Prime Minister Srettha Thavisin recently presided over the Finance Ministry’s “Ignite Finance” vision that aims to make the country a financial hub.
The Finance Ministry plans to consolidate supervision of financial markets, facilitate new investment and draw in foreign capital and professionals.
Actions in the pipeline include licensing virtual banks, establishing a national credit guarantee agency, and providing incentives to foreign financial institutions to operate in Thailand.
Deputy Finance Minister Paopoom Rojanasakul said Thailand needs three factors to woo foreign funds that would support the goal of becoming a financial hub: high return on investment; ease of doing business; and an attractive place to live in.
Thailand meets the third requirement so it needs to create the other two conditions, he said.
Thailand has seen major capital outflows over the last year and a half, as the earnings of listed Thai firms are not attractive and Thai government bonds offer a lower interest rate than United States bonds and those of other countries.
A large amount of money exited the Thai stock market last year, making it one of the world’s worst performers. Capital outflows have continued this year while the bond market is also experiencing large capital outflows.
Previous efforts at creating a financial hub
Prior to the 1997 financial crisis, Thailand had implemented policies aimed at becoming a hub by liberalising the financial market. One of the key initiatives was to allow banks to establish Bangkok International Banking Facilities.
This resulted in large amounts of foreign loans flowing into the country as the Bank of Thailand kept the interest rate high while the baht had a fixed exchange rate to the dollar.
But as foreign debt piled up, the country could no longer maintain the fixed exchange rate regime leading to the collapse of the baht.
Thailand was forced to adopt the managed float exchange rate as part of the International Monetary Fund’s rescue package. Many banks and finance firms collapsed and the real estate bubble burst.
The global financial market has drastically changed since then: financial liberalisation is coupled with the digital economy.
“Financial institutions need not be physically present in other countries in order to provide financial services. I don’t know how Thailand’s financial hub could be designed to meet the changing global financial landscape,” said Nada Chunsom, financial economist at the National Institute of Development Administration.
While allowing virtual banks to operate could increase competition with traditional banks, this may also open up a new market.
Critics often argue that the interest rate spread between deposit and lending rates in the Thai banking sector is much wider than those in Singapore and Malaysia, suggesting that Thai banks are less efficient.
For example, the net interest margin of Thai banks as of the third quarter of last year was 3.2 per cent compared with 2.2 per cent and 2.1 per cent of banks in Singapore and Malaysia respectively.
“This is partly a result of central bank regulations aimed at guarding financial stability,” says Nada.
As compared to stock markets in the region, the Stock Exchange of Thailand (SET) is not as attractive. For example the SET index is currently just over 1,300 compared with Singapore’s Straits Times index of over 3,400.
“The Thai local bourse also has many limitations. For instance, businesses selling alcoholic drinks cannot list on the SET as Thai morality opposes the alcoholic drinks business,” Nada pointed out.
The financial hub plan
To pave the way for a financial hub, Paopoom says the government would ensure all Thais have access to financial services. Licenses for virtual banks would be issued.
Virtual banks are expected to fill a gap, as financial institutions and non-banking financial institutions do not give loans to those who don’t have a financial record.
The National Credit Guarantee Agency would be established, which would give ratings to potential retail and small business borrowers, enabling them to apply for loans from banks, according to Paopoom.
The government would provide subsidies to the credit rating agency, which will provide insurance to lenders against non-performing loans.
When asked whether the role of the new agency would overlap the current responsibility of the Thai Credit Guarantee Corporation (TCG), which offers portfolio guarantee for small businesses seeking loans from financial institutions, Paopoom said the TCG has a limited scope of operation.
It is not clear yet whether the government aims to turn Thailand into a tax haven, but it promises greater incentives for foreign financial institutions to open branches and other foreign businesses to make new investment in the country.
The ministry is in the process of drafting new laws and would soon submit them to the Cabinet for approval before forwarding them to Parliament for enactment, according to Paopoom.
The country needs to strengthen key five businesses: banking, financial securities, future markets, digital assets, and insurance.
A one-stop service would be established to provide foreign investor services including work permits.
The country has the potential to compete with Singapore, he asserted.
By Thai PBS World’s Business Desk
