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Headline: Bonds, brawls and Basil in Bangkok
Source: Euromoney
Date: February 2000
"I'm stuck in traffic" soon won't be the excuse it once was in Bangkok. The Silom Road may still hold you up - and worry you with its well-displayed admissions that pollution levels are higher even than Thailand's recommended doses of lead and carbon monoxide - but the air-conditioned cars of the new Skytrain elevated metro ought to take people off the streets and make the roads clearer.
That said, few stations have escalators to the lofty platforms, and the climb, in definitely non-air-conditioned stairwells, has so far deterred even the most athletic. The train is financially controversial too. CSFB owns 23% of it - it received the shares as collateral after a loan to the project developer went sour. However, difficulties in actually registering the shares to CSFB threatened Thailand's reputation for commitment to reform. A subsequent court ruling has restored that, but the dispute rumbles on. Meanwhile passenger numbers are still below those required for the project to break even.
Perhaps the stress of taking the train contributed to the riots that broke out at a recent government bond auction. While many emerging-market sovereigns find plugging their budget deficits difficult, the Thai government has a rather different problem. Even though the Bank of Thailand is putting pressure on banks not to lower deposit rates for social reasons, rates - particularly at the foreign-owned institutions - have anyway fallen to record lows. This has driven savers eager for higher-yielding government paper to desperate measures. When just Baht10 billion ($280 million) of longer-dated paper was issued in mid-January, fighting broke out among the 2,500 people who turned up in person to buy it. Police struggled to control this ferocious display of market forces. Since short-term institutional and corporate deposit rates are already at zero, we can expect to see a better class of rioter at the next auction.
Interestingly, Bank of Thailand governor Chatu Mongol Sonakul took the opportunity to advise retail investors to buy "low-risk" property mutual funds rather than government bonds. Given the almost daily auctions of prime, repossessed condominiums this call to punt in distressed assets seems rash.
Perhaps his next piece of investment advice will be to buy stocks on the newly-opened Market for Alternative Investment (MAI). This is the Thailand Stock Exchange's answer to the new smaller companies exchanges so popular elsewhere (Hong Kong has just launched its version and every other exchange in the region wants one). Yuth Vorachattarn, appointed the market's first managing director on January 20, expects between six and 10 stocks to be listed by the end of the year. They sound like perfect deposit substitutes.
Falling deposit rates and government bond riots are symptoms of a pan-Asian problem. Corporate loan demand is weak or non-existent as debt-ridden companies seek to deleverage. At the same time, regulators have tightened provisioning requirement - in Thailand, banks must be 100% provisioned by the end of the year. Combine this with a recovery in corporate profits and continued flows into retail deposit accounts and the problem for banks becomes clear: where to find assets.
All, it seems, have hit on the same answer: residential mortgages. Just as the entire sector rushed to lend to big business in the boom, so now the herd is stampeding into the only safe asset-class in town - thus ensuring that it remains safe for less time than it takes to say "concentration risk".
There is a mismatch problem too. The banks have to fund long-term fixed-rate assets with deposits and without adequate government bond or derivatives markets. As one foreign banker admits: "Commercial banks don't want to be holding these kinds of assets and if they could they'd securitize them immediately. The problem is, they have to hold them because they are the only assets around." The credit committees formed as a response to the crisis presumably have only one choice: rubber-stamp the new loans or close the bank. So much for the new spirit of risk management based on cashflows rather than collateral that banks and brokers say now pervades every institution.
One solution to the problem would be the creation of liquid local bond markets to provide banks with alternative assets and a safety-valve for foreign inflows. In Thailand the domestic baht market is developing. Large corporates such as Siam Cement have issued substantial amounts of baht paper as an alternative to foreign fundraising. Unfortunately these bond issues are often followed by a fall in the issuer's share price - not exactly an incentive to develop the market further.
Siam Cement is one of those Thai companies comprehensively failing to win plaudits for its commitment to restructuring. A pulled equity offering late last year (even Goldman Sachs can't sell every deal), and slow asset disposals, have worried investors. Management's reluctance to return to the equity market at present levels puts more pressure on the company's balance sheet, and president Chumpol Namlieng's studied indifference to investors' concerns will worry anyone trying to coach him for those tiresome roadshows.
He could learn from the management at Thai Farmers Bank. Though foreign investors recall the bank's presentations as sullen affairs - the family were losing much of their stake in the bank after all - the equity offering was a success and the bank has returned to profitability on normal operations.
A sense of humour seems also to have returned. In the president's fish tank an air powered submarine bobs madly around, distracting visitors from the bank's Baht80 billion of non-performing loans.
Western visitors to the Asian Development Bank meeting this year will need a sense of humour too. It is to be held in Chiang Mai in early May, which is the hottest time of the year in Thailand. Even in the dry heat of the hilly North, temperatures will top 40 degrees centigrade. Locals are bemused by the choice but Euromoney's theory is that this is a way for Asia's financial establishment to punish foreign vultures for their purchase of most of the banking and brokerage sector at knock-down prices.
Back in Bangkok the best way to prepare for the heat is a three-chilli ("volcanic") meal at Basil's, the restaurant opened inside the Grand Sheraton Sukhumvit hotel. This is no ordinary hotel eaterie - the cool décor puts most London restaurants to shame as do the food and the service. But only those looking to sweat like an ADB delegate caught without a taxi should toy with the three chilli specials.
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