. this conclusion is supported by the following five important reasons. first and foremost is the low direct exposure that the thai banking sector has to sub - prime credit and cdo. cdo exposure of thai banks at the second quarter of last year was less than 0. 3 percent of total asset. banks with cdo exposure have already made full provision and recognized losses in line with ias 39, and presently all sub - prime related cdo positions have been unwound. more importantly, thai banks also do not have investment in us gse securities. this is another positive point that will help insulate the banks from any further spillovers. reflecting this, the direct impact of the turmoil so far, on the thai banking sector, has been limited. second, on the issue of liquidity and financing, banks in thailand are predominantly domestic - owned. hence, they rely more on deposit funding rather than external funding. domestic funding is a more stable source of funding and is not affected by the turmoil. this feature will help cushion thai banks from the effects of the global credit crunch. third, fundamentals of the thai banking system have improved and the key fundamentals are sound and resilient. as a sector, banks in thailand have enjoyed good profits for the past seven years and are well capitalized with the bis capital adequacy ratio at 15. 2 percent at end of june this year. over the years, better risk management, improved asset quality, greater provisioning coverage against losses, and the regulatory and supervisory frameworks that meet international standards, have significantly improved the overall risk profile of the sector. as for the most recent quarter, net profit of 57 billion baht was registered in the second quarter of this year. loan growth in july increased to 11. 8 percent while deposits including bill of exchange grew by 1. 9 percent. liquidity in the system remains adequate, with loan / deposit ratio excluding interbank transactions at 90. 1 percent in july. on asset quality, gross npl ratio edged downward to 6. 4 percent in june. these numbers show that the performance of the thai banking sector is quite robust, and is well positioned to support the economy. fourth, a more difficult picture to assess is the impact of the turmoil on the economy and how this would translate into the impact on the banking sector. so far, notwithstanding the less helpful global environment, the thai economy has performed relatively well, with growth averaging 5. 7 percent in the first half of this year

deficits that went with them ) were not some kind of aberration, but reflected the normal working of market forces. for those who find these deficits to be aberrant behaviour, could i remind you of the feldstein and horioka ( 1980 ) analysis, which suggested that the true aberrant behaviour was the close correspondence between saving and investment within most countries in the world. in other words, the amount of capital flow between countries has been smaller than optimal behaviour would seem to suggest. while a number of poor investment opportunities were certainly undertaken ( most notably, excessive real estate investment ), at an aggregate level it is still correct to say that there were many high profit opportunities available in these countries, as they moved from well inside the technological frontier towards the frontier itself, driven by an eagerness to adopt all sorts of productivity - enhancing techniques. graph 5 : singapore current account per cent of gdp % % - 10 - 10 - 20 - 20 - 30 - 30 - 40 - 40 source : imf international financial statistics. if all this sounds a bit textbook - ish, consider the experience of singapore. as shown in graph 5, they ran a current account deficit averaging more than 10 per cent of gdp for two decades, in a period of policy - making which would universally be regarded, with hindsight, as extremely successful. i should remind you also that all these countries ran, in the textbook sense, “ good ” deficits - i. e. they were used to fund investment and not consumption, and were certainly not funding budget deficits. some of these countries understood, perhaps intuitively more than by rigorous logic, that big current account deficits made them vulnerable : indonesia, for instance, was uncomfortable if its current account deficit was above 3 per cent of gdp. korea, too ( in recent years at least ), ran quite modest current account deficits. but by and large, once these countries accepted the idea of financial deregulation and open markets, they were going to be on the receiving end of very substantial capital inflows. table 2 : saving, investment, current account and budget balances 1991 - 1995 average saving ( % of gnp ) investment ( % of gnp ) cab ( % of gdp ) budget balance ( % of gdp ) indonesia malaysia philippines south korea thailand 31. 8 34. 2 18. 7 35. 4 34. 9 34. 1 40. 5 21. 7 36. 9 41. 8 - 2