During the past five years of world economic turbulence, the Thai economy has shown positive growth almost every year, despite the fact that two of the country’s main trade partners — the United States and the European Union — have suffered dire recessions.
Following the US sub-prime mortgage crisis in 2008, and the euro zone’s public debt crisis, which peaked just three years later, demand from two of Thailand’s three biggest export customers (China ranks first) fell fast and has recovered little.
Yet, Thailand’s economy largely kept growing. Domestic demand replaced the external economy as the main engine of growth starting in 2008, fuelled in significant part by rising household debt.
This is a new phenomenon in Thailand, where the economy has been mainly driven by exports for more than three decades.
But in macroeconomics, as in everyday life, there is no such thing as a free lunch. If household debt rises faster than household income, it can quickly constrain the ability of families to borrow more. That, in turn, will constrain consumption, and limit the economy’s ability to keep growing.
Consider some statistics. Between 2008 and 2012, Thailand’s household debt rose at a pace of 12.8% per year, and its size relative to GDP surged from 56% to 77%.
This puts Thailand on a par with two other countries in Asia where such debt has become a concern. In Malaysia, household debt is 80% of GDP. And in South Korea, the level is 91%.
This high level of indebtedness not only limits the ability of Thai households to borrow more. It also constrains their monthly spending, because paying off existing debt takes up a higher share of income.
According to a Bank of Thailand report, among indebted households in Thailand, the debt-service ratio (DSR) — the proportion of income set aside for debt payment each month — has risen from 30% in 2011 to 34% currently.
Among indebted households having an income of less than 10,000 baht per month, the ratio is almost twice as high, at 62%. That figure is alarming; the Bank of Canada estimates that a DSR above 40% is untenable.
Many factors have contributed to the recent surge of Thailand’s household debt. Among these are reconstruction needs following the floods in 2011; record-high automobile purchases under the first-car tax rebate scheme; and financial innovation widening access to credit for more households.
A seemingly lasting environment of accommodative interest rates and easy credit from financial institutions, especially those in the non-bank segment, has accelerated this rise further.
Between 2010 and 2012, total lending to Thai households expanded at an annual rate of 17%. However, household credit provided by credit card, leasing and personal loan companies surged at a rapid pace of 27% per year — the highest rate of increase among all types of lenders. By comparison, household borrowing from commercial banks, which accounts for 42% of total loans to households, grew only two-thirds as fast — at 17% per year.
Such unbalanced growth in household lending suggests mounting risks both to the financial system and to segments of household borrowers whose indebtedness would reduce their ability to consume.
Early this year, the adverse effects of Thailand’s household indebtedness on consumption became evident. Private consumption grew only 3.4% in the first six months compared to the same period last year. Household spending shrank by almost 2% in the second quarter compared to the first, for the second straight quarter of contraction.
Although consumption of durable goods such as cars has continued to grow due to credit expansion, the higher debt burden that followed has constrained household spending on other items. Spending on non-durable goods, including food and fuel, has barely expanded.
This is one of the reasons the economy is now technically in recession, defined loosely as two consecutive quarters of negative growth. The Thai economy contracted 0.3% in the three months through June from the previous quarter, when it shrank 1.7%, according to the National Economic and Social Development Board.
These unhappy figures suggest that borrowing by certain household segments is advancing into worrisome territory. Because Thai households bear a high debt burden, it has become more difficult for policymakers to cut interest rates to shore up the economy.
Thailand and neighbouring countries have begun to take action to protect borrowers from excessive indebtedness. In Malaysia, for example, the central bank has restricted low-income individuals from owning multiple credit cards. The Bank of Thailand, like some other central banks, now mandates financial institutions to assess each borrower’s ability to afford a loan based on a prudent debt-service ratio.
For Thailand, the sudden rise in household debt in recent years and the latest drop in consumption are undeniably causes for concern. But, because cautiousness has risen and necessary action agreed by regulators and financial institutions alike, damages will be averted.
The good news is that the Thai economy still has great potential to grow and continue advancing household incomes. Unemployment is low, and new opportunities are emerging as Asean economies become more integrated.
But an optimal outcome may depend on whether Thailand undertakes adequate measures to promote the sustainability of financing. These would ultimately support the financial system’s potential to continue growing credit for households.
That would revitalise domestic demand as a reliable source of economic growth, at a time when global prospects remain uncertain.
EIC, a unit of Siam Commercial Bank Public Company Limited, offers in-depth macroeconomic outlook and sectoral impact analyses. For more information, please visit www.scbeic.com or contact eic@scb.co.th