Chitwalai Srisaengchai bought a car last year to take advantage of a Thai tax rebate and now spends 70% of her salary on the loan. She is also giving the Bank of Thailand another reason to resist monetary easing.
According to many Bangkokians, the government's first-car buyer policy has worsened the capital's traffic problems. (Photo by Thiti Wannamontha)
Prime Minister Yingluck Shinawatra's stimulus measures have stoked spending and contributed to rising household debt, prompting the central bank to say it will monitor "persistently high" credit growth. About 1.25 million Thais have taken up the car-buying incentive the government introduced to boost domestic consumption after the 2011 floods, helping drive local car sales to a record in 2012.
"It was a very tempting offer," said Chitwalai, a 27-year-old English teacher in Bangkok who will receive a 100,000-baht (US$3,400) rebate on a black Mazda 2 sedan she bought for 705,000 baht, adding to her family's four cars. "Something like this may not happen ever again, so I had to do it."
Chitwalai's purchase highlights why Thailand's central bank may resist government pressure to cut interest rates on Wednesday as the premier seeks to sustain growth. Lower borrowing costs may spur demand for personal loans that jumped 22% in 2012, the biggest increase in seven years, adding debt risks that threaten to heighten the economy's vulnerability to a slowdown.
"The BoT has already sounded warnings and is likely to pursue a more moderate pace of consumer-loan growth," said Eugene Leow, an economist at DBS Group Holdings Ltd in Singapore. "The fast pace of consumer debt accumulation could lead to an increase in non-performing loans when the cycle turns. It suggests the policy rate is not going lower."
Cool Inflows
The baht has risen 4.3% against the dollar this year. On March 20 it reached the strongest level since the currency's devaluation in July 1997 sparked the Asian financial crisis. The benchmark SET Index rose to its highest since 1994 on March 15.
Deputy Prime Minister Finance Minister Kittiratt Na-Ranong last month reiterated his call for lower rates and a weaker currency to cool inflows and help exporters. BoT governor Prasarn Trairatvorakul has said no special measures are needed to stem inflows, even as he added that the baht has strengthened too fast recently.
Automakers Nissan Motor Co and Toyota Motor Corp have stepped up production in Thailand as the tax rebates boosted demand. Fitch Ratings raised its assessment of the nation last month, citing a resilient economy and a more stable political climate, while the central bank said in March it may raise its gross domestic product estimate for this year to more than 5% after faster-than-estimated growth in the fourth quarter.
'Tough Call'
"It will be a tough call for the central bank, with the baht strength and pressure from the government," said Santitarn Sathirathai, a Singapore-based economist at Credit Suisse Group AG. "The better economic growth outlook and the sharp growth in personal loans show that no further easing is needed."
Seventeen of 18 economists in a Bloomberg survey predict borrowing costs will be held at 2.75% for a fourth meeting on Wednesday. One expects a quarter percentage-point cut.
Policy makers across Asia are battling the risk of asset- price bubbles from increased inflows. Emerging Asia stocks had $9.5 billion of inflows in the first quarter this year, according to Citigroup Inc, compared with $1.8 billion of inflows in the same period a year earlier.
Credit Growth
Average Thai household debt rose from 82,485 baht per household in 2002 to 134,900 baht in 2011, according to the National Statistics Office. The rebate program has cost the state about 90 billion baht, according to government estimates.
The government's increased spending has resulted in a slow deterioration in its balance sheet and the "high-speed credit growth" could pose financial risks for Thailand, Kim Eng Tan, senior director at Standard & Poor's, said on Jan 24.
The central bank will closely monitor risks stemming from "the ongoing high credit growth, particularly for consumer credit, as well as a surge in household debts which have had some effects on households' debt servicing abilities," the monetary policy committee said in the minutes of its Feb 20 meeting published on March 6.
The Excise Department set up a team of 10 in February to monitor delinquency after a number of buyers defaulted on their loans, said director-general Somchai Poolsavasdi. So far, about 2,000 have dropped out, he said, adding that "the number is still very small, so we are not worried."
Debt Trap
Personal loans without repayment for more than three months rose 20.5% to 56.6 billion baht, or 22.3% of total bad debt in the fourth quarter, according to central bank data.
Household savings grew 0.7% in 2011 compared with a 12.8% pace in 2010, according to the National Economic and Social Development Board (NESDB). About 45% of Thai households, or 9.09 million people, cannott save because their expenses and debt exceed their incomes, according to the NESDB.
"We have to monitor household debts closely because they continue to rise and our savings rate is very low," said Suwannee Khamman, deputy secretary-general of the NESDB.
While Chitwalai said she is relieved to finally have her own car to drive to work in, for some first-time buyers, the euphoria has faded with the pressure of monthly payments.
"It would have been wiser for me to wait longer and save more money to buy a car," said Sureephon Withitkul, a 24-year- old officer at Federal Express Corp. She bought a car under the rebate program last year and now spends half her monthly salary on installments. "It's difficult to make ends meet."