Thailand shocked by a 4.71% plunge in November’s manufacturing, prompting concerns about a fading economic base. High household debt poses a significant threat despite the country’s robust finances.
With new disturbing economic data that the country’s manufacturing sector dived 4.71% in November, a key official from the Ministry of Finance has come out to hail the country’s inherent financial stability and ambitious development plans. However, there is a problem. In brief, it is the high level of personal debt strangling the lives and livelihoods of millions of Thai families and the country’s economy. In the meantime, the government’s robust finances and the informal nature of the Thai economy are helping.
They both act to prevent a systematic crisis or a threat to financial stability.
Debt, however, is a difficult, complicated and intractable problem which must be tackled. The Bank of Thailand will begin to restrict credit in 2024.
Of course, this will see a retarding impact on domestic spending. The pain before any economic gain so to speak. Certainly, it is one of a number of essential structural reforms called for by the World Bank in recent times.
The latest statement from the Bank of Thailand (BoT) highlights the shifting economic dynamics of Southeast Asia’s second-largest economy. Besides, it is now accepted that the economy, beset by chronic ailments, is entering a low-growth phase.
These chronic ailments include high household debt, a below-par education system and an ageing workforce.
The rising concern is the hollowing out of the country’s manufacturing base. It was created in the latter decades of the 20th century. In brief, Thailand needs more inward investment and it needs it fast.
Country’s current account deficit in November driven by lower income from fewer foreign tourists and more of them coming on short-haul trips from Asia
Previously, there was good news last week. For instance, private consumption and investment experienced growth in November. However, the country faced a current account deficit of $1.2 billion, following a surplus of $700 million the previous month.
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The central bank’s latest report dampens optimistic speculation that exports are in recovery mode and set to surge.
At length, the latest bulletin revealed that year-on-year growth in dollar-valued exports slowed to 3.9% in November. This was in contrast to a more robust 7% rise in October.
Tourism has gone wonky. Since the pandemic, it has seen spend per head drop and a move towards more Asian day trippers as opposed to long-haul tourists
Significantly, a key factor contributing to this decline was a drop in revenue from foreign tourist arrivals.
By and large, this is thought to be linked to a shorter average length of stay by foreign visitors. This year has seen an emphasis on short-haul tourists from Asia. Countries such as India, Malaysia and China have become the dominant foreign tourism markets.
The fall in manufacturing speaks of a disturbing problem meaning that the economic base of the 20th century may be dissolving.
Thailand’s second-generation economy may be giving away to a changing world while foreign investment could be leaving Thailand behind. This is the government’s greatest fear.
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In any case, the failure of the country’s education system is a significant problem underlying this trend.
In the meantime, Prime Minister Srettha Thavisin has been trying to combat it by intensively drumming up inward investment. The hope here is Thailand’s older 20th-century allies, Japan and the United States, not China.
Questions about the health of Thailand’s economic engine
Additionally, and more disturbingly in the long run, manufacturing has seen a sharp contraction during the same period. Undoubtedly, this raises concern about the overall health of Thailand’s economic engine.
The Bank of Thailand acknowledged a positive trend in private consumption, which increased by 0.8% from October.
Additionally, there was a 1.8% rise in private investment. The central bank emphasised that domestic demand is expected to play a crucial role in sustaining economic activity in December.
However, the economic slowdown seen in 2023 was certainly compounded by a contraction in public spending.
It was down compared to the same period the previous year.
In summary, the cause is the delay in the disbursement of the 2024 fiscal budget. This affects capital expenditure, although state enterprises’ investments expanded, particularly in transport and utility projects.
Bombshell for Thai Prime Minister Srettha Thavisin when third quarter growth came in at only 1.5%. Time for him to get real, wake up and smell the coffee and he has
The overall economic growth for the July-September quarter stood at a modest 1.5%.
This was a bombshell for the government and Prime Minister when it was confirmed in November. At any rate, it fell below expectations and was driven by weak exports and subdued government spending.
On the other hand, it appeared to awaken the PM who all of a sudden appeared to wake up and smell the coffee. Since then, he has worked closer with the Bank of Thailand and set himself the task of being Thailand’s salesman.
Inflationary pressures, in the latter half of 2023, exhibited a downward trend.
On the whole, this was thanks to government subsidies on fuel and electricity prices. Of course, this was supported by a decline in global crude oil prices.
Despite these challenges, the Bank of Thailand expresses confidence in the country’s economic situation.
The central bank is known to be focused on stability whereas the government seeks growth for its expansionary economic agenda.
Thailand, luckily, has a strong fiscal situation. Paid for, up to 2020, by a vibrant and profitable foreign tourism sector and strong export performance
In the meantime, the central bank and key officials point to Thailand’s strong fiscal position. At the same time, they assure the public and markets of its ability to weather economic shocks.
The country’s banking system and financial reserves are impressive.
In effect, they were built up by decades of prudent management since the 1997 Asian Financial Crisis. They were paid for by the country’s export sector and a profitable foreign tourism industry up to April 2020.
A noteworthy concern, however, pricks this certainty and that is rising household debt.
The central bank reported a slight increase in the ratio of household debt to gross domestic product (GDP) to 90.9% at the end of the third quarter. The total amount of debt reached ฿16.2 trillion.
At length, this has prompted attention from both the Bank of Thailand and the government, as they strive to find measures to curb this worrying trend.
At the same time, apart from struggling to deal with falling manufacturing output, the economy faces another key problem in 2024. This is an anticipated credit squeeze as the Bank of Thailand tightens the credit tap.
2024 credit squeeze to be imposed by the Bank of Thailand from January will dampen domestic demand, but it is necessary pain to tackle chronic household debt
In response to the household debt issue, there will be higher loan requirements. In brief, it is all part of the bank’s effort to rein in reckless credit and curb borrowing.
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The measures go into effect on the first of January with further, more ambitious initiatives being launched in April 2024. This will undoubtedly impact domestic sales in the first half of next year.
In short, Thailand’s economy must be ready to suffer the pain of reining in excess borrowing before it can see any gain.
At the same time, factory output also faces headwinds. Overall, the manufacturing production index for November declined by 4.71% year-on-year. Markedly, the figure surpassed the earlier Reuters forecast of a 4.0% fall.
Things under the bonnet are worse than first thought.
The slowdown is attributed to high household debt and elevated interest rates. Sooner or later, this impedes both consumption and investment. Various economic indicators are sending ‘caution signals’ to economic analysts.
Cautious economic signals coming from Thailand’s business firmament. Government points to strong fundamentals and the kingdom’s hearty informal sector
These include a lower business confidence index due to reduced purchasing power and delays in the construction sector, associated with the 2024 budget.
Nonetheless, the Director-General of the Fiscal Policy Office with the Ministry of Finance, Pornchai Thiraveja, sought to allay fears. He confidently asserted that Thailand’s fiscal position remains robust.
He stated that the government has adequate fiscal space to withstand crises equivalent to 10% of GDP. The public debt-to-GDP ratio, although significant at the end of fiscal 2023, includes contingent liabilities. This includes state enterprise debts, not directly guaranteed by the government.
Significantly, Prime Minister Srettha Thavisin is also the Minister of Finance in this government.
The news that public debt, which has inched over 61% of GDP, contains padding may come as a reassurance to some. The public debt to GDP ratio itself, while higher than some regional peers, is generally below Western economies. Significantly, it is also far below that of China where public debt at the end of 2022 stood at 77.1%.
Undeniably, household debt is a big problem. The 2.7% non-performing loan rate is misleading as the figure concerned is 8% for loans in difficulty
Moreover, the Fiscal Policy Office director highlighted Thailand’s financial stability. Firstly there is a Bank for International Settlements ratio of 19.9%. This is well above the Bank of Thailand’s threshold of 8.5%.
Non-performing household loans accounted for a relatively small 2.7% of total outstanding loans, reinforcing the country’s financial resilience.
The figure of 2.7% here can be misleading. In short, more detailed figures show a far higher percentage of loans which are known to be of degraded quality.
Special mention, unresponsive or non-performing loans are now reckoned to represent ฿1.09 trillion in borrowings from the total owed of ฿13.6 trillion to Thailand’s financial institutions.
Rising bad loan rates across the board put pressure on the Bank of Thailand, leaving it at odds with the government’s pro-growth economic policies
Actually, Thailand has a significant and indeed a threatening problem with household or private sector debt.
Because Thailand is not a developed country, the threat is more serious. Household debt or personal debt levels are a real danger to financial stability
Additionally, coming from a country that has not yet reached developed status and with other underlying problems, it poses a particular systemic risk. The Bank of Thailand itself has made it clear that it represents a threat to financial stability.
Addressing concerns about rising household debt, Mr Pornchai emphasised that the government has ample policy space to navigate future economic risks. Thailand’s economic structure was described as flexible, and capable of weathering internal and external risk factors due to a diverse GDP contribution across sectors.
Mr Pornchai also pointed out the flexibility of Thailand’s labour supply, particularly in the informal sector and agriculture, which can absorb economic shocks.
The agricultural sector, consistently contributing to domestic consumption and exports, holds the potential to support the economy during crises or economic slowdowns.
Thailand’s ‘black economy’ has a positive influence
The financial official’s reference to the informal sector or the ‘black economy’ highlights how this part of the economy, which accounts for up to 50% of economic activity, acts as a preserver of economic stability.
It is a significant point as progressive reforms aim to curb it. In short, it highlights the contradictory nature of economic reform and improvement.
Additionally, the director highlighted the government’s timely policies and sound fiscal and monetary measures, leveraging digital technology for economic schemes and stimulus measures.
Thailand’s strategic location in Southeast Asia was emphasised, positioning it as a regional hub for trade and investment, especially in new S-curve industries and the Eastern Economic Corridor.
As Thailand faces economic headwinds, the government and central bank’s proactive stance and strategic measures will play a crucial role. Certainly, they are now steering the country through uncertain times.
With a balanced approach encompassing fiscal prudence, targeted investments, and adaptive policies, Thailand aims to navigate the current challenges.
It could emerge stronger in the global economic landscape but it will take structural reform. Chiefly, however, the containment of personal debt now or, miraculously, higher income levels is essential.
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Further reading:
Steady as she goes growth and economic stability driven by a growth in US exports is all good news
Economy at crossroads: World Bank calls for structural reform to avert two decades of low growth
Fragile, weak economy sees central bank holding interest rates and reducing 2023 growth to 2.4%
Srettha’s crisis is not just an economic one, it is a ‘3D debt crisis’ that is strangling GDP growth
Zombie Thai firms holding back economic growth as they struggle just to pay interest on bank debt
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
