Macro-Economic Perspective

Once acknowledged as one of Southeast Asia's strongest economies, Thailand saw relatively subdued growth between 2012 and 2016. As rising household debts reduced overall consumption, flooding and increasing global competitiveness caused the country's manufacturing exports to decline significantly. At the same time, much-vaunted infrastructure projects were delayed due to regulatory hurdles and capital shortages. As a result, GDP growth threatened to dip below 3% at various points across this period, while neighboring countries such as Vietnam and the Philippines saw yearly economic expansion surpass 6% over the same timeframe.

However, over the past two years the country has managed to bounce back and resume its positive outlook. In 2017, the gross domestic product grew by 3.8%, buoyed by gains in tourism (more than 34 million visitors) and rejuvenated exports (key industries included electrical components, jewelry, plastic pellets and vehicles). This year, the economy is on track to hit 4% growth off the back of further development in these two key sectors. Consumer confidence also seems to have risen in line with these figures as consumption increased by 3.5% over 2018.

These trends could well form the basis for an even greater transformation if the Thai government is able to successfully implement infrastructure initiatives that would once again stimulate private investment in the country. Another key focus area should be education reforms and the overall expansion of skilled labor. As Thailand's workforce begins to age and its labor pool shrinks, the country must develop its service sector so it can boost innovation in manufacturing and reap the benefits of a digitally agile, knowledge-based economy. This should also help to bring in further foreign investment.

Socioeconomic Factors

Thailand has experienced steady socioeconomic development over the past decade. In this period Human Development Index (HDI) ratings for purchasing power per capita, literacy rates, sanitation, and water accessibility have all improved. As a result, the country is now ranked 93 out of 186 nations in the overall rankings. Thailand also boasts on the most effective healthcare systems in the world.

While these metrics obviously illustrate a progressing nation, widespread inequality still exists especially in minority communities in the far south and north of the country. The country's populous northeastern region also houses 66% of the countries impoverished citizens. These factors have limited the impact of the country's economic development to its urbanized city centers. By all accounts, the inequality gap is continuing to widen. Currently, the top 20% of Thailand's population earns over half the income.

Financial Services Sector

Thailand's current financial services sector developed largely in response to the 1997 financial crisis which saw widespread currency devaluation across Asia and a gross fiscal loss of 33% to Thailand's GDP at the time. It took at least two years for the country to recover from the lasting effects of the crisis. As a result, the government decided to rebuild its financial institutions on principles of stability and consistency rather than aggressive growth. This risk-averse approach led the government to consolidate many vulnerable private banks in the state infrastructure while implementing strict capital and gearing guidelines alongside a new regulatory framework for financial service providers. These reforms were based around prevailing industry best practices as defined by Basel II.

During the 2009 global recession, these moves towards fiscal prudence and good governance paid off as the private sector had been deleveraged to largely manageable levels while the domestic capital markets were robust enough to ride out international volatility. Today, Thailand enjoys a financial inclusivity rate of 74% (around �th of the population has access to traditional banking networks) which places it well above other countries in the ASEAN region. However, the reliance on state-run banking systems has made the FSS inflexible and resistant to innovation.

Although commercial banks are still the dominant force in the financial services sector (overall asset contribution of 19.3 trillion THB as of 2017), alternative finance providers have gained significant ground since 2011. Mutual funds and life insurance products in particular, have shown strong growth over this period. The former has increased its share of financial assets by 4.3%, while the latter has grown by 2.3%. In the coming years, the financial services sector will likely tilt even further towards these providers.

Despite these ongoing transformations in the sector, some clear deficiencies can still be observed:

• SMEs and other informal entities still lack adequate access to formal savings, investment and credit instruments.
• The same is true for rural and low-income households. Traditional banking products also fail to address the funding requirements of these customers.
• Risk assessment processes are extremely rigorous, and financing is rarely granted without the provision of collateral.
• Loan application processes are time-intensive and complex. Most households and SMEs cannot provide adequate documentation to verify their sources of income and credit history.
• Transaction costs for fund transfers remain high due to the high cost of state-run infrastructure.
• Despite widespread financial inclusivity, most customers still lack basic financial literacy and are unaware of available financing options on the market.

Access to Financing

Before the 1997-1998 crisis, there were over 124 banks in operation across the country. Today, there are just 25. Fourteen of these are Thai-owned commercial banks, and a further 11 are branches of foreign banks. Apart from these institutions there are eight specialized financial institutions (SFI), these are government-backed organizations that have been set up to serve specific government objectives i.e the Bank for Agriculture and Agricultural Cooperatives controls investment in the agricultural industry, the Government Housing Bank controls access to home loans. Together, SFIs make up 25% of deposits in the economy and hold almost 30% of all household debt.

Thailand's capital markets make up the third pillar of private sector financing in the country. These markets are relatively shallow. When compared to China's $2.2 trillion equity market and South Korea's $986 billion market, Thailand's market capitalization stands at a modest $296 billion. Currently, only about 2% of the domestic population invests in these markets. However, a far larger portion of investment is dedicated to long-term financial instruments such as life insurance, mutual funds and pensions. The lack of diversification in the country's economy is largely attributed to the fact that the government has failed to set up a proper infrastructure for non-banking financial instruments. The country's strict legal and regulatory framework has also worked to impede development in this area.

Role of SMEs

Over 99% of Thai businesses are classified as SMEs. Together these organizations employ almost 80% of the country's workforce and contribute almost 40% to the GDP. SMEs also play a critical role in Thailand's core manufacturing industry, making up 19.7% of the companies in this sector. They also help larger enterprises by covering production and supply shortages in underserved areas. These figures illustrate how integral SMEs are to the overall health of Thailand's exports. SMEs also make up 40% of the workforce in the agricultural and food production sectors, and contribute significantly to the tourism industry as well.

As of 2014, 80% of all loans to SMEs were still sourced from commercial banks. However, loans to these organizations only represent 38% of overall disbursements. Access to traditional financing has become even more restricted in the aftermath of the global recession, and the lending situation has been further worsened by ongoing political instability and international market volatility. As a result of these trends, commercial banks have increased their collateral requirements to 16% of the overall loan amount. SMEs are also charged higher interest rates (averaged out to 1.6%) in acknowledgement of the increased risk of default from these entities.

While most SMEs rely on internal sources of financing for their initial startup capital, capital injections are generally sought for expansionary purposes. Due to increased difficulties in accessing financing through commercial banks, Thai SMEs have increasingly turned towards SFIs. As of 2014, the government has instituted expansionary lending policies (lowered interest rates, collateral requirements) that are aimed at developing the SME sector. As government-backed lenders, SFIs are far more likely to accept new loan applications from smaller businesses. The SME Bank of Thailand was specifically established to serve these objectives, as of 2014 this SFI has provided $2.62 billion worth of funding to entrepreneurs across the country. The government has also implemented a credit guarantee program to facilitate easier access to commercial funding.

As well-intentioned as these schemes might be, World Bank statistics show that only about 3.6% of Thai SMEs had applied and received SFI loans, while a meager 1.2% had been accepted for credit guarantee programs. The fact remains, that the vast majority of SMEs still prefer the convenience of commercial funding even though the chances of application rejection are higher.

Alternative Sources of Financing

In the absence of funding from commercial banks and SFIs, other sources of financing must be sought. Venture capital is one such source of capital. While these forms of investment are generally reserved for high potential organizations, the Thai government has set up a 5 billion baht venture capital fund for SMEs.

The government is also looking to develop its Nonbank Financial Instruments (NBFI) sector as well as its capital markets specifically to serve the funding requirements of small businesses. The Market for Alternative Investments (MAI) was set up in 1998 to provide growth opportunities for entrepreneurs. This market has grown rapidly in recent years and new companies are being listed all the time. The MAI is being positioned as the first step in a full stock market listing.

The Thai Bond Market Association (TBMA) has implemented a number of training programs to support SMEs that are attempting to connect with funding opportunities on the capital market. The TBMA also provides guarantee schemes to reduce the risk of SME investment for high value investors. The key with these initiatives is to: reduce the risk of investment, reduce the information asymmetry that leaves many SMEs without access to funding sources, and to reduce the transaction cost of bond and share issues.

The Thai government has also taken the lead in equipping microfinance providers with the assurances they need to increase funding to micro businesses and low income households.

Fintech

As part of the Smart Cities and Thailand 4.0 initiative the Thai government has aimed to integrate more digital technologies into its infrastructure. This extends to the financial sector where the Bank of Thailand aims to use financial technologies to:

• Lower the costs of transactions.
• Improve risk management processes at banks and other financial services providers.
• Open up access to financing for underserved borrowers (SMEs)

In service of these objectives, the Thai government has set up a regulatory sandbox where new Fintech products can be stress tested. They have also implemented new open data initiatives which should free financial data from traditional banks and give SMEs and consumers the opportunity to seek financing on their terms.

Although most Thai's already have access to traditional banking, the government has also set up a nationwide interbank e-Payment system known as PromptPay. To date, almost half of the population has signed up for this service. Apart from this initiative, Thailand is also supporting the growth of P2P lending platforms and Robo advisory finance systems to increase consumer knowledge and access to alternative sources of financing.

Leasing Landscape

Asset-backed loans have become a critical source of alternative financing in both consumer and commercial financing. The two biggest service providers in this area are MLTS and SAWAD. By 2020, the former will have over 4000 branches across Thailand while the latter organization is looking to add 300-400 new branches per year. These investments are largely down to a thriving automotive industry. Motorcycle and vehicle sales have shown strong growth across 2017 and 2018, and customers prefer obtaining these products through asset-backed loans rather than installment plans.

The sudden explosion in asset-backed loans is down to a relaxing of restrictions governing these agreements. In the past, commercial banks were only allowed to issue these loans on very specific assets (passenger cars with no more than 7 passengers, trucks that were no heavier than 1600kg). Since 2008, these restrictions have been lifted and commercial banks are now able to provide asset-backed loans on any type of asset. For customers, this easing of restrictions allows them to use their existing assets as collateral for new leases, which helps to decrease the interest burden and increases the chances of an application being accepted.