Thailand’s Deposit Protection Cut!!
by MBMG Investment Advisory
From 11th August onwards, the Deposit Protection Agency (DPA) says that it will reduce protection offered per individual account holder in each Thai financial institution to THB 1,000,000 from THB 5,000,000. It’s important to note that this isn't because of the current COVID-related economic stress, which in fact actually led to the delay of this long-planned move.
The Deposit Protection Institution Act took effect to reinsure depositors at the height of the Global Financial Crisis on August 11, 2008. Since then, the initial full-coverage protection limit of THB 100 million per depositor per financial institution has been reduced to THB 50 million on August 11, 2012, to THB 15,000,000 on August 11th 2016 and THB 5 million on August 11, 2019.
Thai banks have generally been adequately capitalized and since 2008, the Bank of Thailand (“BOT”), the monetary authority which regulates Thai banks, put in place some of the most stringent measures in the world to protect the Thai banking system. The argument that GFC is now long past has been used to justify the step-by-step process to lower the Thai deposit protection rate. During the COVID crisis, some of these bad debt preventive mechanisms have been relaxed indicating that non-performing loans (NPL’s) might be expected to increase over the next few months as it may be unrealistic to expect the temporary cash-flow assistance provided during this time and earlier on in the crisis to be repaid as intended. With this in mind, one might argue that the DPA should wait until the COVID crisis is fully over before reducing the protective level again.
Thailand’s Capital Adequacy Ratio 1998 – 2021 –Above 12% is considered reasonable.
The 2011 floods caused more damage to the CAR than COVID-19 caused in 2020.
If, in the unlikely event that any Thai banks were to fail, then a more widespread concern might be the sudden and deep depreciation of the Thai Baht, especially against safe havens such as the Japanese Yen and the global reserve currency, the US Dollar. A secondary concern might be the risk to Thailand’s various credit ratings, and the potential knock on effects if (like other governments faced with a major crisis), the Thai government wasn’t tempted to issue a moratorium exempting the DPA from offering protection, even at the reduced THB 1,000,000 level, or delaying the 30 day restitution period stipulated by the DPA. The Thai government may also decide not to protect deposits belonging to foreigners just as the Social Security Fund (SSO) decided to only pay Thai nationals the THB 2,500 in COVID relief even though other nationalities employed in Thailand also pay the monthly contributions to the fund.
Currency risk is always present, particularly with an emerging market which is often fraught with trade or political idiosyncrasies (the THB has been remarkably strong in recent years largely due to the relatively low public debt to GDP, lack of investment in Thailand or abroad, and trade surpluses). As you can see from the chart above depicting the capital adequacy ratio (capital available as a percentage of the weighted risk of outstanding loans), both the 2011 floods and 2001 World Trade Centre caused more damaging impacts to the capital adequacy of Thai banks than COVID has until the end of March 2021. However, this may change in the months ahead given the severity of the current, ongoing COVID-19 wave, and we may see another cycle of rising bad debt and the THB finally depreciating.
Depreciating on account of the wave
THB versus USD over the past two years
Regardless of Thai banks, it is always prudent to diversify asset holdings and structures and we continue to strongly recommend this in most cases. This might mean reviewing where your savings are maintained, and where your business interests are? A legacy of historic exchange rate controls that placed constraints, for many people, on exporting Thai Baht, is that many business owners in Thailand, whose businesses are primarily exposed to Thai economic and currency risk, continue to also hold all their savings in Thailand, too. One simple way to diversify deposits and spread both currency and default risk is to purchase US treasury notes (a convenient method for doing this is via an index tracker, or ETF). We believe that long-term US treasuries offer the most upside. While US Treasury ETF’s aren’t available to purchase on the Thai Stock Market, they are available if you have an international investment platform.
MBMG Investment Advisory provides bespoke consulting reports that review the most cost-effective funds/ETF platforms for an affordable cost, and we can explain about reducing asset risk by deploying US Treasuries. Even though they are denoted as constitution the ‘Risk Free Rate’, US Treasuries aren’t completely default free, but the chance of a US government US treasury note default is exceedingly low, perhaps it might be considered a rarer than once in 100-200 years (>4-Sigma event) and that a major negative trading even or day in the treasury market might happen only once in every 750 days (a >3-Signa event).
Thailand’s deposit protection is now on the low side
Deposit Protection p/Individual ~THB (million) Equivalent
EU EUR 100,000 3.9
UK GBP 85,000 3.9
HongKong HKD 500,000 2.1
Singapore SGD 75,000 1.85
China RMB 500,000 2.6
US USD 250,000 8.2
Thailand THB 1,000,000 1.0
Deposit protection would generally seem to be most readily available to those who might be expected to need it the least and this might be seen as further indication of a global financial system that all too readily, in the phrase borrowed by one of today’s leading development economists, Ha Joon Chang, from a 19th century critique of British economic imperialism, kicks away the ladder from aspirant nations.
MBMG Investment Advisory is licensed by the Securities and Exchange Commission of Thailand as an Investment Advisor under licence number Dor 06-0055-21.
For more information and to speak with our advisor, please contact us at info@mbmg-investment.com or call on +66 2 665 2534.
About the Author:
Paul Gambles is licensed by the SEC as both a Securities Fundamental Investment Analyst and an Investment planner.
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