Credit Suisse's troubles are shaking global financial markets while systematic risk should be diminished by official moves and private assistance
US
The assistance given to SVB should help prevent contagion, and so the risk of a banking crisis is limited. SVB collapsed due to a unique combination of the bank’s overreliance on long-term Treasuries and a flighty and undiversified depositor base. This meant that it was highly exposed to rate hikes, and as deposits were withdrawn, it rapidly became illiquid and insolvent. This differs from the 2008 crisis, which was driven by reckless lending and weak asset quality, and the authorities’ rapid and targeted response should restore confidence and head off future problems. February’s headline inflation stood at 6.0% YoY and 0.4% MoM, while core inflation came in at 5.5% YoY and 0.5% MoM, as expected.
Although fears over the outlook for weak regional banks persist, the impacts of the SVB collapse will be limited by the swift move by authorities and private sector to increase liquidity. US labor market also remain strong, and with inflation still far from the Fed’s 2% target, we expect a further 25-bp rate hike to 4.75-5.00% at the 21-22 March FOMC meeting. Overall, though, we see the US economy continuing to slow down through 2023 on a combination of high interest rates, strong inflation, and fragile financial markets.
Eurozone
UBS has reached an agreement to acquire Credit Suisse backed by the Swiss central bank, expected to reduce systematic risk. UBS will pay 3bn francs (USD3.25bn) for Credit Suisse (CS) compared to its market cap of USD90bn in 2007, or a 97% reduction in value, aimed at restoring confidence. Major issues of the deal included: (i) the government is granting a 9bn francs guarantee for potential losses from assets; (ii) The SNB is offering a 100bn francs liquidity assistance to UBS; (iii) both banks can access liquidity from the SNB without restrictions in accordance with the guidelines on monetary policy instruments; and (iv) investors will have to bear some of the burden on the USD17.27bn loss on CS bonds. Earlier last week, the ECB has raised policy rate by 50bps to 3%, indicating concerns over price stability continued to dominate worries over the financial stability.
Krungsri Research expects the deal between CS and UBS under the support of the SNB should help to restore confidence in the financial system and mitigate the risk of contagion. In addition, the clear separation of the problems that need to be addressed between banking risk and inflation risk should help to strengthen confidence in the Eurozone's financial and economic stability. As for the economic outlook, we still see the Eurozone growing at a slower pace this year due to effects of high interest rates and high inflation.
China
Economic activity is improving following China’s reopening, but weak recovery and a lack of liquidity are reflected in the latest RRR cut. Retail sales rose 3.5% YoY over January and February, in line with expectations, while at 5.5%, growth in fixed asset investment beat market forecasts. However, real estate investment shrank 5.7% and at just 2.6%, growth in manufacturing output underperformed. Nevertheless, from 15 March, China has begun to issue tourist visas, and data from the WTTC indicates that in 2019, prior to Covid-19, 11.6% of GDP came from travel and tourism.
Although the collapse of SVB and trouble at Credit Suisse are not directly affecting the Chinese financial sector, and indicators show stronger consumption and investment post-reopening, the recovery is still weak. The financial sector remains exposed to the troubled real estate industry, and so the PBOC announced on 17 March that the reserve requirement ratio (RRR) for banks would be cut. With effect from 27 March, this will be reduced by 25bps to a weighted average of 7.6%, the first cut since last December. Geopolitical risk still remains, with Xi Jinping traveling to Russia over 20-22 March, when he will present China’s 12-point plan for ending the Ukraine war to President Putin.
Headwinds generated by turbulence in financial markets in major economies are stiffening while domestic factors continue to drive Thai economy
Industrial sentiment has improved on strengthening domestic demand. The Thai Industries Sentiment Index rose in February for the 3rd straight month, climbing from 93.9 in January to 96.2, its highest since April 2019. Improvements were seen in all components, including overall orders, sales, manufacturing output, operating costs and performance. Sentiment has been boosted by improvements in consumption, clear signs of recovery in the tourism sector, the reopening of China, economic stimulus measures that are being channeled through a number of projects, and an acceleration in government spending. These various factors are thus helping to drive the economy, while alongside this, the cost of inputs have fallen relative to a month ago.
Recovery in domestic economic activity and an improving outlook for the tourism industry are helping to boost manufacturing output in related areas, and this is reflected in January’s 1.5% increase in output of food and beverages (up from -2.0% in December). Moreover, although softening demand in overseas markets means that manufacturing for exports (e.g., chemicals, rubber goods, and plastics) remains weak, improving business confidence, the rebound in the tourism sector, and strengthening domestic consumption has helped to push the 3-month expected sentiment index from 101.1 in January to 103.6 in February, its 2nd month north of 100 points. In addition, May’s election will pump more money into the economy, while both the tourism sector and many exporters will benefit from the easing of Covid containment measures in China. However, the economic slowdown in the US and Europe and turbulence in global financial markets may undermine confidence, especially among businesses that are more dependent on overseas markets.
Thai commercial banks remain resilient. The SVB collapse and Credit Suisse crisis should have a limited impact on Thailand's financial stability. According to BOT Assistant Governor, Financial Institutions Policy Group, local commercial banks have no direct exposure to the troubled US institution (SVB). In addition, the total exposure of Thai banks to startups and fintech firms globally represents less than 1% of these banks’ capital. At the same time, Thai banks have not invested in digital assets, and their subsidiaries hold only some THB 200mn of these, with investments in digital assets and venture capital subject to strict oversight by the BOT. Given local banks’ low external exposure and strong capital position, the Thai Bankers’ Association expects that the industry will see only minor impacts as a result of the troubles facing Credit Suisse and other US banks.
The collapse of SVB and the uncertain outlook for Credit Suisse have sent shockwaves through global financial markets, and Thailand has not escaped the impact of these. The SET has thus seen a recent outflow of funds, a drop in stock prices, and greater volatility in capital and FX markets. However, Thailand’s banking system is in a much stronger position than it was in the 1997 Asian Financial Crisis, and it was able to weather considerable headwinds during the Global Financial Crisis of 2008. According to the latest data (as of end-2022), the financial position of the commercial banking system in Thailand remains strong, and this is reflected in: (i) a BIS ratio of 19.4%, the second best in ASEAN after Indonesia; (ii) a liquidity coverage ratio (LCR) of 197.3%; (iii) NPLs of just 2.73% of total loans; (iv) an NPL coverage ratio of 171.9%; and (v) overall bank credit and deposits that are diversified across industries. The soundness of the Thai banking system has also been reinforced by the creation of a THB 134bn fund that provides coverage of up to THB 1mn per depositor per financial institution, thus providing insurance for more than 98% of depositors.
