Another negative impact of government intervention in the free market caused by the disastrous pandemic shutdown in 2020 was identified this week. Zombie firms with no growth potential clogging up the financial system and absorbing resources.
The Bank of Thailand has revealed a contraction of 0.9% in outstanding loans in Thai banks as the central bank moves to rein in private sector debt levels, something which will go into overdrive in 2024. At the same time, a report by the Economic Intelligence Centre (EIC) at Siam Commercial Bank warned that ‘zombie’ Thai firms, making up 18.5% of those operating, were holding back economic growth by using up resources and reducing competitiveness, another negative impact of the previous government’s generous supports during the pandemic shutdown.
This week, the Senior Director of the Financial Institutions, Risk Model and Analysis Department at the Bank of Thailand, Ms Atchana Lamsam, revealed that the banking sector in general was in a robustly healthy position with over ฿65 billion in profits in the third quarter of 2023.
However, overall, commercial banking in Thailand saw the level of outstanding loans in the system recede by 0.9%, marking a consolidation of economic activity as the economy comes out of the pandemic era with the banks moving to tightened lending criteria in line with the central bank’s policy of reining in the Kingdom’s private sector debt levels.
Shocked Prime Minister after release of third quarter growth figures at only 1.5% with Central Bank voicing concern over external economic conditions
The news comes in a week in which Prime Minister Srettha Thavisin was forced to admit his surprise at the lack of economic growth seen in the third quarter when the National Economic and Social Development Council (NESDC) revealed a growth rate of 1.5% against analysts’ expectations of a growth rate of 2.4%.
PM ‘worried’ over shock GDP data showing the economy stalling with only 2.5% growth projected
The lower-than-expected growth underpins the view of the Bank of Thailand Governor Sethaput Suthiwartnarueput, who has consistently advised the government to focus on strengthening Thailand’s financial stability amid a dangerous and chaotic world economic environment which could yet pose potential systemic threats to the Thai economy.
Among those concerns is the fast-moving news from Beijing where this week President Xi Jinping ordered $446 billion injected into 50 approved Chinese property developers by Chinese financial institutions in a manoeuvre that could simply move the crisis from the property and local banking sectors into the Communist country’s overall financial system.
Similarly, rising interest rates in Europe coupled with stubbornly high inflation and weak economic growth or even contractions in some member countries is causing concern to rise in respect of the European Union’s economy with signs of fragility in the Eurozone’s banking sector.
Thai economy is externally robust but imbalanced with private sector debt problems in the short term and demographics in the medium term
At length, all this has the potential to impact Thailand where an imbalanced economy depends on an industrial base generating exports to foreign markets, a wealthy elite and a critical foreign tourism industry which disburses income to the grassroots economy but which has strong external finances or reserves.
Explicitly, 98% of public debt is held in baht or advanced by local lenders and exchange reserves which can cover 7.1 months of external payments while the recovering foreign tourism industry is expected to drive the economy into a current account surplus in 2023 of 1% of GDP.
Thailand’s financials are sound but the economy is exposed if another world banking crisis emerges
This week, Ms Atchana explained that the quality of loans within the Thai commercial banking system was strong, but admitted that the non-performing loan rate may be set to rise at a higher rate, with the non-performing loan rate for the third quarter increasing marginally to 2.7%.
At the same time, the proportion of Stage 2 loans with a deteriorated credit rating, came in at 5.85%, a decrease from the previous quarter as banks rein in loans to business and consumer borrowers.
Banking sector is managing the household debt problem but 2024 will see even more aggressive action, in a campaign which will impede growth
Thai banks have also been managing the extent of automobile loans on their books after a sudden rise in re-possessions in the first and second quarters of 2023.
Potential hazard lights flashing as kingdom’s auto loans spiral into default with sky-high borrowing
Ms Atchana pointed out that the loans being advanced to the small business sector have now been shrinking for five quarters in a row.
‘The overall picture was that loans contracted in the third quarter of 2023. But if we consider the details, we will find that SME loans have been shrinking for five quarters. As for bad debts, I accept they may start to increase gradually. We may see more coming out,’ she told a press briefing.
The bank has ambitious plans, beginning on the 1st of January 2024 to tackle alarming household debt levels which at the end of June stood at 90.7% of GDP. The figure remained constant as the level of debt rose with marginal economic growth seen this year.
Capital from Thailand and other Asian economies is moving away to an environment where higher returns are on offer this year driven by US interest rates
In summary, the central bank plans to impose more stringent lending criteria and quality standards on the banking sector in conjunction with ambitious debt restructuring measures.
This is bound to be a headwind to economic growth in the coming year and in the shorter term.
Lower interest rate of 2.5% forecast to be kept in place by the Bank of Thailand which is coming under pressure as the lower rate drives capital outflows
This campaign will go into overdrive from the 1st of April 2024. After that, we will see the banks using debt service liability ratios to adjudicate on loan applications.
The news comes as the Bank of Thailand is expected to keep its lending rate stable at 2.5%, which although less than half what it is in the United States and across other Southeast Asian countries, is considered to be a tipping point for many indebted Thai firms and borrowers.
At the same time, it is starting to drive capital outflows from Thailand to other financial markets with a better return on offer while some analysts, free market purists, question the wisdom of trying to manage the financial market by keeping interest rates lower or the desirability of debt moratorium or provisions.
Siam Commercial Bank’s intelligence unit highlights ‘Zombie’ Thai firms at the heart of the country’s economy and lack of growth problem
Indeed, a report by the Economic Intelligence Centre at Siam Commercial Bank released this week suggests that the previous government’s attempts to keep small businesses open during the pandemic crisis may have been a mixed blessing for the economy with significant growth in what the centre termed ‘zombie’ companies.
These are small business concerns incorporated as Thai private companies which have been in business for more than 10 years but which are just about able to, or in many cases, fail to service debt levels with significant amounts owed to commercial banks.
The survey found that 18.5% of all Thai companies were in this category and were merely ticking over and servicing bank debt.
This has severe repercussions for the overall dynamism of the economy and is quite similar to the economic catastrophe currently unfolding in China, where zombie companies initially established with the support of the state were set up with significant investment in machinery and facilities but failed to attract ongoing export orders.
Zombie firms failing slowly with no real prospects to generate growth in the economy going forward
The survey by the Siam Commercial Bank’s Economic Intelligence Centre (EIC) found that most of these companies were in the small business sector in Thailand. They dwarfed the number of new companies that are being set up.
For instance, between January and August 2023, 68,665 companies were established in Thailand, mainly servicing the real estate sector and the tourism business and associated services.
The centre noted that these zombie companies are having difficulty meeting even reduced interest payments under bank moratorium arrangements which are due to expire shortly.
Most of these companies made no profit or a loss while those that did are slowly failing under the burden of debt.
The intelligence unit concluded that this high proportion of zombie companies was having a significant negative effect on the country’s economic system because of the resources they use and their impact on the country’s competitiveness.
The report by the Economic Intelligence Centre (EIC) suggested that their ultimate demise may have been beneficial to the economy as it would have resulted in scarce resources being allocated to more efficient companies with growth prospects.
Thailand’s external finances are robust as Fitch Ratings retains its BBB Plus rating and stable outlook
At the same time, the report warned that any increase above the 2.5% interest rate threshold currently being held by the Bank of Thailand would see many of these companies fail, something which illustrates how they continue to contribute to the fragility of the economic system while acting as a depressor on future potential growth.
Despite this week’s disappointing economic news, the Thai economy retains its external strengths, although concern is rising about the potential impact of government policies which may drive up public debt further.
In mid-November, the ratings company Fitch maintained its BBB Plus rating for the country’s currency and gave the Kingdom a stable outlook classification.
The agency cited its strong external financial position and sound macroeconomic policies, but warned that its income per capita was lower than BBB Plus peer countries, and also cited concern over World Bank governance scores.
The ratings agency assessed the growth outlook for 2023 before it was reduced to 2.5% in recent days and suggested that the country was poised for recovery of its export industry with steady growth in its foreign tourism sector.
Exports remain challenged going into 2024 with worries now over the manufacturing industry itself which underperformed in 2023 and faces higher costs
Nevertheless, there are already growing doubts about this with the Thai National Shippers’ Council, this week, only forecasting a 1-2% rebound in exports in 2024 after this year’s disappointing outcome.
It based its assessment on weaker demand in key export markets and potential concerns at home about the manufacturing industry itself, with many firms which make up Thailand’s export base, plunged into difficulties this year with manufacturing only operating at 58% capacity and many fearing the impact of a scheduled increase in the minimum wage from the beginning of the year.
At the same time, forecasters are looking closely at the projected number of foreign tourists that the country can hope to receive by the end of 2023, with this figure now being knocked down to 28.5 million.
Country has a medium-term demographic problem
Thailand’s economy is also suffering from a severe medium-term demographic problem as the country’s population ages.
Certainly, this was a key point highlighted by Fitch in mid-November, which is causing a rapid decline in the number of working adults available to power the country’s GDP moving forward.
Thailand’s days of GDP growth in excess of 5% may be a thing of the past as it has grown too old
The country’s economic growth from the end of July to the end of September at 1.5% compared sharply with Vietnam’s which grew by 5.3%, the Philippines which grew by 5.9%, Malaysia’s which grew by 3.3% and Indonesia’s which grew by 4.9%.
Only Singapore which is experiencing specific problems because of geopolitical turmoil, tensions and notably, an ageing crisis of its own, also recorded less GDP gain. The city-state recorded a lower growth rate at 0.7%.
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Further reading:
Incoherent government economic policy clashes with Bank of Thailand’s efforts to rein in debt
Economy is in troubled waters with fears for both exports and foreign tourism as 2023 winds down
Thailand faces an economic future of low growth despite Srettha’s plans because of a darker world
Another dip for the baht or are economic danger signals flashing for both Thailand and the world?
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Economic danger signals emerging as politicians wrangle over who will form the next government
Bank of Thailand to tackle household debt in new plan from 2024 which will see higher standards
Politicians skating on thin ice as the economy may not be able to withstand a political stalemate
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Potential hazard lights flashing as kingdom’s auto loans spiral into default with sky-high borrowing
