Thaksin’s proposal to clear bank debt and reset credit histories sparks concern from the Bank of Thailand, warning of moral hazard. As debt rises and manufacturing declines, experts fear Thailand’s economy faces deep structural challenges with no easy fix.
The Bank of Thailand on Wednesday issued a statement in response to a suggestion made by former Prime Minister Thaksin Shinawatra, suggesting that bank debt be bought off the country’s financial institutions. At the same time, Mr Thaksin advocated that borrowers have their credit histories wiped clean with credit bureaus and agencies so that they can regain access to lending. However, the proposal by Mr Thaksin highlights the desperate nature of the challenge facing Thailand’s economy right now. On the one hand, it faces a massive debt crisis, while on the other, in the longer term, it faces seemingly insurmountable structural problems.
On Wednesday, the Bank of Thailand issued a short statement that politely warned about a proposal floated by ex-Prime Minister Thaksin to buy household debt of the country’s financial institutions.
Mr Thaksin floated the idea, albeit rather tentatively. Certainly, he made clear he had not yet fully thought through the idea. At the same time, he suggested that it would not just have to be the government that participated in buying the debt.
Later, Prime Minister Paetongtarn Shinawatra acknowledged her father’s remarks. She urged people to keep an open mind to any proposal that may assist the economy.
Bank of Thailand warns against moral hazard risks in response to Thaksin’s debt relief proposal
Meanwhile, at the Ministry of Finance, Deputy Prime Minister Pichai Chunhavajira responded by suggesting that any such proposals must be considered carefully.
The Bank of Thailand reiterated that buying bank debt must not create a dangerous credit environment. Instead, it must support debtors to access credit and solve problems at the right point. Meanwhile, the Bank of Thailand raised the question of moral hazard.
In other words, creating a climate where ordinary people can ignore their responsibilities. The bank, in particular, insisted that Thailand must promote and support sound financial discipline.
At the same time, it suggested that any mechanism involving financial restructuring must keep the ultimate responsibility of paring down debts with the borrower could be looked at.
Certainly, it acknowledged that it had not seen any details of any proposed scheme. The confidential bank referred to its past efforts to address the problem of household debt.
Monetary Policy Committee sees rising household debt and warns of asset quality deterioration among higher income groups as credit crunch impact spreads
However, at this week’s Monetary Policy Committee, the notes suggest that the bank has seen evidence of an ongoing deleveraging of household debt albeit at a slow pace.
In the meantime, of course, banks are becoming increasingly concerned about the decline in asset quality.
The central bank, in particular, appeared to take issue with Mr Thaksin’s proposal that borrowers should be given a clean bill of health with credit agencies such as the National Credit Bureau (NCB).
Indeed, it warned that financial institutions under its remit needed to have accurate information to assess credit risks.
In turn, the banks could make a fair assessment of credit costs. Finally, the bank noted that any proposal from Mr Thaksin must still deal with the country’s overall resources and financial system.
In brief, it said the country’s resources must be accurately assessed and the deployment of any funding carefully calibrated.
Academics and analysts reject Thaksin’s proposal as economic concerns continue to mount into 2025
Later, academics and some financial analysts poured cold water on Mr Thaksin’s idea. In particular, pointing out that the government was already heavily borrowed and dismissing any appetite from the private sector for such a proposal.
Indeed, Thailand is presently experiencing a severe dip in confidence in its Stock Exchange of Thailand (SET). The index has fallen 16% in the last year. This comes despite national economic GDP achieving 2.5% growth last year.
In short, there are concerns that the country’s manufacturing base is crumbling. Furthermore, there are questions about the GDP metrics given the higher proportion of Thailand’s exports now simply being re-exports from China.
The latter can be seen in Thailand’s massive trade deficit with China, which rose significantly in January 2025. The figure was $5.7 billion, the highest in over twenty years.
Indeed, at the recent Monetary Policy Committee meeting, which agreed on a 25 basis points lower interest rate, only pencilled in projected growth for 2025 at 2.5%.
Structural issues and rising debt levels weigh heavily on Thailand’s economic future as base weakens
This comes despite a strong start to 2025 for the economy. Meanwhile, it is widely expected that Thailand will experience headwinds in the second half of 2025 due to the effects of President Trump’s rising tariff wall.
At length, the Bank of Thailand in its statement emphasised its message that the kingdom must address its long list of chronic structural problems. In short, there is no easy fix to the problems that Thailand is facing economically.
Massive debt levels that require growth of over 10% per annum to be sustainable top the list. The country’s total debt level presently stands at 223% of GDP.
However, underlying these problems is Thailand’s lower population and ageing demographics.
In addition, the shortcomings of the country’s education system are being exposed as the world moves towards higher technology. For instance, the country’s lower level of English.
Thailand’s declining manufacturing base adds to growing economic uncertainty in 2025 as firms cannot compete
Meanwhile, its manufacturing base is disappearing. For example, Thailand’s vehicle manufacturing sector output declined by 20% in 2024.
Only 1.47 million vehicles were manufactured. This came not only despite but perhaps due to the government’s much-wanted EV policy. EV sales declined in Thailand last year by 8%. However, overall car sales declined by over 25%.
Furthermore, this trend has continued into 2025 with vehicle sales down 10% in January. Finally, the fact that the former Prime Minister floated this idea suggests how challenged Thailand’s economy is right now.
Indeed, it shows that solutions outside the box are required. Significantly, Mr Thaksin has described Thailand’s economy persistently as facing a far greater crisis than that of 1997. Back then, he says, it was about a house needing a new roof.
Meanwhile, today, he says the foundations of the economy are gone. Little wonder that the Bank of Thailand on Thursday warned about the deterioration of loan quality now spreading up the social scale to higher earners.
Declining loan growth and worsening credit conditions raise red flags for the Thai economy, fears of a crisis
The minutes of the Monetary Policy Committee held in February saw the committee concerned about the lack of loan growth.
In particular, it noted a sharp drop in lending to smaller firms. Indeed, these are the manufacturing concerns that are failing to compete. Especially, in a world of advanced technology and more open markets.
“SMEs are facing additional liquidity pressures due to the deterioration of trade credit, with most experiencing longer receivable credit terms,” the notes read. Significantly, the committee felt that Thailand’s small business sector and indeed households have still not recovered from the pandemic-era shock.
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Economic growth in 2025 faces growing downside risk as growth for 2024 now confirmed at only 2.5%
Meanwhile, the banks cutting off the credit taps is strangling the economy from the bottom up.
In 2023, banks advanced ฿723 billion in Thailand. Afterwards, that sank to ฿124 billion in 2024. However, the situation has now completely reversed, with banks reining in lending in January by ฿158 billion.
After that, the banks are increasingly left with higher credit risks and indeed non-performing loans and bad debt. In effect, this may be the problem the government and Mr Thaksin are hoping to avoid. Certainly, a potential crisis which is exercising minds.
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Further reading:
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