FS_Review_2025e.pdf 

In the first half of 2025, Thailand's financial system showcased underlying resilience, with strong capital buffers across banks and a gradual decline in household debt. Yet, this stability is under growing strain from interconnected vulnerabilities, prompting a decisive policy response to navigate the turbulent waters ahead.

Four Converging Storm Fronts

The system faces four critical risks that threaten to amplify economic headwinds:

1. The Liquidity Squeeze: Financial conditions have tightened sharply. Credit growth has turned negative, driven by cautious lenders and weak demand. Small and medium enterprises (SMEs), especially the smallest, are caught in a perfect storm: they face the steepest credit cuts, higher borrowing costs, and prolonged cash conversion cycles. Simultaneously, a significant portion of vulnerable households—with incomes insufficient to cover living costs—see their financial buffers eroding.

2. Fragile Investor Sentiment: Amid global and domestic uncertainties, investor confidence remains brittle. A strong risk-off appetite is starving higher-risk corporates of funding, particularly in the high-yield bond market where new issuance fails to cover maturing debt. The real estate sector is a glaring concern, with its refinancing capabilities in question.

3. Strains on Corporate Giants: While overall leverage among large corporations has moderated, specific sectors are weakening. Highly leveraged firms in trade and real estate, pressured by slowing consumption and exports, are seeing profit margins shrink. Their distress poses a systemic risk due to their massive debt footprint in both loan and bond markets.

4. A Cooling Property Market: The real estate downturn remains a persistent vulnerability. Despite a temporary boost from relaxed mortgage rules, core demand is weak. Falling sales, high inventories, and dwindling new projects are squeezing developers' finances, directly threatening the rollover of their substantial bond debt.

The Dual-Pronged Policy Response

Confronting these challenges, authorities are deploying both immediate relief and structural reforms.

• Short-Term Relief: The central bank has cut rates to ease debt burdens. Targeted debt restructuring programs, like "Khun Soo, Rao Chuay," provide payment breaks for SMEs and vulnerable households. A dedicated 267-billion-baht SME liquidity package combines credit guarantees and soft loans. Tax measures aim to improve cash flow for businesses.

• Long-Term Re-engineering: Ambitious reforms seek to rebuild the financial architecture. These include bolstering credit guarantees for SMEs, empowering individuals to share their data to improve credit access ("Your Data" initiative), licensing innovative virtual banks, and promoting risk-based lending. Regulators are also crafting stricter rules for high-yield bonds to enhance market discipline.

A System Still Standing, For Now

Crucially, the financial system's core remains robust. Banks are well-capitalized and highly liquid, with strong buffers against loan losses. Stress tests confirm their ability to withstand severe shocks. The ongoing household debt reduction, while gradual, is proceeding in an orderly fashion, avoiding a destructive credit crunch.

Conclusion: Vigilance Required

Thailand's financial stability is at an inflection point. Institutional strength provides a vital shield, but it is being tested by acute cyclical pressures and deeper structural flaws. The success of the current policy mix—melding targeted support with foundational reform—will determine whether the system emerges stronger or succumbs to the gathering risks. The path forward demands unwavering vigilance.