RADHIKA MADANA MOHAN learns even in political uncertainty, Thailand’s economy is in good shape as Islamic finance flourishes.

At one end of the spectrum, Thailand managed a 12% annual growth rate in the first quarter of 2010. This impressive growth rate came from private consumption, investment and exports, all of which expanded. On the other, the current political instability in the nation could not have come at a worse time.

While most nations are trying to recover from the post global financial crisis, Thailand is losing its momentum, looking more and more vulnerable. With some of the worst violence in Thailand’s history occurring within the past month, foreign equity investors’ patience is wearing thin, with many considering fund withdrawal.

Tourism has taken a severe blow, slashing arrivals to the country by almost one third of the usual numbers. This is alarming as the industry supports 6% of the economy. Estimates suggest a possible US$3.7 billion in revenue.

Even though tourism accounts for 15% of Thailand’s workforce, Fitch Rating’s Vincent Ho says there’s nothing to worry about, as Thailand’s work force is indeed very flexible. The associate director of Asia Sovereign Ratings believes workers shall be absorbed into other sectors of the economy.

“Last year, Thailand experienced the impact of global recession and there was a substantial shrinkage in the manufacturing sector; and most of the unemployed workers were absorbed by labor intensive sectors such as the agricultural sector,” said Ho. He expects the same to happen with the tourism industry.
Thai banks have so far proven resilient to the financial sector troubles in the US and Europe, but prolonged domestic political unrest could compound the economic slowdown in Thailand. Fitch Ratings’ forecasts for Thailand’s economic growth are 3.8% for 2010 and 4.2% next year.

The agency lowered the outlook on Thailand’s long-term local currency credit rating to negative from stable.

At this point, the damage is rather mild, but should the political uncertainty prolong, the country withstands a possible foreign business exodus. However, there is hope that the past shall repeat itself: investors temporarily leave, but later return to the market when it becomes more stable. Although Ho predicts, this is unlikely to occur within the next 12 months.
Steady progress

Thailand has every intention of enhancing its Islamic banking and finance industry to cater for its 9.5 million Muslim population mostly located in the southern part of the country.

The sole Islamic bank in the country, the Islamic Bank of Thailand (IBT), was established in 2003. Last year, the bank announced profits of THB300 million (US$9.3 million).

The bank has 61 branches operating throughout Thailand and plans to add 33 more to support its growth. IBT also hopes to widen its mass appeal and tap into the international scene.

Additionally, IBT is set to become a major shareholder with a 49% stake in Nava Leasing, a Stock Exchange of Thailand (SET) listed company. The bank will purchase 465.5 million shares at THB1.20 each from the company, 265.5 million shares through a partial lender and 200 million shares via private placement.

Nava Leasing focuses on hire-purchase and financial leases hoping to benefit from bank funding to expand its coverage in the southern part of the country, reaching out to Muslims in that area.

However, IBT expects fierce competition from Malaysia’s CIMB Bank’s acquisition of Bank Thai. The bank now known as CIMB Thai has begun formalizing plans to open an Islamic window through its 125-branch network.

Furthermore, the Bank of Thailand and the Ministry of Finance are intending to ease regulatory framework, granting foreign institutions more freedom to expand. This could be an opportunity for HSBC, Standard Chartered and Citi to take advantage of this new system by introducing Islamic windows to the country.

Earlier this year, IBT floated its THB55 billion Sukuk (US$1.7 billion) in the local and overseas market. The bank had hoped by the second quarter to have raised THB5 billion (US$155 million) from a local Sukuk and another THB50 billion (US$1.5 billion) in funds raised as a sovereign Sukuk by the third quarter. However, there has been a delay due to the political turmoil in Bangkok.

On the legal and regulatory front, Thailand recognizes the necessity to tailor its current financial structure to accommodate Islamic finance. For Sukuk issuance, the Ministry of Finance has drafted a regulation for tax exemption which includes tax liability from the transfer of assets. Additionally, the Thai Securities Commission is drafting a new regulation expected later this month, permitting both domestic and international issuances of Sukuk.

Malaysia has developed an extensive skill base that Thailand hopes to emulate. There are efforts afoot to attract Malaysian firms to help the country expand its Islamic banking industry. The main driving force being that the majority of Muslims in Thailand live in the southern province close to the Malaysian border, which potentially serves as an incentive to establish a cross-border relationship.

In terms of indexes, the SET joined forces with global index provider FTSE Group last year. The FTSE SET Shariah index consists of 63 stocks with a combined market capitalization of about THB1.74 trillion (US$42 billion), equivalent to 39% of the total eligible Thai stock market. Three Islamic funds are currently available locally, managed by MFC Asset Management and Krung Thai Asset Management. Investors include the Government Savings Bank, Social Security Fund, the SET, the Islamic Bank of Thailand and the Thai Military Bank.

Ruengrit Pooprasert, partner at law firm Zaid Ibrahim & Co Thailand, says the main obstacle for Thailand in terms of Islamic finance is that the general population is still at education level. Most consider Islamic finance only relevant to Muslims. On the positive side, he believes policy-makers have already begun taking initiatives to accommodate Islamic finance.

Even in its early stage of Islamic finance, Thailand is treading through clear waters well equipped with knowledge and guidance. The country may benefit from the experience and shortcomings of those who have already ventured deep into Islamic financial waters.