, up from 2.39% last December, valued at 92.4 billion baht.

Bad consumer loans increased across each segment in the first quarter, with credit-card NPLs up to 3.9% from 3.2%, worth 7 billion baht, while bad personal loans increased to 2.8% from 2.5%, tallying 21.6 billion.

Housing NPLs rose to 2.4% from 2.2%, valued at 41.1 billion baht, with automobile NPLs up to 2.6% from 2.5%, totalling 22.6 billion. SME NPLs surged to 3.3% from 3.11%, valued at 149 billion baht.

SMEs, particularly small businesses, warrant specific concern, as their capacity utilisation in manufacturing remains relatively low, which could affect corporate asset quality in coming periods, Mr Fang said.

"If the growth situation does not pick up, SMEs are going to come under increased pressure, and NPLs related to them are going to increase," he said.

Mr Fang said an uptick in special-mention loans, defined as 30-90 days overdue, in the SME segment could signify a coming deterioration in NPLs, given the lacklustre growth momentum. NPLs are past 90 days overdue.

Despite a challenging operating environment, Moody's still maintains a stable outlook for Thailand's banking sector thanks to financial institutions' strong capital buffers and abundant reserves, while the low-interest-rate environment serves as somewhat of a cushion against debt leverage for borrowers, he said.

Mr Fang said banks' loan and deposit growth ratios were projected to remain in lockstep with each other thanks to the softer macroeconomic environment.

In a related development, Moody's affirmed Thailand's Baa1 rating and stable outlook due to the government's strong financial position, marked by low funding costs and a favourable debt restructure, said Christian de Guzman, a vice-president and senior analyst of the sovereign risk group at Moody's.

"Credit-negative developments would include: a renewed escalation of political confrontations, resulting in potentially long-lasting effects on tourism or manufacturing; a sharp rise in government funding costs related to domestic political uncertainty or a lapse in fiscal discipline; a deterioration in the balance of payments; and a significant loss of official international reserves," Moody's "Inside Asean" report said.

Mr de Guzman said domestic political uncertainty weighed on investor confidence among domestic and foreign entrepreneurs and clouded private consumption sentiment and FDI inflows.

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