Transcript Thailand’s experience with financial services liberalisation

Thailand’s 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).
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3 types of financial service liberalisation
 Financial service openings => market access by
foreigners
 Financial deregulation, e.g. lifting controls on
interest rates and on activities of FSP
 Capital account liberalisation => allow freer flows
of capital
2
Thailand’s financial services
 Divided into 4 groups




Banking
Securities and asset management
Insurance
Non-bank
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Thailand’s 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
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Scope of liberalisation in the early 1990s
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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
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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
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 Engage in underwriting in foreign currencies
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
8
Financial deregulation - Interest rate
 Until 1990, all deposit rates were capped
 In 1989, deposit ceiling for >12 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.
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Exchange rate system reforms




1963-1977,
1978,
1981-1984,
1984,
Baht fixed to gold
Basket peg ($ weight = 0.85)
Fixed to USD 1:23.
Basket peg
10
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.
11
1997 Financial crisis
 1997-1998, Baht floated => 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
12
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.
13
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 =>
manias, panics and crashes
(Kindleberger)
14
Inappropriate government policies
 BIBF operations
 Entry of foreign BIBF branches intensified competition =>
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
15
 Perceived need to strengthen financial
supervision and regulation in Thailand
before further liberalisation.
 “Crisis prevention” measures
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Two-prong:
ex ante discipline and ex post safety net
 Ex ante discipline: emphasis on compliance
to pre-set standards and codes +
surveillance/monitoring mechanisms
 Ex post safety net: emphasis on creating new
safety net scheme
Trade-offs: moral hazard
Complementary
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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, ASEAN+3 ERPD),
regional safety net scheme (AMF/ CMI), and
other types (ABMI).
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Post-1997
 Further banking service opening
 Allow 100% foreign ownership for 10 years
 Foreign equity participation <49% 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)
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Impact on banking industry so far
• Increased foreign share ownership in top 4
banks (foreign ownership >40% for 3 of 4)
• DBS, ABN AMRO, Standard Chartered and
UOB became majority shareholders of 4
domestic banks
• DBS divested in 2004
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Commercial bank industry:
Top 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%
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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);
22
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 => a move towards lower to middle
income group to sustain growth
• Deteriorating credit quality and higher risk of credit
delinquencies
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• BOT raised concern over credit risk
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
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Insurance service opening
 Post-crisis,
 DOI eased restrictions on joint-ventures, <49%
 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
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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 <1% of market
share and less than Bt 300 mill capital)
 Direct price competition and product differentiation not
possible
26
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 =>
AIA enjoys 50% market share in life insurance industry
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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%
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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%
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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)
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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 < 49%
 NVDR sidesteps 49% restriction
31
Other regulations on securities…
 AMCOs face limited scope of investment due to
 Thai SEC’s 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 70:7
 New product offering must be approved by SEC Thailand
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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%
33
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.
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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?
35
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.
36
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) => 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
37
Thank you
38