Bank of Thailand chief: No trace of a bubble

The central bank governor says most of today’s investment in property does not come from loans. (Photo by Benjapol Amornjiarasak)

There are no signs of dramatic growth in borrowing for property speculation activities, while banks have been better at managing risks associated with project financing, says Bank of Thailand governor Veerathai Santiprabhob.

His comments dispelled concerns over a real estate bubble after Supachai Panitchpakdi, a former director-general of the World Trade Organization and secretary-general of the UN Conference on Trade and Development, earlier warned that most domestic private investment was concentrated in the property sector, which could cause a bubble.

“We did not see strong growth in loans used for speculation on property prices compared with overall housing loans,” Mr Veerathai said Thursday on the sidelines of the Greater Mekong Investment Forum.

The increase in investment in high-end property was partly attributed to low interest rates, which pushed investors to look for higher returns.

“The spike in real estate prices we are observing is not alarming and will not create systematic risk like what happened in the 1997 crisis where speculators’ funding was mainly concentrated in borrowing,” Mr Veerathai said.

Even though the price of property has been rising fast in some segments, the main condition that is different between today and the 1997 financial crisis is the source of the funding, the central bank governor said.

He said most of the property speculation in 1997 relied on loans, but now the majority of the money used to buy property is from the savings of wealthy people.

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The quick rises in property prices are mostly concentrated in the luxury residential segment, Mr Veerathai said.

On the supply side, he said financial institutions have better managed risks in recent years, especially loans for real estate development for both pre- and post-financing.

For pre-financing, a lot of developers have shifted to relying more on capital markets, which have lower financial costs, Mr Veerathai said.

“However, some developers also use financial instruments in the capital market such as bills of exchange to fund their long-term investment, a practice we deem as a mismatch,” he said. “But these few cases won’t affect the financial system as a whole.”

In related news, Mr Veerathai said recent economic readings show that the Thai economy has recovered in many sectors, particularly merchandise exports, which expanded rapidly in the past few months.

He said exports picked up as broader-based sales abroad rose for most products in line with the recovery in exports among many East Asian countries.

“Private consumption also fared better in the fourth quarter of 2016 through the first quarter this year, partly because of higher prices and output of agricultural products,” Mr Veerathai said.

The effect of low private investment on the overall economy still warrants close monitoring by the central bank, but investment in some sectors such as information and communication technology and the digital economy continues to grow, he said.

Separately, the Bank of Thailand’s business sentiment index showed that business confidence increased to 52.3 in May from 49.6 in April, surpassing the 50-point threshold that separates pessimism from optimism.

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The central bank said the improved confidence, especially in manufacturing, was mainly due to improvement in order books both from domestic and foreign markets.

But confidence for the next three months fell slightly to 55.2 in May from 55.8 in April as a result of softening confidence in order books, production and sales sub-indices of respondents in the non-manufacturing sector.

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