1 in 5 Thai banks’ restructured loans will go bad: analyst

SMEs will likely struggle to make payments as production costs squeezes profits.

Thai banks are facing an oncoming onslaught of bad loans in the coming year.

Between 15% to 20% of Thai banks’ restructured loans will miss payments and become non-performing, S&P Global Ratings warned in its mid-year banking outlook for 2023.

Part of this has to do with Thailand’s high household debt and the structural weakness of its small and medium enterprises (SMEs).

“Credit risk remains heightened, given very high household debt and corporate debt as well as pre-existing structural weaknesses in the small to midsize enterprise (SME) segment. Thailand's household leverage, at 87%, is one of the highest among emerging markets and has reached unsustainable levels, leading to elevated risk of default,” warned S&P Global Ratings primary credit analyst Deepali V Seth Chhabria.

Many of Thailand’s SMEs remain vulnerable too due to their inability to fully pass on a rise in production and borrowing costs, further squeezing their profits, warned Seth Chhabria.

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Headwinds from external factors and rising interest rates are adding risk as well.

"Thailand's externally oriented economy relies significantly on final demand in the U.S. and Europe. We expect these economies to slow later this year, which could lower demand for Thailand's manufacturing," Seth Chhabria said. Elevated household leverage would then weigh on debt-servicing capability.

On the other hand, the end to interest rate hikes will mitigate downside risks.

"Real interest rates are still negative, but we believe interest rates have peaked at 2%, and could start moderating by 2024," Seth Chhabria said.