The International Monetary Fund (IMF), my alma mater, appointed a new chief on Oct 1. The new Managing Director, Kristalina Georgieva, suddenly changes the "everything is okay" view on the world economy to "the world is about to collapse".
She has warned about four major risks to the world economy. First, 90% of the global economy is facing a significant slowdown. Second, about US$400 billion worth of world trade was damaged by trade wars in 2019. Third, the amount of damage is likely to increase to US$700 billion next year. Fourth, US$19 trillion of corporate debt is at risk of becoming bad. The loan default level would be higher than the sub-prime crisis of 2008.
This is quite an unprecedented move by the IMF for an organisation that usually tones down the real economic situation to avoid controversy and, as some claim, panic. But I don't think the IMF has any other choice but to tell the truth. They cannot keep revising down global economic growth forecasts and insisting that everything is still okay. Worst of all, if governments around the world still think or fool themselves into thinking that their economies are doing fine and next year things will return to normal, nobody is going to be brave to admit their domestic problems and start fixing them. China is one of them.
The IMF has set an example of accepting the real-world economic picture. It would be wise for the Thai government to follow in its footsteps by admitting the problems and starting to fix the economy the way it should be done. If the government decides to do so, here are three areas of the economy that I believe should receive priority.
The first area is overall GDP growth. Once the government cleans up the GDP figures, they will find out that the Thai economy has been growing by less than 1% since the fourth quarter of last year, not by 3%. The governor of the Bank of Thailand is absolutely right when he said that the Thai economy is not in recession but is growing below its potential. For an economy to be in recession, it has to register two consecutive quarters of negative growth. That has not happened yet. Very close, but not yet. However, the Thai economy would qualify to be termed as "in recession" next year. Don't forget to interview the governor again in the second quarter of 2020.
To fix GDP growth, the usual demand management strategy, namely fiscal and monetary policies, is useless and will actually do more harm than good. Even the governor knows that. If the governor truly believes that the Thai economy is growing below its potential rate, he would support an expansionary credit policy in order to push consumption demand up to its potential. On the contrary, he has ordered curbs on household credit by imposing a stricter loan-to-value rule for housing loans, slowing 0% credit card lending campaigns, and encouraging banks to adopt stringent lending practices. His monetary policy aims to further slow consumption, which is the way it should be under current macroeconomic circumstances.
The proper way to fix Thai GDP is through supply management strategies. Thai workers will have to have more jobs and receive higher pay. Thai farmers will have to have higher farm prices. Of course, these are structural problems and will need time to change. However, one should not forget that 70% of our GDP depends on exports. Depreciation of the Thai baht would be a quick and effective solution to provide short-term remedies. Most economists, including the governor, will not agree but I have theoretical arguments for this. Let me give you an example. Japan has consistently had a current account surplus since 2015 but look at the yen exchange rate movement. Maybe it is time to study other countries' exchange rate policies.
John Maynard Keynes once said "In the long run, we are all dead." Short-term, immediate, problems must be managed first before one gets to find long-term solutions such as identifying structural changes that are needed.
The second troubling area is, of course, household debt. An 80% debt-to-GDP ratio is certainly not sustainable for a medium-income country such as Thailand. Thailand's per capita income ranks 86th in the world but our household debt/GDP ratio ranks number 12. That says something about the severity of the problem.
If one lets the problem solve itself organically by spending less and saving more, it will take at least 10 to 20 years before household debt returns to a sustainable level, which means that the Thai economy will be on a slow growth path for the next decade or two. Along the way, at least 25% of businesses will go bankrupt and millions of workers will be out of jobs.
A shortcut to healthy consumption will have to be made. I am against the idea of debt hair-cutting as it will cause moral hazard. However, short-term consumer debt should be turned into long-term, low-interest debt.
Let's look at an example. If you have a 100,000-baht credit card debt, you probably will have to pay 10,000 baht a month for principal repayment plus an 18% interest rate on outstanding debt. But if that debt is converted into a five-year, fixed payment with a 6% percent interest rate loan, the monthly payment is probably reduced to 2,000 baht. The debtor will immediately have close to 10,000 baht a month for extra consumption. And that is exactly what the economy needs. More consumption.
I guarantee that this debt-refinancing scheme will be 600 times more effective than the government's ad hoc Chim, Shop, Chai (taste, shop, spend) cash-handout scheme. Best of all, the government will make some money out this scheme, not lose money. The cost of the five-year government bond is currently at 1.425% but the government will collect 6% from debtors.
The third troubling area is the manufacturing sector. An export-oriented country like Thailand needs at least 10% of private investment growth each year. Some 5% of investment is for maintaining production facilities and the other 5% is for upgrading the facilities.
Sadly, we have not seen investment in the manufacturing sector in Thailand for the past five years. If the government had been telling the whole truth about the export sector, Thai exports in September would have shrunk around 10%, not 1.4% as reported. The reason why official export figures only show a 1.4% decline is because gold exports increased by 110.6% that month. Taking the temporary gold exports out, the entire export sector is in deep trouble.
Oh well. When do you think the Thai government will subscribe to the "Honesty is the best policy" principle like the IMF has just done?