Small firms' debts point to problems

Small firms' debts point to problems

Prime Minister Prayut Chan-o-cha has consistently promoted small and medium enterprises (SME) as the backbone of his Thailand 4.0 programme and the country's economic growth story. (Bangkok Post file photo)
Prime Minister Prayut Chan-o-cha has consistently promoted small and medium enterprises (SME) as the backbone of his Thailand 4.0 programme and the country's economic growth story. (Bangkok Post file photo)

Over the past week data coming out of the government and the private sector are showing signs that could be worrisome in the medium to longer term for the country. Rising household debt, increasing non-performing loans among small and medium-sized enterprises (SMEs) and strengthening of the baht are all compounding the problems.

According to the Bank of Thailand, bad loans in the SME sector rose to as high as 4.48% of outstanding loans as of the end of March from 4.35% seen during the fourth quarter of 2016.

Not too long ago, Jaturong Jantarangs, the Bank of Thailand's assistant governor for the monetary policy group, said soured SME loans showed no signs of declining as a lack of competitive edge and uneven economic recovery hindered businesses' debt-servicing ability.

Higher bad SME loans and household debts have been cited as among the key reasons for the lack of consumption to drive economic growth.

The SME sector plays a vital role in the development of the economy all across this region. A TMB Analytics report recently said that Thailand alone has as many as 360,000 SMEs that generate close to 10 trillion baht in revenue annually and employ about 11 million people.

The SME sector has been the backbone of Thai economic growth and despite small firms' margins being squeezed after the raising of the minimum wage to 300 baht a day in 2012, the sector continues to survive.

But of late this sector has been hit by many factors including a lack of innovation, incentives to help them grow and, worst of all, a stronger baht that has taken away their competitive edge.

The baht has been trading at a more than two-year high after gaining 6.1% this year, second only to the Korean won in terms of its strength against the US dollar.

Experts have warned the SME sector to be more innovative in its product range while looking at ways to hedge their exposure to foreign exchange volatility. But not many SMEs tend to heed such advice.

There is a feeling among many government officials that something needs to be done fast to keep the momentum going but so far no concrete measures seem to have been put in place to stop the decline of this important sector.

On the contrary, a lot of SMEs' possible competitive edge is going to be wiped out after the six-month deadline for the halt on the new labour law put in place by the military government comes into effect.

Prime Minister Prayut Chan-o-cha came out to use his powers under Section 44 to put a brake on the new labour law but the brake will be released on Jan 1, 2018, prompting many migrant workers to head back to their countries.

These migrant workers have been part of the lower production costs for SMEs and even larger firms but the moves of the military administration in trying to tackle this issue have prompted a mass exodus of labour. Even the Federation of Thai Industries last week came out to warn that the SME sector was most likely to be hit by a labour shortage as it lacks the budget to switch from a labour-intensive workforce to automation.

Although PM Prayut has imposed the powerful Section 44 to postpone the implementation of the law for six months, investors were unsure about how to react to the changes, which impose harsher penalties for illegal employment of foreign labour.

The action of the government coupled with the stronger currency has taken a toll on the confidence of investors. The FTI's confidence index fell for a third consecutive month to the lowest in 10 months in June. It fell to 84.7, down from 85.5 in May and 86.4 in April.

The only silver lining visible is the fact that exports for the past two months have been rising by double-digit levels after having been subdued for the past few years. Exports in June rose 11.7% year on year after increasing 13.2% in May. In the first six months of this year, exports rose by 7.8% to $114 billion as imports gained 15% to reach $107 billion. The Commerce Ministry has forecast export growth of 5% this year after last year's 0.5%, which was the first annual growth in four years.

Despite this good news, the government needs to undertake urgent measures to solve the problems of the SME sector so that it can gradually adapt to the changing times and strengthen itself. Domestic consumption could help push economic growth but the SME sector needs to be revived first.

Umesh Pandey

Bangkok Post Editor

Umesh Pandey is Editor, Bangkok Post.

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