Thai regulator warns of weakening debt serviceability, bond market 

Slower-than-expected income recovery and rising cost of living are hitting households.

Thailand’s financial regulator has warned of higher risks in the periods ahead as the debt serviceability and fund-raising capabilities through bonds are expected to weaken.

The ability of households, and small and medium-sized enterprises (SMEs) to repay their loans–particularly low-income households and SMEs in the manufacturing and trade sectors–are expected to weaken. These vulnerabilities of households and SMEs may result in deteriorating asset quality of financial institutions, the Bank of Thailand (BoT) highlighted in a joint meeting on Thailand’s financial stability with the Monetary Policy Committee (MPC) and the Financial Institutions Policy Committee (FIPC) that took place earlier in July.

Authorities expressed confidence that financial institutions (FIs) should be able to manage their asset quality and assist borrowers through debt restructuring procedures, limiting the likelihood of having a sharp rise in bad loans.

Thailand’s economy is expected to continue to expand, thanks to improving tourism and private consumption, which in turn should translate to improvements in income and financial positions of both households and corporations.

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“Nevertheless, a particular pocket of households remains vulnerable due to their slower-than-expected income recovery and rising cost of living. Moreover, the financial positions of SMEs who have yet to fully recover from the COVID-19 pandemic as well as those affected by the export slowdown in tandem with the global economy should also be monitored,” the BoT warned in a statement on the joint meeting published on its website.

Credit risks in certain companies are also facing a potential increase as the ability to raise funds through the bond market will be affected, the BoT concluded.

“The corporate bond market faces higher risk from an increase in both the amount of corporate bond defaults compared to the previous year and the number of companies receiving negative rating actions on credit rating and credit outlook as a result of their own idiosyncratic factors,” BoT wrote.

The capital market has also become more volatile due to domestic political uncertainty and corporate governance issues in public companies. As a result, investors are reportedly exercising more caution in where to park their money, BoT said.

Unprecedented risk events include liquidity stress stemming from sudden and severe deposit outflows at a level unseen in the past as well as other factors that can critically affect the financial system even when the probability of such events occurring in Thailand is low.

To prepare for unprecedented risk events, the MPC and FIPC said that they will continue to closely monitor and assess risks.