BIBFs map unchartered territory
Officials are worried about what kind of 'monster' the BIBF banks will turn out to be. Thanong Khanthong and Vatchara Charoonsantikul report.
Thailand took another uneasy step towards liberalising its financial system yesterday with Finance Minister Amnuay Viravan awarding licences to seven new foreign banks to operate offshore banking under the auspices of the Bangkok International Banking Facility (BIBF). The newcomers are Fuji Bank, Generale Bank SA, Korea Development Bank, National Australia Bank Ltd, Royal Bank of Canada, Tokao Bank Ltd and Union Bank of Switzerland.
The new BIBF banks will push the Thai financial system deeper into uncharted territory, toward the final destination of making Bangkok a regional financial centre. Whether Bangkok will arrive at that lofty goal, the past development of BIBF banks points in a different direction.
Since 1993, the BIBF banks have been making their formidable presence felt in the Thai financial system. Using Bangkok as a funding centre, they mobilise Eurodollar funding from overseas for lending in the domestic and neighbouring markets.
Yet they do so in a terribly aggressive way that has raised the eyebrows of the policy-makers, who are now concerned about the health of the bubble financial system.
Starting from scratch in the second half of 1993, the BIBF banks joined the liquidity-driven locomotive to expand the bubble economy. By the end of that year, their combined assets had reached Bt234.91 billion Bt197.02 billion for out-in, Bt37.89 billion for out-out transactions.
The following years saw the BIBFs go into overdrive, with their assets jumping several fold to Bt557.47 billion in 1994 and Bt1.2 trillion in 1995 before levelling off at Bt1.27 trillion in the first 11 months of 1996.
Of particular policy concern is the build-up of the ''out-in" BIBF business, which lends Eurodollar money to the domestic market. Through the BIBF, Thailand is importing inflationary capital.
In three years the market share of the BIBF banks has shot up from zero to 26 per cent of the total Thai banking system. Of the total BIBF banks, 12 are local commercial banks, 11 are foreign bank branches and 19 are foreign banks, seven of which have already upgraded their status to foreign bank branches.
The inflated asset growth of the BIBF banks could partly be attributed to a flawed policy of the Thai authorities, who set quantitative growth as one of the criteria for upgrading their status into full foreign bank branches. The BIBF banks said ''thank you" and earnestly converted their assets from Singapore or elsewhere into Thailand. They also massively booked credit, structured as short-term loans.
It was not until September last year that Moody's Investors Service Inc, the US credit rating agency, downgraded Thailand's short-term debt. Moody's signalled that it was concerned over a rapid build-up of short-term capital in Thailand, which was used to finance the current account deficit.
A debate ensued as to whether most of the BIBF loans were short-term or a disguise for foreign direct investment. Short-term capital is defined as capital with a maturity of less than one year. The Thai authorities, however, ordered the BIBF banks to revise their accounting methods and re-booked most of their loans as long-term (one year and one day?).
Still, Moody's has stuck to its earlier assessment of Thailand's heavy reliance on short-term debts to finance its current account deficit, which ballooned to more than 8 per cent of the gross domestic product last year.
The dramatic asset growth of the BIBF banks has added pressure to the money supply growth, which has been growing at more than 20 per cent over the past three years. A tight monetary policy had to be kept over the past three years to combat inflation.
''We don't know what kind of monster the BIBF will turn out to be in the future," a monetary official said. ''Do we want them to book more assets? How much?"
Despite the lack of a clear policy over the BIBF, the Thai authorities have continued to liberalise the banking sector.
This financial liberalisation has been made ahead of a final agreement by the World Trade Organisation. In relative terms, Thailand is being even more generous than Japan, an economic superpower, in the liberalisation of its financial sector.
The seven new BIBF banks are going to crowd out the BIBF business, which has already booked more loans than the market can absorb. At least over the next two to three years, amid a sharp economic slowdown, the financial institutions will pay more attention to consolidating their businesses rather than expanding.
Looking back, the Thai top policy-makers did not feel comfortable at all with the liberalisation of the financial sector. In 1990, during the Chatichai administration, then Bank of Thailand Governor Chavalit Thanachanan lifted foreign exchange restrictions by adopting Article 8 of the International Monetary Fund.
With that move, Thailand proudly proclaimed that it was no longer a debtor country but a net lender to the IMF. However, Chavalit privately expressed concern over the destiny of the country to control capital flow. Adopting the IMF obligations meant there was no turning back for financial liberalisation.
Net capital flows threaten to swamp the Thai market, reaching US$9.68 billion in 1990, $11.29 billion in 1991, $9.4 billion in 1992, $10.49 billion in 1993, $12.16 billion in 1994, about $21.60 billion in 1995 and about $15.66 billion in the first nine months of 1996.
These net capital inflows, unchecked by a fixed exchange regime, set the stage for a bubble economy that went bust in 1996.
During the Chuan administration, there was pressure for Thailand to further open up its financial markets, although negotiations for financial liberalisation under the General Agreement on Tariffs and Trade were not going anywhere.
Then finance minister Tarrin Nimmanahaeminda and Vijit Supinit, the central bank governor, agreed to hand out BIBF licences to 19 new foreign banks, seven of whom were subsequently awarded the foreign bank licences.
The BIBF business will be a testing ground for the newcomers, for their business will be limited to largely foreign currency activity. The Provincial International Banking Facility was given incentives to provide baht loans, but the offshore banks have found this a burden since most of their business is located in Bangkok.
Now Amnuay and Rerngchai Marakanond, the current central bank governor, have to deal with this BIBF animal. They have embraced seven more BIBF banks, which will be here to stay forever.