Research in 2017 by Lian C, Ma Y and Wang C found that low interest rates lead to significantly higher allocations to risky assets even when the difference between risky and risk-free assets is held constant. The effect is more prominent when the rates are below the historical norm.

Does the Thai financial market encounter this type of behaviour?

Of course it does. The growth of risky asset investments – such as savings cooperatives and foreign investment funds – are significantly higher during a period of low market interest rates than when the market rate is high.

For example, during periods that the policy rate hovered around 1.251.5 per cent – the historically lowest – deposits at savings cooperatives grew by more than 19 per cent year on year each month compared to 9 per cent during periods with higher interest rates. Additionally, investment in foreign investment funds (FIFs) has also increased tremendously since the beginning of the downward trend in the policy rate in 2012. There has been an increase in net asset value from more than Bt353 billion to over Bt1.1 trillion in February 2018.

However, this kind of behaviour should not threaten Thailand’s financial stability unless investors are unaware of the risks regarding these high-yield investments, which could lead to inefficient investment decisions, such as over-investing in risky assets. Then, the important questions should be, “Are Thai investors fully cautious of the risks they have to take to earn those high returns?” and “Are there any risks relating to high-yield investment that investors may not be aware of?”

Let’s take a look at savings cooperatives whose combined assets were worth more than Bt2.2 trillion in 2016 – larger than the total assets of every medium-size bank in Thailand. First, considering the fundamental investment risk, credit default risk, saving cooperatives seem to have low nonperforming loans or NPL of about Bt1.2 billion compared to total lending to members of Bt1.8 trillion. This is because they receive loan repayments directly from their members’ payrolls. Yet, because savings cooperatives tend not to be members of credit bureaus, many of them can not holistically assess the debt burden of their members. In addition, many saving cooperatives allow their members to roll over their debts by taking out a new loan to pay off a maturing one. Therefore, low NPL figures may not reflect their default risk.

Another important risk factor can be analysed from comparing funding from members, in term of deposits and equity, and lending to members. For instance, one of the largest Thai saving cooperatives has funding from members of about Bt108 billion – much larger than members’ loan demands of Bt21 billion.

In order to generate hefty returns to pay the members their promising generous dividends and interest, these cooperatives have to invest excess funds into a variety of assets such as local equities and corporate debts.

FIFs, which have been gaining popularity with Thai investors, are also important risky assets, with a value of roughly 7 per cent of Thai nominal GDP. Most FIFs seem to be “quite” safe investments since the majority of them invest in fixed incomes. You have to know your risk to correctly estimate the compensation you would like to get and efficiently diversify your portfolio.

Contributed by Duangrat Prajaksilpthai and Poon Panichpibool. Views expressed in this article are those of the authors and not necessarily of TMB Bank or its executives.