Thailand

1
Thailands experience with financial services
liberalisation

• WBI Trade in Services Course in Hanoi, Vietnam,
• May 23-27 2005.
• Jutamas Arunanondchai
• Fiscal Policy Research Institute (FPRI), Bangkok,
  Thailand

The content is drawn from various sources
Mullineux, Murinde Pinijkulviwat (200-) FTA
Monitoring (2005) TDRI (2005) Sathirathai
(2004) and Euromonitor (2004).
2
3 types of financial service liberalisation

• Financial service openings gt market access by
  foreigners
• Financial deregulation, e.g. lifting controls on
  interest rates and on activities of FSP
• Capital account liberalisation gt allow freer
  flows of capital

3
Thailands financial services

• Divided into 4 groups
• Banking
• Securities and asset management
• Insurance
• Non-bank

4
Thailands financial liberalisation

• 2 Phases
• Between 1990-1997 (focused on banking)
• Post-1997 financial crisis
• Scope of liberalisation in the early 1990s
• Scope of liberalisation post-1997

5
Scope of liberalisation in the early 1990s
6
Capital account liberalisation

• Exchange control deregulation (IMF Art. 9)
• 1990, Phase I commercial banks can trade in
  foreign currencies for trade-related transactions
• 1991, Phase II
• All exchange controls abolished and new ones
  introduced for reporting purposes only
• USD 10 m limit per annum for investment by
  individuals
• Foreign funds can move in and out freely
• 1992, Phase III
• Exporters can receive and make payment in Baht in
  addition to foreign currencies
• Exporters can transfer foreign currency deposits
  for overseas debt payment

7
Financial service opening - BIBFs

• In 1993, BIBFs were introduced to encourage
  capital inflows to finance domestic investment
  and throughout Indo-China region
• 46 BIBF licenses granted
• Income tax reduced from 30 to 10
• Permitted activities of BIBFs
• licensed banks use foreign funds raised overseas
  to lend locally (out-in) or to lend overseas
  (out-out)
• Cross currency trading
• Trade finacing on out-out
• Loan syndication arrangements
• Arranging issue of debt instruments
• Engage in underwriting in foreign currencies

8
Financial service opening BIBFs cont.

• Prudential regulations relaxed, e.g. capital
  adequacy ratio, single lending limit (in view
  that BIBFs were supervised by authorities of the
  home countries).
• ST debts increased markedly, most are rolled over
  for long term use

9
Financial deregulation - Interest rate

• Until 1990, all deposit rates were capped
• In 1989, deposit ceiling for gt12 m increased from
  9.5 to 10.5-11.0 to mobilise savings
• 3-yr interest rate liberalisation plan (1990-93)
• 1992, Ceilings on all bank deposits were
  abolished
• Competition for deposits
• 1992, Ceiling on lending rates for banks, finance
  etc. removed
• Lower interest rates by BIBF led to stiff
  competition and borrowers can acquire cheaper
  loans.

10
Exchange rate system reforms

• 1963-1977, Baht fixed to gold
• 1978, Basket peg ( weight 0.85)
• 1981-1984, Fixed to USD 123.
• 1984, Basket peg

11
Further deregulations for banks

• FDI abroad
• Local banks were encouraged to open branches or
  form JVs (Mode 3)
• In Indochina to channel BIBF funds towards
• In financial centres to tap funds into BIBFs
• 1992-1998, increased scope of activities
• Allowed to establish mutual fund management
  companies with foreign analysts
• Arranging, selling and trading debt instruments
• Etc.

12
1997 Financial crisis

• 1997-1998, Baht floated gt volatile exchange rate
• Huge capital outflows (non-renewal and repayment
  of ST loans)
• Net outflows in 1997 USD 8.4 bill and on 1998 USD
  16.0 bill
• Mostly from the banking sector
• 1999-present, net foreign exchange position
  limits imposed (15 limit for commercial banks)
• due to surging volume of foreign exchange
  activities and derivatives trading

13
1997 Financial crisis cont

• In 1997, 12-14 deposit ceiling imposed to
  maintain stability.
• 1997-1999, High interest rate policy to support
  Baht and FIDF.
• Since 1998, restrictions on deposit rates
  reduced.

14
What went wrong?

• Various factors are thought to have contributed
  to the crisis
• Inappropriate government policies
• Inherently unstable financial market
• Herd behaviour of private agents gt manias,
  panics and crashes (Kindleberger)

15
Inappropriate government policies

• BIBF operations
• Entry of foreign BIBF branches intensified
  competition gt banks took excessive risks in
  borrowings and lending.
• Moral hazard induced by fixed exchange rate (no
  hedging)
• No restrictions from lending to domestic
  borrowers in USD
• Mismatch in loan durations
• Poor supervision of commercial banks and finance
  companies
• Collaterals not properly valued

16

• Perceived need to strengthen financial
  supervision and regulation in Thailand before
  further liberalisation.
• Crisis prevention measures

17
Two-prong ex ante discipline and ex post safety
net

• Ex ante discipline emphasis on compliance to
  pre-set standards and codes surveillance/monito
  ring mechanisms
• ? Ex post safety net emphasis on creating new
  safety net scheme
• Trade-offs moral hazard
• Complementary

18
Current initiatives

• International emphasis on the first type (ROSCs,
  FSAP, Basle II, etc.)
• Domestic reforms to strengthen market discipline
  (new deposit insurance system, credit bureau, new
  asset classifications, new banking regulations,
  etc.)
• Regional surveillance (ASP, ASEAN3 ERPD),
  regional safety net scheme (AMF/ CMI), and other
  types (ABMI).

19
Post-1997

• Further banking service opening
• Allow 100 foreign ownership for 10 years
• Foreign equity participation lt49 in all
  financial sectors
• Financial Master Plan (2004)
• One full branch limit (minimum capital of Bt 3
  billion)
• Foreign bank subsidiaries allowed to open 4
  branches (Bt 4 billion minimum capital)
• IBFs (out-out out-in) no tax benefits for
  out-in transactions post-crisis (linked to mode 1)

20
Impact on banking industry so far

• Increased foreign share ownership in top 4 banks
  (foreign ownership gt40 for 3 of 4)
• DBS, ABN AMRO, Standard Chartered and UOB became
  majority shareholders of 4 domestic banks
• DBS divested in 2004

21
Commercial bank industryTop 5 firms (2002)
12 banks Market share Foreign ownership
Bangkok bank 21.53 48.34
Krung Thai bank 18.31 17.09
Kasikorn bank 13.16 48.98
SCB 11.67 43.54
SCIB 8.46 8.54
22
Other impacts on banking industry

• Foreign banks and branches focus on
• retail banking, e.g. credit card services
  (decline in income threshold)
• Institutional clients
• Individuals with high net worth
• Brought in technology and know-how ...
• Personnel from various foreign banks have been
  head hunted by Thai banks (tech transfer)

23
Post-1997 policies and existing situation for
credit cards

• Credit cards
• In 2002, minimum income restriction reduced to Bt
  7,500 from Bt 15,000
• Rapid expansion of credit cards (before 2002,
  only 10 of population owned credit cards)
• Strong growth amongst lower income consumers
• Heavy competition gt a move towards lower to
  middle income group to sustain growth
• Deteriorating credit quality and higher risk of
  credit delinquencies
• BOT raised concern over credit risk

24
Existing policies and situation for credit cards

• New regulatory measures
• 3 interest on cash advance fee
• Minimum monthly income requirement at Bt 15,000
• 18 interest limit on revolving credit (some
  foreign FSPs were charging 27)
• Next?
• Voluntary consolidation to strengthen portfolio?
• Increased market segmentation focus on niche
  market, e.g. young generation

25
Insurance service opening

• Post-crisis,
• DOI eased restrictions on joint-ventures, lt49
• 25 additional licenses issued
• Increased quota to 25 for life 76 for non-life
• Following restrictions remain
• Cross-border service allowed for re-insurance,
  not direct insurance.
• One branch limit

26
Highly regulated non-life insurance market

• Non-life insurance activities are heavily
  regulated through
• Prescribed range of insurance premium for most
  policies, e.g. for auto insurance
• Investment eligibility conditions
• Applications for new insurance products etc.
• Lots of market distortions
• Lots of competition (76 firms most with lt1 of
  market share and less than Bt 300 mill capital)
• Direct price competition and product
  differentiation not possible

27
Impact on insurance industry

• Post-crisis, increased participation of foreign
  entities in the form of JV led to greater product
  variety, e.g. bank assurances.
• Foreign providers have not entered auto-insurance
  industry in general because the complexity of
  local market and require network of garages.
• AIA entered in 1950s before foreign ownership
  restriction came into place. First mover
  advantage gt AIA enjoys 50 market share in life
  insurance industry

28
Life insurance industry Top 5 firms (Sept, 2004)
25 in total Market share Foreign ownership
AIA 49.31 US branch
Thai Life 15.90 0
AACP 8.55 21.06
Thai Samut 6.16 0
Muang Thai 5.87 0
29
Non-life insurance industry top 5 firms (Sept,
2004)
76 in total Market share Foreign ownership
Viriya 13.79 0
Tipaya 6.76 7.74
Bangkok 6.72 25.92
Samphan 4.19 0
Sinmunkong 3.75 22.99
30
Securities and asset management services opening

• Market access
• License is required
• Need commercial presence
• Investment banking
• De facto liberalised in mode 4, e.g. Morgan
  Stanley in HK fly their agents into Thailand to
  prepare deals (need to comply with local
  regulations wherever securities are sold)

31
Securities and asset management cross border
regulations

• Cross listing of Thai securities not yet possible
  (although talks with Singapore etc.)
• Sales of foreign financial assets in Thailand is
  heavily restricted (in-out)
• Retail Thai investors can invest in mutual fund
  units (FIF) managed by AMCOs
• Institutions may
• invest in securities issued by Thai residents up
  to USD 50 mill, else seek approval from BOT
• Foreign investors may invest in Thai securities
  under relatively free environment (out-in)
• Ownership per company lt 49
• NVDR sidesteps 49 restriction

32
Other regulations on securities

• AMCOs face limited scope of investment due to
• Thai SECs restrictions (not helped by lack of
  product variety in Thai financial market)
• Cap on investment abroad (not helped by lack of
  experience in global market and lack of demand by
  Thais)
• Minimum brokerage fee of 0.25
• Deregulation in 1999-2000 led to price war
• Thai retail and institutional investors ratio is
  707
• New product offering must be approved by SEC
  Thailand

33
Securities and asset management top 5 firms
(2002)
39 in total Market share Foreign ownership
Seamico 6.11 50.16
SCB 4.02 0
Phatra 3.91 49.93
Bualuang 3.32 19.17
Krungsri 2.89 0
34
Impact on securities and asset management
industry so far

• Foreign investors account for 23 of SET
• More competition in business for
• Institutional clients
• High net worth individuals
• FIF allows greater portfolio diversity for Thai
  residents familiarise Thai service providers
  with global markets
• Local AMCOs do not use up all their annual FIF
  quota, but foreign ones do.

35
Summary of the lessons

• Highlighted the importance of policy flexibility
• For macro management
• In capital account
• etc.
• At the minimum, comprehensive and effective
  safeguard measures must be included in trade
  agreements.
• Safeguard measures could be revised as new
  information becomes available?

36
Lessons

• Local market environment or condition dictates
  the outcome of liberalisation
• E.g. deregulation of brokerage fees led to price
  war due to very elastic demand.
• Educating retail investors to look long term and
  encouraging consolidation of service providers
  are important as first steps.

37
Lessons

• Benefits of market opening and capital account
  liberalisation so far
• Increased choice, lower prices
• Technology transfers (but to what degree?)
• Greater competition (particularly for high income
  group)
• Increased market access to finance by lower to
  middle income group
• Costs
• Financial crisis (if do not sequence properly) gt
  recession, burden on tax payers
• Increased competition leads to more risky
  behaviour which must be contained.
• Increased debt level for lower to middle income
  group
• Many lack the knowledge of financial planning

38
Thank you