When an economy faces a financial crisis, it can create a big bang like the mass collapse of financial institutions such as during the Great Depression of the 1930s, the Thai Tum Yum Kung crisis of 1997, the Japanese financial crisis in late 1997, and the US Hamburger crisis of 2008.
However, a Thai financial crisis in 2024 could be equally damaging but a quite one. One may term it the silent killer. Commercial banks camouflage bad debt problems with debt restructuring and underreporting outstanding non-performing loans (NPLs). However, with or without a bang, the effects on the economy would be the same -- the banking system stops providing loans to (and even recalling loans from) the private sector, bringing the economy to a standstill or even contraction.
But before I start explaining the reasons for the doomsday prediction, let me briefly analyse last week's economic data for February, released by the Bank of Thailand (BOT). The data is not good and indicates a continued slowdown of the economy. It's no wonder why economic research houses, including the World Bank, revised their Thai GDP growth projection for 2024 downward by about 0.5% to around 2.7% to 2.8%. I am certain that they might lower growth projections further once the actual Q1 growth figure comes out.
During the first two months of 2024, agricultural output declined 6.45% and the manufacturing production index contracted 2.85%. Only the service index expanded -- by 8.3%. High growth in the service sector was in part a result of foreign tourist spending. Based on two months of output data, Q1/2024 GDP growth is estimated to be around 0.8%--1.1%. If this trend continues throughout the year, the 2.7%--2.8% growth target will be out of reach.
Just for clarification. When calculating GDP value using an "output" approach like in the paragraph above, service output will include foreign tourist spending. But when calculating GDP using the "expenditure" approach, consumption of service activities will be limited to the spending of locals. Foreign tourist spending will be recorded separately under the category of "export of services".
Apart from the February data, there are a few interesting points to be noted from the updated data of Q4/2023. First, household debt increased by 143 billion baht in Q4/2023, pushing the household debt/GDP ratio higher to 91.3%. Second, Thailand borrowed US$3.2 billion (117.3 billion baht) more from abroad in Q4/2023 to support domestic liquidity. Third, foreign tourist spending dropped further to 30,951 baht per person from 31,729 baht per person a quarter before. The spending/head figure used to average 45,820 baht before Covid. The reduced per head spending made Q4/2023 tourism income only 51.5% of Q4/2019 tourism income, despite a 22% headcount reduction.
Back to the main story.
How can I be confident that a financial crisis will happen in 2024? The answer is the capital inadequacy of Thai banks due to the high level of NPLs. Based on BOT data, the banking system has a capital adequacy ratio, commonly known as a BIS ratio, of 19.6%, which is six times higher than the official NPL ratio of 2.7%. This is a healthy banking system as the international standard only requires a BIS ratio of 10.5%--8.0% of main capital and 2.5% of buffered capital.
The problem is that 2.7% might not be the real NPL figure. The real figure is more likely to be 12.6%, making the "real" BIS ratio fall below 8.0%. According to the international standard, banks must cease their operations. Please read on, and I will explain.
It is well known that Thai household debt ranks 6th globally at 91.3% of GDP. But what is not really known is that our problematic household debt ratio is the highest in the world by a wide margin. Thailand's problem household debt is 19.8% of the total household debt portfolio.
The number comes from these three sources: (a) Past bad debt (restructured debt) of 7.7% of portfolio, (b) Present bad debt (NPLs) of 7.7% of portfolio; and (c) Future bad debt (special mentioned) of 4.5% of portfolio. By the way, the figures are from the National Credit Bureau (NCB) which covers 13.7 trillion baht of household debt, about 84% of the portfolio. Basically, NCB monitors all household debt in the country except from cooperatives and government student loans.
Special mentioned debt is debt that has less than three months of non-payment. It is also known as "skipping debt" among creditors as borrowers avoid legal threats of NPLs by keeping non-payment instalments to be less than three months. For example, a borrower would pay instalments for months 1, 2, 4, 6, and 8 and skip instalments for months 3, 5, and 7. Therefore, such borrowing would not become an official NPL until month 9.
If one looks at the world's top 10 highest household debt to GDP list, Thailand has per capita income at least five times lower than its peers, indicating a much lower ability to service debt. The top 10 list, from top to bottom, comprises Switzerland, Australia, Canada, South Korea, Hong Kong, Thailand, Netherlands, the United Kingdom, Norway, and the United States. In all these countries, except Thailand, more than half of household debt is mortgage debt which has strong collateral backups. Mortgage debt accounts for 97% of total household debt in the case of Switzerland and 53% in South Korea. But mortgage debt is only one-third of Thai household debt.
Here is the hidden problem of underreporting NPLs. Under the BOT's reporting system, the overall NPL ratio is 2.66%--2.88% for personal consumption loans and 4.38% for manufacturing loans. How would the BOT's 2.88% household NPLs (outstanding 158 billion baht) reconcile with the NCB's 19.8% NPLs (outstanding 1,047 billion baht) in the same category? The figures are wide apart.
Shall we look at an example from the automobile loan portfolio? While the BOT shows the automobile loan's NPL ratio at only 2.13% with an outstanding NPL of 25 billion baht, the NCB reports a 20.9% NPL ratio with 230 billion baht outstanding, plus another 208 billion baht for special-mentioned auto loans waiting to join the NPL's team. Given that over 300,000 vehicles were repossessed last year, the NCB auto loan data looks much more reliable.
Do the BOT and NCB live in the same country called Thailand?
Since BOT data is obviously under-reported (probably by banks who do not want to provide a loan-loss reserve), I again have to estimate more reliable NPL data myself. The number I come up with is an overall NPL ratio of 12.6%, not 2.66%. That is a crisis-level NPL. This is the very reason why I referred to this article as a "silent crisis." The financial system is already in crisis, but the Bank of Thailand lives in a make-believe world of 2.66% NPLs.
Unfortunately, reporting data is just numbers, but the dire debt payment situation is real. Commercial banks know the quality of their assets best, whether it is 2.66% NPLs or 12.6% NPLs, and they will behave accordingly. If they are uncertain about asset qualities, they would be very selective in loan issuing and recall dubious loans as much as possible. Such a practice would lead to the collapse of the business sector, much like what we witnessed after July 1997.
At this point, readers may decide whether to believe the "Hello Kitty" NPL situation of the BOT or the harsh real world NPL numbers of the NCB. Am I smelling Tom Yum Kung cooking in the kitchen?