The impact of the financial crisis in 2008, although not directly impacting Thailand, did result in a disruption to investment patterns which saw ฿500 billion withdrawn by foreign investors from the Stock Exchange of Thailand (SET) and a new climate of reduced investment in the Thai economy. With China’s economy now having to contend with reduced growth in the longer term as well as its own property and banking crisis, the danger of further instability on world financial markets would be very bad news for Thailand’s economic prospects no matter how sound or well capitalised the kingdom’s financial sector appears to be.
Thailand’s central bank and key government officials on Monday and Tuesday were confident that the failure of several US banks including the Silicon Valley Bank (SVB) in California and the Signature Bank in New York would not impact the kingdom’s financial system. However, top analysts in Bangkok are not so certain that the danger of the situation has passed as elevated interest rates not only in the United States but across the world may lead to further unknowns within the global financial system sparking another possible threat to a world already suffering from hampered trade and geopolitical conflict.
The Bank of Thailand moved on Monday to reassure investors and the public that Thailand’s financial system is safe after the collapse of two American banks over the weekend.
However, some financial analysts in Bangkok have urged business leaders and investors to be cautious despite the prompt action by the Federal Reserve and US authorities in response to the situation.
Senior Bank of Thailand official issued a statement clarifying the country’s status concerning the US Silicon Valley Bank (SVB) collapse. No exposure
The Assistant Governor of the Financial Institution Supervisory Division at the Bank of Thailand, Ms Suwannee Jesadasak, issued a statement clarifying that the main US bank in question, the Silicon Valley Bank (SVB) with assets of some $200 billion had been shuttered by officials working with the Federal Deposit Insurance Corporation (FDIC) on Friday last the 10th March 2023.
She explained that the bank’s closure stemmed from the aggressive policy of the Federal Reserve in the United States since last year in hiking US interest rates which had made securities held by the Silicon Valley Bank (SVB) which paid lower returns, less valuable.
A subsequent firesale in response to higher US rates by the troubled bank led to it incurring losses of up to $2 billion which, in turn, led to it drawing on its deposits base to pay its costs.
The bank has been a significant player in the burgeoning tech industry in California and the key concern of US authorities over the weekend was reassuring US deposit holders and avoiding contagion.
Bondholders and shareholders wiped out
Officials up to US President Joe Biden made it clear that all funds held by the Silicon Valley Bank (SVB) were protected so that firms could pay their bills and paychecks as normal.
Bondholders and shareholders were not so fortunate, suffering a wipeout. It remains to be seen what knock-on effects are caused by this.
On Monday, Ms Suwannee confirmed that there were no Thai banks which had dealings with the West Coast US institution or the Signature Bank in New York which was also closed on Sunday.
The top bank official referred to the Bank of Thailand’s policy under Governor Sethaput Suthiwartnarueput, announced clearly in recent years, to ensure that Thai banks and financial institutions avoid holding assets or Tier One capital in digital assets.
Central bank and key ministries are actively monitoring developments in the United States and worldwide for further fallout from the bank failure
She explained that Thailand’s banking and financial sector overall had extremely limited exposure to the tech sector with less than 1% of assets associated with it.
She did reveal that some commercial banks held digital assets to the value of ฿200 million, a relatively insignificant figure.
The Bank of Thailand and the Ministry of Finance, like their counterparts around the world, are watching the response by US authorities to the situation given the importance of the US financial system to world finance, the US dollar to international trade and the US economy in terms of trade and outward investment.
The assurance by US authorities through the Federal Deposit Insurance Corporation (FDIC) that all depositors are fully protected and the triggering of the Bank Term Funding Programme, releasing $25 billion into the economy, appears to be working, for now, with signs from the market, in the last 24 hours, that confidence is being renewed following a sharp 4.71% fall in the US stock market last week.
Baht gained ground against the dollar but is still 5.5% lower than it was worth at the end of January this year after strong gains since October 2022
In terms of the Thai baht against the US dollar, it has gained some ground in recent days against the US currency but, at ฿34.50, it is still 5.5% lower than its value against the greenback recorded on January 22nd last when it returned only ฿32.69 following a rapid gain in value for October 16th 2022 when it was valued at ฿38.13 to the US currency.
The market is predicting that the US Federal Reserve may pull back on its hike in US interest rates to curb inflation with the latest inflation rate at 6%.
The latest consumer price data shows a smaller-than-expected cooling leaving the Fed with a dilemma between pursuing its interest rate reduction strategy and testing the stability of what is a diverse banking system.
A further 50 basis point hike had been pencilled in for next week’s Federal Reserve meeting bringing US rates to 5.5% but this is now being questioned with some analysts even suggesting room for United States money managers to begin to scale back borrowing rates at some point towards the end of the year.
These predictions may be premature, however, as US officials, for now, are satisfied that the response over the weekend has been adequate and Fed Chairman Jerome Powell has underlined that the overarching policy of the fed is to bring inflation in line at all costs with some hopes that the US, whose economy continues to grow with stronger than expected data, may avoid a recession in 2023.
Praise for swift US action over last weekend which saw the substantial and important UK arm of Silicon Valley Bank sold to British HSBC Bank for just £1
In Bangkok, key market analysts remained concerned about developments in the United States with Mr Trawut Luangsomboon of Jitta Wealth Asset Management Co. Ltd. (AMC) insisting the closure of the Silicon Valley Bank (SVB) and another recent failure, that of Silvergate Bank, a California based bank established in 1998 and which specialised in cryptocurrency transactions, may be a sign of wider malaise not just in the United States but worldwide with a financial system feeling the effects of heightened interest rates after over a decade and a half of ultra-low borrowing costs and an uncertain geopolitical environment.
Mr Trawut pointed out that this development was quite different from that in 2008 when the Lehman Brothers collapse in New York triggered a worldwide ripple effect leading to several sovereign debt crises.
He praised the swift response from US authorities over the weekend as they worked closely with UK counterparts.
Part of this response saw the UK arm of Silicon Valley Bank (SVB) expeditiously sold to the HSBC Bank for the sum of £1.
HSBC boss said it made ‘strategic sense’
The UK bank was a key player working with many high-tech firms in the United Kingdom that are critical to its emerging digital and technology economy.
The sale of standalone Silicon Valley Bank UK Limited to HSBC Holdings plc saw the British-based world bank acquire deposits of £6.7 billion against a loan book valued at £5.5 billion.
Noel Quinn, the HSBC boss was upbeat about the transaction: ‘This acquisition makes excellent strategic sense for our business in the UK. It strengthens our commercial banking franchise and enhances our ability to serve innovative and fast-growing firms, including in the technology and life-science sectors, in the UK and internationally.’
In Bangkok, Mr Kavee Chukitkasem, Head of Research at institutional brokerage Pi Securities Public Company Limited ascribed the failure of the Silicon Valley Bank (SVB) also to the aggressive Federal Reserve policy of hiking interest rates.
Acceptance that Thailand has one of the best capitalised financial systems in the world
He, like Bank of Thailand officials, Thai Minister of Finance Arkhom Termpittayapaisith and Prime Minister Prayut Chan ocha over the last 48 hours went on to highlight Thailand’s strong financial sector with padded levels of capital reserves and a very low level of foreign debt, with over 98% borrowed at home in Thai baht, as insulating the kingdom, to a great extent, from any possible contagion or threat that may develop.
Thailand retains one of the most well-capitalised financial systems not only in Asia but in the world which makes the baht an attractive currency for speculators.
Mr Kavee cautioned, however, that it was too soon to rule out other developments and the possibility of another financial crisis impacting the already troubled world economy, something that would hurt Thai firms and the wider economy at home.
‘The SVB problem comes from the Fed’s high policy rate hike. And keeping interest rates at this level for a long time causes high financial costs to put pressure on the business sector continuously. And anyone who is not strong will have problems immediately. In this round, it is possible that it may be the beginning of a new round of financial crisis,’ Mr Kavee said.
Impact on the wider and real economy is what is of concern including the ability of the kingdom to attract inward economic and financial investment
He pointed out that in the aftermath of the 2008 financial crisis which hit the world from 2008 to 2011, Thailand since 2011 had seen an exit of foreign investment in the Thai stock market to the value of ฿500 billion.
Of course, this also corresponds with the negative impact of coups in Thailand staged by the military in 2006 and 2014.
Thailand is losing the battle to attract inward investment in Southeast Asia to develop its economy against stiff competition from Vietnam and Indonesia
Thailand with an open economy is particularly susceptible to international shocks especially as the economic picture in China with diminished growth prospects as well as its ongoing banking and property crisis, is no longer likely to come to the rescue.
Any negative development in world financial markets which impacts the investment climate for firms and investors tends to see money flow back to the United States which is still, counterintuitively, seen as a secure haven.
The Bangkok analyst praised Thai authorities for creating a sound financial infrastructure for the kingdom’s banking system and economy and highlighted the key role of incoming foreign tourists in helping to boost the country’s current account although, over the last six months, it has continued to post deficits due to a crisis in exports and the elevated cost of imports into the kingdom.
Failure of Silicon Valley Bank (SVB) and other banks comes after a huge drop in bank failures to zero between 2020 and 2023 based on low interests rates
The closure of a number of US banks over the weekend should also be seen in context. After the Lehman crisis in 2008, over the next three years, no less than 389 US banks failed.
In response to the crisis, the US government under President Obama introduced safeguards and heightened regulation which, to some extent, was cut back by the Trump administration.
The effective response over the weekend was possible due to some of the changes introduced including the need for a rapid response to a crisis.
It should also be noted that the US Federal Reserve oversees a localised financial monitoring system with local federal reserve boards throughout the country responsible for oversight of financial institutions and banks in each area.
From 2012 to 2016, there were 101 US bank failures while from 2017 to 2020 there were only 13 closures.
From 2020 up to 2023, no banks failed at all in the United States.
This was all driven in part by an unprecedented run of relatively low-interest rates since the 2008 crisis with the COVID-19 pandemic interrupting the cycle as it began to move upward from 2016 to 2020.