Thailand’s Deposit Protection Cut
From 11th August onwards, the Deposit Protection Agency (DPA) says that it will reduce protection offered per individual account holder in one financial institution to THB 1,000,000 from THB 5,000,000. This isn’t because of the current Covid crisis and has long been planned.
The Deposit Protection Institution Act took effect 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 been adequately capitalized and since 2008, the BOT put in place some of the most stringent measures in the world to protect the Thai banking system and this can help to justify the step-by-step process to lower the Thai deposit protection rate.
During Covid some of these bad debt preventive mechanisms have been relaxed to cope with the Covid situation and common sense tells us that non-performing loans (NPL’s) may increase over the next few months as temporary cash-flow assistance provided during this time and earlier on in the crisis might not be paid-back accordingly. With this in mind, one might argue that the DPI should wait until the Covid crisis is 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 in 2020.
If in the unlikely event Thai banks were to fail, then the main concern would likely be the sudden and deep depreciation of the THB to the USD, and don’t be surprised if (like any government faced with a major crisis), the Thai government issues a moratorium so that the DPA didn’t need to protect even THB 1,000,000, or not within 30 days as the DPA stipulates.
The Thai government may also decide not to protect deposits belonging to foreigners just as the Social Security Fund (SSO) decided to only pay Thais the THB 2,500 in Covid relief even though all nationalities pay the monthly amount.
Currency risk is always present everywhere and particularly with an emerging market which is often fraught with trade or political peculiarities (the THB has been remarkably strong in recent years largely due to 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 what Covid has done up until the end for March 2021.
However, this may change in the months ahead given the severity of the Covid-19 wave, and we may see another cycle of rising bad debt and the THB finally depreciating.
Depreciating on account of the wave
Regardless of Thai banks, it is always prudent to diversify assets and we strongly recommend this in most cases. This might mean reviewing where your savings are maintained, and where your business interests are?
It is amazing to see entrepreneurs owning a business in Thailand that are subsequently carrying a significant Thai market and Thai currency risk to also have all their savings in Thailand, too.
One simple way to diversify deposits is to purchase US treasury notes, and a convenient method for doing this is via an index tracker, or ETF. We believe that long-term US treasuries offer the most value. While US Treasury ETF’s aren’t available to purchase on the Thai Stock Market, they are available if you have an offshore fund 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.
Of course, US Treasuries aren’t completely default free, but the chance of a US government US treasury note default is exceedingly low, perhaps it might happen only once in 100-200 years (>4-Signa event) or a major negative trading event than abnormally knocks the price down might happen on one day in every 750 days (a >3-Signa event).
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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