By Leslie Wright
Cash flow is a term often heard, but sometimes misunderstood.
Basically it is the difference between the amount of money coming in
and the amount of money going out.
Having a positive cash flow simply means you (or your company) have
more income than you spend, while a negative cash flow means you are spending more than
youre generating.
As Charles Dickens character, Mr. Micawber, so succinctly put it:
"Income twenty shillings, expenses nineteen shillings and sixpence - result
happiness. Income twenty shillings, expenses twenty shillings and sixpence - result,
misery."
Everyone, everywhere
Cash flow management applies to individuals, to businesses big and
small, and even to countries. It affects everyone, everywhere.
No matter whether youre an individual, a company, or a country,
positive cash flow allows you to accumulate capital from savings. Negative cash flow gets
you into debt.
Without effective cash flow management it is very easy to spend more
than you earn. It takes self-discipline to keep spending within your income limits.
One often hears the droll comment that Thais always have too much month
left over after their salary.
This adage partly derives from the low income that many Thai workers
receive; but it also reflects the local attitude towards money, discipline, and thrift.
Thrift always comes a long way down the list of priorities, while fun
comes almost at the top.
And, it is worth noting, this is not a trait exclusive to Thais.
Sufficient for today
Some individuals find it very easy to spend. And
when they have no more money in their pockets or the bank, they spend money they
dont have by running up credit card debt, or by borrowing money from other sources.
Some people get their personal finances into such a mess that they
actually borrow money from one credit card to pay off the debt on another one.
The very high rates of interest that apply to this vicious cycle adds
to the burden by accumulating further debt, which escalates month by month to the point
where someone (usually the credit card company) has to break the cycle.
This is usually quite painful to the debtor, and can ruin his credit
rating for several years.
However, if you exercise some self-restraint and discipline, credit
cards can actually be used to your advantage, and even to make money!
How? Easy.
Charging purchases to a credit card and then paying off the bill in
full when it becomes due usually incurs no credit charges.
In the meantime your money is earning interest in your savings account,
rather than having been withdrawn to make cash purchases.
In effect, you can put off actually paying for your purchase (or
dinner) by as much as 4-6 weeks this way, and earn interest on that money in the meantime.
However, as was recently reported by one of the largest local banks,
over 40% of their credit-card holders have stopped paying their bills altogether. As a
result, Thailands major banks have also stopped issuing new credit cards.
Many locals regard a pawnshop as virtually the same as a bank, but in
reverse. In hard times they make a deposit, and in good times they make a withdrawal.
Similarly many Thais regard the local gold shop as the equivalent of a
flexible time deposit.
A gold chain - ("to help me remember you" is the line often
used to acquire one or several of these) - can be carried around anywhere, and whenever
cash is needed, can be deposited at the gold shop, and may be redeemed when the good times
come around again... perhaps during your next trip to Thailand.
High season always brings lots of activity to both these Thai
equivalents of Savings & Loans.
A vicious spiral
If youre running a business and have
extended credit to others, and these debtors are reluctant or slow to pay you, you will
have bills to pay yourself but possibly no money to pay them with.
While you are thus suffering what is termed by bankers and economists
"a short-term liquidity problem brought about by negative cash flow" - or in
laymans terms, youre short of cash - you may be forced to borrow money to keep
your business going.
Inevitably, you will have to pay interest on this money, and be
expected eventually to return the capital.
In the meantime, you are, in effect, financing the bad business
practices of others.
To make matters worse, local banks nowadays are at best reluctant and
at worst unwilling to lend money to small businesses.
In most cases, unless you are able to come up with substantial
collateral, your request for a bridging loan or additional operating capital will fall on
deaf ears.
Needless to say, even if you have the collateral, the interest rates
being asked are still expensive; and if youre unable to borrow from the bank and
have to go elsewhere, the rapacious rate of interest demanded by moneylenders can be
potentially crippling to your business.
And, it is worth noting, if youre unable to repay the
vigorish on time or at all, this might be crippling to your body as well! (In
Hong Kong the standard "example to others" used to be severing your Achilles
tendon with a set of bolt cutters; in the Philippines and Thailand the punishment tends to
be even more permanently incapacitating.)
Your business may have been doing well, but collection problems forcing
this additional debt burden upon you may make all the difference between continued success
and your business failing.
The banks: lenders or borrowers?
In the past it was fairly easy for people to
borrow money from banks in Thailand, provided they were willing to pay the relatively high
interest rates being charged.
This option has now become very difficult for most people, despite
government pleas to ease credit to stimulate economic recovery.
Except of course if you, your brother, wifes brother or cousin
happen to be a shareholder-director of a bank, and even better if youre a poi (which
in this context is not a type of decorative pond fish; on the contrary - its an
acronym for a potentially dangerous big fish called a "Person Of Influence")
then its apparently very easy to borrow money, and in the past you didnt even
need to put up any collateral. And probably wont even have to pay back the debt
either!
Even with the new laws governing seizure of collateral (assuming there
was any to seize), it could take up to 10 years for the banks to go through the laborious
court procedures to get a judgement against you.
Nowadays it seems the ultimate status symbol in Thailand is no longer
to have a BMW or M-B (there are plenty of those around already) but to have an NPL.
A nations debt
When a countrys spending exceeds its
capacity to pay for its purchases, three things can happen.
One, if more goods are imported than are being exported, the balance of
payments deficit increases; or if the money was spent by the government, its
national debt increases.
One solution to this problem resorted to by most governments in the
past was simply to print more money. Then the amount of money in circulation becomes more
than the reserves which support that money. In turn, the real purchasing power of that
money - its true value - is lessened.
And this is basically what creates inflation.
The second scenario that can result from poor fiscal management or
overspending is that the nations economy shrinks, the currency comes under pressure
and may even be devalued, and the economy then shrinks further, leading to unemployment,
diminished tax revenues, and a greater burden on the governments already-diminished
coffers until its goods once again become competitive at lower prices on the international
market, and the balance of payments situation starts to improve.
However, this independent scenario can only exist if the
nations capital reserves are sufficient to weather the storm.
The third solution of a country overspending and running
short of capital reserves is to be forced to borrow money from overseas institutions - the
IMF, for example - to prop up its economy.
Any bank imposes conditions on its loan to a borrower, and the IMF is
fundamentally no different.
The fact that any particular government doesnt like the
conditions, which are often harsh, is irrelevant: they should perhaps have kept their
house in better order and taken steps before the crisis to prevent it, thereby avoiding
having to go cap in hand (almost) to avert disaster.
Carping after the event is really only a prelude to the oft-practised
ploy of renegotiating the terms which they were more than willing to accept when first
they desperately needed the bail-out, and subsequently to buy more time to gather in the
money needed to keep to the restructured payment schedule.
Borrowing cheap can be expensive
Borrowing dollars abroad at low interest rates
and using this money locally for various things - including speculative investment - was a
pastime favoured by many local corporations and individuals before the currency crisis
hit.
They imagined that the Baht - which had been stable for a long time at
around 25 to the US$ - would maintain this strength indefinitely, and enable them to make
windfall profits on the relative difference in interest rates at home and abroad, or use
low-interest dollars to expand their production capacity, in the expectation of being able
to repay the cheap loan from the anticipated profits.
However, when the crisis hit and the Baht tumbled, the situation was
made worse because these debts to foreign institutions still stood in dollars, and
strangely enough, most foreign banks do expect to get paid.
At the height of the crisis, when the Baht stood at 55 to the US$, the
overseas debt had effectively more than doubled in local terms, and many of these debtors
- both corporate and private - were unable to repay their overseas loans.
What can the banks do? Seize the collateral? In many cases they
couldnt, because of local laws not providing for this. (Hence the demands for
reforms, which, naturally enough, have been resisted so vehemently by those such
amendments would affect.)
And even if the overseas banks had been able to seize the collateral,
if this was local real estate, for example, to whom were they going to sell the property
to recoup their cash? The property sector was one of the hardest hit by the crisis, and
no-one was buying.
All the banks can do, effectively, is give the debtor the opportunity
to renegotiate the loan, in the hope that they will at least eventually recoup some of
their capital, and the debtor will keep to his agreement to pay a more modest rate of
interest in the meantime.
This restructuring applies to individuals, to corporations,
and even to countries.
Banks are interested only in money. So long as they have an income
stream - debtors paying interest, customers making deposits - they are able to lend this
money out to others, and earn a profit from the interest (provided the borrower keeps to
the repayment schedule); or in the current situation, increase their capital to make
provision for the bad debts they will soon have to write off because so many borrowers
have chosen not to keep to their repayment schedules.
Banks are not in the real estate business, so seizing collateral
property which they cant turn into cash flow does them no good at all.
Similarly, having to sell off assets at a considerable discount
doesnt make their books look too good either.
But at least that is better than having assets on paper - in the
receivables column - which arent moving, and arent being
collected, and thus unavailable to pass on to borrowers from whom an income stream and
profits can be generated.
Thus the need for the hard-pressed local banks to generate new sources
of capital, by floating convertible bond issues, debentures, preferred shares, etc.
These banks will then still have the legally-required capital base when
they are forced to write off the enormous sums of NPLs, and still have sufficient money to
lend to new borrowers (or old ones, once their loans have been restructured), from which
they will be able to generate income from the relatively high interest rates they will
still be charging (despite these having been lowered over the past several months) when
compared against the interest they will be paying out to depositors (lowered even further
in recent months) and the dividends to their new capital partners whove effectively
lent them the money to continue this cycle - at least until the next crisis.
The question still remains, though, how well future debt will be
managed, by individuals, corporations, and nations.
If you have any comments or queries on this article, or about other
topics concerning investment matters, write to Leslie Wright, c/o Family Money, Pattaya
Mail, or fax him directly on (038) 232522 or e-mail him at [email protected]. Further details and back
articles can be accessed on his firms website on www.westminsterthailand.com.
Leslie Wright is Managing Director of Westminster Portfolio Services (Thailand) Ltd., a
firm of independent financial advisors providing advice to expatriate residents of the
Eastern Seaboard on personal financial planning and international investments.