Foreign Investments at Risk as Thai PM and Central Bank Battle Over Rates

(Bloomberg) -- The escalating tug-of-war between Thai politicians and central bankers over interest-rate levels is clouding the outlook for local banks, setting the stage for a further exodus by foreign investors.

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Prime Minister Srettha Thavisin and his top aides are ramping up pressure on the Bank of Thailand to cut rates to help jump-start an economy the premier says is in a “crisis.” The central bank has signaled it’s in no hurry to unwind a tightening cycle of eight straight quarter-point hikes to the highest level since 2013. The clash is hitting the equity prices of lenders such as Krung Thai Bank Pcl, Kasikornbank Pcl and Bangkok Bank Pcl, whose bottom lines are already being hit by rising non-performing loans.

Politicians say banks are using the excuse of high rates to sting customers. Pichai Naripthaphan, an adviser to Srettha, this week urged the BOT to prevent lenders from raking in “record profits amid an economic slowdown,” echoing Deputy Finance Minister Julapun Amornvivat, who said bankers were profiting at the expense of “people who are shouldering high borrowing costs.”

The central bank is reluctant to lower rates, citing the need for a buffer against potential global shocks. Commercial lenders say they’ve already trimmed their margins in the current cycle by shelling out more for deposits, a claim supported by Kasikorn Securities Pcl, which expects earnings growth in the sector of 8% this year, barely half the pace in 2023.

The SET Banking Index has tumbled more than 6% this year, almost double the loss for the broader market. Krung Thai, Kasikornbank and Bangkok Bank — among the three largest asset holders — lead the industry’s decline. On Wednesday, Krung Thai fell as much as 1.9%, Kasikornbank declined as much as 1.7% and Bangkok Bank retreated as much as 1.1%

“Foreign investors prefer the technocrats at the central bank to be allowed to do their job without interference from politicians who tend to take a shorter view to gain public approval,” said Alan Richardson, a fund manager at Samsung Asset Management.

Southeast Asia’s second-largest economy isn’t the only place politicians are questioning the conduct of financial institutions amid a so-called cost-of-living crisis. Government leaders in South Korea, Australia and UK have previously sought to take banks to task for either charging high rates or offering low rates to depositors.

Pressure on the Bank of Thailand to cut rates will bring “negative sentiment to investment in the banking sector for a while,” Korakot Sawetkruttamat, an analyst at Kasikorn Securities, said in an email. Every 25-basis-point cut in the benchmark rate implies a 5% to 7% downside risk to the brokerage’s earnings forecast for the sector, he said.

The BOT’s tightening cycle, comprising a 200-basis-points hike in 13 months to 2.5%, has been especially hard on the country’s small- and medium-size enterprises and low-income groups, according to Srettha, who became prime minister in August. The Thai economy grew 1.8% last year, missing most forecasts. Meanwhile household debt has remained above 90% of gross domestic product and public debt has ballooned by half since 2019, to about 62%.

“The sustained elevated interest rates might pose some risks to Thailand’s financial sector given the pre-existing structural weakness in SMEs and debt-laden households,” said Rena Kwok, a credit research analyst at Bloomberg Intelligence. That could put more pressure on banks to reduce their interest margins, she said.

The simmering tension between the government and the central bank has also weighed on the baht — Asia’s worst-performing currency after Japan’s yen this year — with foreign investors continuing to pull money from Thai stocks and bonds. Baht swaps are now pricing the benchmark rate to fall by almost 50 basis points over the next 12 months, or almost double the expected cut at the end of December.

Limited Upside

Asia Plus Securities expects a rate cut in the second half of this year, which would hit bank profits in 2025, according to a report by Senior Analyst Therdsak Thaveeteeratham. The brokerage is neutral about the industry’s outlook and expects it to post profit in line with the nation’s GDP growth this year.

“Thailand’s economic growth has limited upside,” Therdsak wrote, adding he expects lenders to manage return on equity by raising their dividend payout ratios. “We favor bank plays with high dividend yields.”

Aside from lobbying for lower rates, Srettha has also continued to push for a signature program unveiled during the election campaign — a cash handout to almost every Thai adult. However, the program’s price tag of 500 billion baht ($14 billion), to be funded through borrowing, has drawn criticism from opposition parties and push-back from BOT Governor Sethaput Suthiwartnarueput.

(Updates with bank share prices in fifth paragraph.)

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