Tensions between the Bank of Thailand and the coalition government led by Prime Minister Srettha Thavisin, who is also the finance minister, have been apparent for months and flared up last week after the Monetary Policy Committee (MPC) decided to maintain interest rates at 2.5% following a political push for a reduction.
The rift was exposed during the discussion on the digital wallet scheme, with the central bank urging caution with the 560 billion baht project.
A poll by the National Institute of Development Administration found 68.8% of the public would not be disappointed if the government scrapped this project, but Deputy Prime Minister Phumtham Wechayachai insisted the scheme will continue to wend its way through the political process.
Mr Phumtham defended the project as essential to pump up the economy and warned a crisis similar to the Tom Yam Kung crisis of 1997 could occur if the government does not implement some stimulus.
Should businesses be concerned about an impending economic crisis? The private sector chimed in, with some of them suggesting the government should think about other measures rather than clinging to the digital wallet scheme.
A new economic crisis in Thailand is likely as a perfect storm of bad circumstances brews within and outside of the financial sector, said Sangchai Theerakulwanich, president of the Federation of Thai SMEs.
The level of non-performing loans (NPLs) continue to worry bankers and businesses, especially those in the automotive industry, he said.
Mr Sangchai said NPLs are a factor that could lead to an economic crisis, as some of them are the result of the pandemic, which subdued economic activities.
Last year, NPLs in the banking industry totalled 500 billion baht, according to Bangkok Commercial Asset Management. Many small and medium-sized enterprises (SMEs) are facing a liquidity crunch and cannot access loans, he said.
This concern over NPLs caused banks to adopt stricter auto lending criteria, leading domestic sales of pure pickups to plunge by 31.8% in 2023 year-on-year, said the Federation of Thai Industries. The trend is expected to continue this year.
In 2024, car seizures are expected to total 200,000 units, down from 250,000 last year, according to media reports citing an estimate from Apple Auto Auction (Thailand), a used car auction service provider.
"I think the crisis already hit its nadir, but there may not be a large immediate impact similar to the Covid-19 or Tom Yam Kung crises," said Mr Sangchai.
The Tom Yam Kung crisis refers to the Asian financial crisis of 1997.
"Another negative factor is higher production costs in the manufacturing sector. While the government is helping manufacturers by curbing oil and electricity prices, these measures require a large sum of money and it is uncertain when this support will end," he said.
Mr Sangchai also pointed to Thailand's import value from China greatly exceeding the value of exports to that nation.
The export of Thai goods dropped in part because of China's slow economic growth as its real estate sector slumped, while the import of Chinese products increased, notably electric vehicles and cheap household products purchased via e-commerce platforms, according to media reports citing the Export-Import Bank of Thailand.
"I'm worried Thailand is losing power to control its trade with China," he said, noting this is a crucial issue that needs to be addressed by the government.
Mr Sangchai said he believes businesses, especially SMEs, can better manage their finances if the central bank reduces the policy rate and improves regulation of loan rates set by commercial banks.
"The highly debatable 10,000-baht digital wallet handout is good for the economy, but the government should change its spending conditions, which originally aimed to have recipients use the money to buy products," he said.
The handout can help the economy in the long term if it is used to train people in skills as well as improve and develop businesses, especially those run by micro-SMEs, said Mr Sangchai.
There are 2.7 million micro-SMEs in Thailand, each of which hire no more than five workers, according to the Federation of Thai SMEs. They form the majority of entrepreneurs in the SME segment.
Bangkok Commercial Asset Management's booth at a Money Expo. According to the firm, last year, NPLs in the banking industry totalled 500 billion baht. Patipat Janthong
Aat Pisanwanich, senior consultant at International Research Consultant Co Ltd, said the economy is not in a crisis similar to 1997, which led to the closure of 56 financial institutions and negative growth.
Financial firms have sturdy fundamentals, posting profits of more than 200 billion baht last year.
Headline inflation declined for four consecutive months as of January, reaching its lowest level in 35 months. Yet Mr Aat said officials see no indication of deflation.
Deflation is when the prices of goods and services fall over a period of time as people spend less and delay purchases in anticipation of lower prices, leading manufacturers to cut prices and earn less. This leads to an economic slowdown, investors delay their investment and ultimately the money supply in the system declines.
"It is necessary to look at the inflation itself -- whether it is inherent, caused by high interest rates, or influenced by external intervention, such as government policies to reduce the cost of living. In a nutshell, there is no deflation so far and there's no need to worry," said Poonpong Naiyanapakorn, director-general of the Trade Policy and Strategy Office.
Mr Aat said Thailand's monetary policy direction is too dependent on the US Federal Reserve's policy rate, fearing that policy rate cuts will trigger capital outflow and depreciation of the baht. The baht should move in alignment with other regional currencies as its weakening could benefit the Thai economy, helping tourism and exports, he said.
Mr Aat said interest rate spreads between deposits and loans are very high in Thailand, up to 6%, while they are 2-3% around Southeast Asia.
When spreads are too large, it is considered a major impediment to the expansion and development of financial intermediation, as it discourages potential savers with low returns on deposits and limits financing for potential borrowers, reducing feasible investment opportunities and the growth potential of the economy, he said.
As a result, the central bank should closely monitor the spread between deposits and lending rates so they are not too wide, to avoid causing a heavy financial burden, said Mr Aat.
The Asian financial crisis of 1997 significantly damaged the Thai economy and spread throughout Asia.
Amonthep Chawla, chief economist of CIMB Thai Bank (CIMBT), said Thailand's economic growth was less than expected at 1.5% year-on-year in the fourth quarter of 2023, with the rate expected to decline on a quarter-on-quarter basis.
Many analysts have a practical definition of recession as two consecutive quarters of decline in real GDP. However, very short periods of decline are not considered recessions in terms of macroeconomics.
Economists use a wider set of measures of economic activity to determine whether a country is suffering a recession, he said.
The agricultural sector and SMEs in the provinces are struggling, reducing the purchasing power of the low-income segment, said Mr Amonthep. However, the purchasing power of the middle to upper-income segment remains positive, supporting private consumption and economic growth, he said.
Mr Amonthep said CIMBT will continue to monitor the economy in the first quarter before determining whether the economy is in a crisis. The bank anticipates the economy will improve in the first quarter, quarter-on-quarter, based on the improving export and tourism sectors, he said.
Given the economy's uneven and sluggish growth, both fiscal and monetary policies are needed to support a rebound under targeted measures, said Mr Amonthep.
For fiscal policy, the government's digital wallet scheme and other tentative stimulus measures should be focused to help fragile segments, he said, while monetary policy should support the financial liquidity of vulnerable enterprises.
"The bank expects the economy to be sluggish for the first half of the year. Stimulus schemes would provide liquidity support for vulnerable segments, but these should be targeted measures," said Mr Amonthep.
The Bank of Thailand may consider cutting the policy rate in the latter half of the year assuming the Fed cuts its rate in May, he said.
CIMBT's base-case scenario forecasts GDP growth of 3% in 2024 without the digital wallet scheme. If the measure is implemented, growth would increase to 3.6% this year.
In addition, Mr Amonthep said Thailand's economy needs structural reform to sustain growth and strengthen competitiveness in the long term.
A range of dragon products, such as decorations and lanterns are sold at the Yaowarat market in Bangkok to celebrate the year of the dragon, a Chinese zodiac sign, as Thailand's headline inflation declined for a four consecutive months in January 2024, reaching its lowest level in 35 months. Somchai Poomlard
Sanan Angubolkul, chairman of the Thai Chamber of Commerce, said the chamber and the University of the Thai Chamber of Commerce (UTCC) believe the probability of Thailand facing a crisis akin to the 1997 fiasco is minimal.
He said the economy is expanding at a lower rate than expected, attributed to high global interest rates and geopolitical issues affecting the global economy, resulting in export contraction and sluggish tourism.
Mr Sanan said the economy has started to show signs of recovery this year, with exports anticipated to turn positive and tourist arrivals estimated to reach 35 million.
Various economic research centres (excluding the Finance Ministry) estimate GDP growth of 3% this year, with the potential to reach 4% if appropriate government stimulus policies are implemented.
He said the NPL forecast is not excessively high, averaging no more than 5% of total loans. Banks are quickly provisioning for potential losses and maintaining strict lending standards to ensure high-quality loans, said Mr Sanan.
Thanavath Phonvichai, president of the UTCC, said the economy is nowhere near the Tom Yam Kung crisis because no banks have collapsed and the NPL ratio is relatively low. During the crisis, the unemployment rate was 4%, but the current unemployment rate is less than 1%.
The economy is slowing, but is still growing. The International Monetary Fund, the World Bank and the Bank of Thailand all estimate GDP growth of about 3% this year.
"Thailand's economy is still growing, despite repeated statements from the government warning of a potential crisis, which makes Thais fearful and reluctant to spend," said Mr Thanavath.
"The government's constant drumbeat of economic crisis has also deterred foreign investors, as they are uncertain about the real situation in Thailand. Talking about an economic crisis too much and too often may make it a real risk, convincing people a crisis is looming and limiting their spending."
Maybank Investment Banking Group maintained its GDP growth forecast at 3.2% for 2024, with downside risks and inflation of 1.8% as subsidies dissipate and the minimum wage hike takes effect.
When the central bank hiked rates in September 2023, the assumption was that government stimulus measures, amid a steady upturn in exports and tourism, may push GDP growth to 4.4% in 2024, noted a paper jointly prepared by Maybank's director of macro research Erica Tay.
Given concerns about elevated household debt, the policy statement at the Feb 7 MPC meeting highlighted steps taken to help resolve indebtedness via non-monetary policy means, including responsible lending measures, according to the paper.
"Now, with the economy at little risk of running too hot, monetary policy may need to shift from neutral to a slightly accommodative stance at the coming MPC meetings," noted the paper.
Exports and manufacturing, in particular, have delivered a downside surprise in early 2024. Pockets of slackness have widened in key sectors such as the automotive industry, especially amid surprisingly intense competition from China, noted the Maybank paper.
In addition, lower than expected spending by foreign visitors has dulled the hopes of a lift to tourism receipts.
"While there are concerns that lower interest rates may reignite excessive borrowing by vulnerable groups, we believe the new guard rails put in place to foster responsible lending would help to ring-fence these risks," Maybank said.
Phusadee Arunmas and Nareerat Wiriyapong