Household debt crisis looms as rates hike

Household debt crisis looms as rates hike

A sign advertises interest rates at a money expo. Household debt now exceeds 90% of Thai GDP as households struggle to make ends meet. (Bangkok Post file photo)
A sign advertises interest rates at a money expo. Household debt now exceeds 90% of Thai GDP as households struggle to make ends meet. (Bangkok Post file photo)

With interest rates set to rise in the second half of the year, increased household debt could deal a heavy blow to the Thai economy, weakening consumer purchasing power and slowing economic growth, according to KKP Research.

Thailand's household debt now exceeds 90% of Thai gross domestic product (GDP), ranked 11th-highest in the world, as households struggle to make ends meet.

Most households in the lowest 20% have an average monthly income of only 10,000 baht, while the minimum monthly expenditure is 12,000 baht. These households resorted to borrowing to pay for daily essentials, driving up the proportion of short-term consumer debt to total household debt, said the research house.

Thailand's per capita income is also very low compared with countries with similar levels of debt, suggesting the Thai economy is more vulnerable to impacts from indebtedness than other countries, KKP Research stated.

According to Credit Suisse, Thailand has one of the highest levels of wealth inequality in the world, and debt tends to be concentrated in low-income households that have a lower asset-to-debt ratio. As a result, when interest rates rise, these households have to reduce their consumption to pay off their debts, which will slow economic growth.

Low-income households also bear a bigger brunt from inflation as food and energy expenses make up a relatively larger proportion of total household spending, decreasing their ability to pay down debt.

Higher household debt will cause Thailand to face a long downturn in the economic cycle, said the research house.

The debt burden will intensify as interest rates rise and higher household debt slows consumption growth. Any attempts to stimulate consumption through debt will reach a dead end because there is already a high level of debt, said KKP Research, meaning debt-driven consumption stimulus cannot create growth.

If the economy enters a debt repayment period or deleveraging, consumption momentum will drop by about 1.3 percentage points, while economic growth will slow by about 0.7 percentage point, causing a long economic slump, according to the research agency.

However, the firm believes Thai financial institutions will remain strong with high foreign currency reserves. Risks to monitor include Thailand's loss of competitiveness, which could lead to a negative current account balance, a weakening baht, excessive debt that may lead to an economic crisis, and a weaker tourism recovery than expected.

External risk factors include global central banks' long-term plan for their monetary policy in case of stagflation, as well as the promotion of domestic tourism by the Chinese government that could result in a decline in the Thai current account.

KKP Research said the Thai government should not try to stimulate the economy through debt, preferring a gradual hike of interest rates.

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