Macroeconomic Perspective

After experiencing GDP growth of 3.6% in 2018, Thailand's economy was expected to show improvements in 2019. GDP growth was projected at a 3.9% rate.

According to Deloitte, Thailand's relatively slow economic growth can be attributed largely to a weak export sector that is heavily influenced by global market trends. These factors create economic vulnerability that is being countered through rapid digitisation. However, the gains presented by digital technologies are threatened by challenges in sectors that have long dominated Thailand's market. The net export segment of the economy is expected to make up 10% of Thailand's GDP in 2019, Deloitte explained, and the difficulties created by trade uncertainty are not exclusive to the nation. Instead, they are having a broad impact across Southeast Asia, with Thailand being hit particularly hard due to its heavy dependence on exports.

While economic growth challenges in Thailand are significant, The World Bank points to a generally strong economic situation, as the nation has been a development success story. Since December 1, 2011, the nation has lost US$45.6bn to economic damages and losses from floods. However, it has grown from a low-income country to an upper-income country within a generation, creating millions of jobs, improving its educational system and reducing the poverty rate from 67% in 1986 to 7.8% in 2017.

Economic maturation creates opportunity for financing gains - stronger economic growth naturally fosters investment activities, increases in consumer spending and business expansion initiatives. However, the continued evolution of the Thai financing industry is dependent on more than stable economic growth. Socioeconomic hurdles must be overcome to create greater opportunity for the kinds of economic activities that drive financing market maturation.

Socioeconomic Factor

While Thailand has developed quickly, it still faces challenges from economic inequality. The World Bank found economic inequality increased from 2015 to 2017, as average per capita household consumption increased for the population as a whole, but declined for the bottom 40% of the population.

Thailand is grappling with the implications of rapid development and economic uncertainty. In response, there is a growing move to adopt digital technologies to increase access to financial services and improve governance in the banking sector, Deloitte explained. Digitisation is perceived as an infrastructure-like tool to create economic opportunity and reduce the barriers to financial resources in the nation.

Digital Economy Vision

The possibilities of digital capabilities in the Thai economy are particularly evident in the nation's Digital Economy Vision - a formal roadmap for digital innovation. The Thailand Digital Economy and Society Development Plan is specifically aimed at big-picture challenges that can be addressed through technology. Targeted challenges include:

• the middle-income trap;
• a rapidly ageing society;
• economic integration;
• inequality; and
• limited capacity for construction, agriculture, manufacturing and service sectors.

Specific 10-year goals involve having digital sectors make up 25% of the nation's GDP and positioning the nation in the top 15 of the World Competitiveness Scoreboard. These broad digital projects show the scale of innovation taking place in the nation, and the trend is highly visible in the financial services sector. Digital advances hold the potential to:

• unlock fintech innovation;
• open avenues to increased access to financial services to population groups outside of major urban centres;
• increase small business funding from a more diverse range of sources; and
• drive changes in consumer behaviours that fuels demand for a wider array of financial services.

These trends are becoming apparent as the Thai financial services sector moves quickly to take advantage of digital capabilities.

Financial Services Sector

According to Deloitte, financial services organisations in Thailand face numerous challenges as they embrace digital capabilities to create new opportunities and improve their operational processes. They are dealing with rapidly escalating volumes of data, higher expectations for financial insights, short business cycles and a talent crunch.

While these challenges are significant, they come as Thailand stands out among the most innovative in the Asia Pacific region. Speaking with the Bangkok Post, an IDC representative said Thailand is outperforming Malaysia, Indonesia and Taiwan in financial service innovation. Heading into 2019, analysts expected digital disruptors like data monetisation, agile development and micropayments to impact the sector. In particular, IDC found that Thailand is a regional leader in digital identity capabilities, with 54% of Thai respondents to IDC's Digital Trust Index survey saying they expect digital identity to function as a real digital version of their physical identity. The regional average is 32.6%. While digital technologies and evolving regulations are expanding the reach of the financial services sector, the economic issues leading to slow growth in the nation are impacting the lending industry. Bloomberg reported that Tisco Financial Group, which boasted the top performing stock in Thailand's banking sector, altered its lending strategy in the middle of the year.

According to Bloomberg, the lender looked at the high competition in the retail lending sector and the increasingly risky practices gaining momentum - including providing zero downpayment and low-rate loans - and chose to change course. To reach its growth goals the company opted to lean conservative through 2019, especially after the Bank of Thailand highlighted growing concerns about financial stability in the nation. Increased opportunity in the developing nation is leading to higher debt rates, pushing regulatory bodies to introduce policies that rebalance the market.

These practices put Thailand's challenge in context. The nation is modernising and digitising quickly, creating opportunities to expand access to financing and offer innovative loan products. However, the high levels of uncertainty created in a nation that is changing quickly add inherent risk to the financing sector, putting high levels of pressure on lenders.

Thailand's Auto Finance Sector

The auto finance sector in Thailand plays a significant part in the overall development of the country's economy. According to a Sales Volume Report by Toyota Motors Thailand, the domestic vehicle market posted 523,770 units sold in the first half of 2019, with a 7.08% year-on year increase, dominated by the leading three brands - Toyota, Isuzu and Honda. Vehicle sales in September 2019 in Thailand, however, decreased 14.1% year-on-year to 76,195 units, according to the Federation of Thai Industries. Vehicle sales in this month dropped for the fourth consecutive month, due in part, to the stringency in the loan approval process in the country as a result of the increasing level of household debt.

The primary players in Thailand's auto finance sector consist of banks, captive finance companies and non-bank entities. The market is dominated by banks, with the largest share of auto finance extended due to decreased costs of financing and with perceived higher levels of reliance in their systematised and established operating structures. However, a large number of captive finance companies have been acquiring a substantial share in the market. In Thailand, financial institutions including conventional banks and captive finance companies attain their clients mainly through vehicle dealers. Non-bank entities have the lowest market share.

The report 'Thailand Auto Finance Market Outlook to 2023' published by Ken Research stated that the auto finance sector in Thailand is anticipated to increase in the next five years fuelled by lower interest rates, the increasing consumer confidence index and the progressing used vehicle market. In terms of credit disbursed, the auto finance industry has been projected to increase to THB1.6 trillion by the end of 2023, registering a CAGR above 3% during the course of 2018-23. Obstacles being faced by the auto finance sector in Thailand include stringent regulations, challenges in terms of infrastructure and economic issues, especially pertaining to high household debt which is one of the primary reasons individuals in the country are holding up spending.

Despite these dilemmas pertaining to not just the auto finance and leasing industry, but the overall financial services sector of the country, Thailand remains as the second largest economy in Southeast Asia and maintains itself as a vehicle production and export base for the top automobile manufacturers across the world. Further, there are a range of opportunities for growth in the market. According to the Economist Intelligence Unit, the Central Bank of Thailand loosened monetary policy in early August 2019 amid strengthening of the local currency.

There are a number of growth opportunities in the market. Fintech and further innovation in the industry will enhance the auto finance sector in Thailand. Further, Thailand is expected to be a global green automotive production base with advanced technology implementation by 2021. The anticipated growth over the next five years of Thailand's finance and leasing sector will be further driven by flexible, customised schemes alongside new, innovative, customer-friendly initiatives. The increase of commercial activities involving vehicles, primarily car sharing, public transportation and for industrial and agricultural purposes will also be a driver of growth for the auto finance sector. Additionally, the sector is projected to be driven by increased sales of multi-purpose and luxury vehicles as a result of growing brand awareness alongside an increase in the number of families in Thailand.

Access to Financing

Conversations around access to financing in Thailand often centre around SMEs. An Asian Development Bank Working Paper explained that SMEs account for 99.7% of all enterprises in Thailand, contributing to a 26.3% share of exports and 39.6% share of economic output in 2014. The study found that Asian economies tend to be dominated by banks as the primary source of business funding, an issue that creates complicated access to funds for SMEs. Most banks are hesitant to carry the risk associated with SMEs, especially as many lack clarity in their financial statements and auditing procedures. While the regulatory situation is still in flux, the overarching trend is clear: Access to financing for SMEs is still limited, but efforts are being made to create stronger visibility to make loans more accessible.

Alternative Sources of Financing, Fintech and Leasing

The rapid digital innovation taking place in the Thai financial services sector is fuelling the emergence of fintech businesses and alternative sources of financing. For example, a Tilleke & Gibbins report unpacked the first peer-to-peer lending regulation from the Bank of Thailand. The new regulations could open the door to increase peer-to-peer lending platform use in the nation, providing access to underbanked populations and accelerating lending processes for businesses. The new regulation lays the groundwork for peer-to-peer lending penetration in the nation, and Thailand is beginning to gain momentum in the fintech space. The "2018 Global FinTech Hub Report" identified Bangkok as one of the world's emerging fintech hubs, rating the city strongly for fintech customer experiences and noting a particularly large growth space for the industry. Fintech disruption is also evident in the automotive sector, where banks and subsidiaries continue to dominate, Ken Research found. New vehicle financing will expand at a compound annual growth rate of 6% from 2018 through 2023 and used vehicle financing will rise at a CAGR of 9%, creating opportunities for lenders. While banks are the clear leaders, fintechs and other alternative lenders are gaining a foothold to penetrate the sector.

Broad maturation in the financial services and fintech sectors are contributing to long-term growth expectations in the Thai auto finance sector. By 2023, new vehicle funding will dominate the auto financing sector, gaining three-quarters of the market share. However, growth will take place at a more rapid pace in the used auto financing space, as it will expand at a 9% CAGR during that period. While the growing auto lending market shows promise, the Thai automotive industry is threatened by expectations for declining sales. According to Ksikorn Bank, Thailand's domestic automotive market was set for a decline of between 2% and 5% in 2019. While strict credit policies, high debt rates and growing interest rates threaten the market, demand for and lower prices for electrical vehicles are creating opportunities for long-term growth. This is especially true as government policies incentivise EV development. What's more, high growth rates are also fueling greater scrutiny on the industry.

The Bank of Thailand is increasing its oversight of the industry. A Bangkok Post report explained that auto loans increased by 12.6% year-over-year in 2018, an even faster pace from previous years. However, non-performing loans also grew by 1.66%. The Bank of Thailand is now exploring the auto financing market more closely to consider regulatory adjustments to reduce risk and increase supervision of lending processes. This move comes as the auto industry goes through a similar pattern to the mortgage sector in Thailand, the Bangkok Post explained. Those issues were met by new regulations that increase minimum down-payment requirements for second, third and subsequent homes. In the equipment financing sector, Thailand is the ASEAN region's largest construction equipment leasing market. Orbis research found it boasts a 23.62% market share in the segment.

Conclusion

Thailand faces a difficult balancing act between rapid development and challenges at the foundation of its economy. A study from S&P Global found that Thai banks are facing rapid changes moving forward as digitisation becomes the new normal in the industry. At the same time, private sector indebtedness and increasing policy rates are creating high risks that lenders must address. S&P Global expected the Thai economy to weather these challenges and continue to grow through 2019 - the study projected a 3.8%-4.1% growth rate, a comparable forecast to Deloitte. Banks hoping to seize opportunities in the nation will need to enhance their digital capabilities, particularly in areas like Blockchain and support for cashless payment platforms.