Covid-19 stimulus may sink economy
It is undeniable the Covid-19 outbreak is wreaking havoc on economies worldwide. To lessen the pain on their citizens and prevent economic free-fall into the recession trap, most governments are rolling out stimulus packages, typically consisting of cash handouts, wage compensation and concessional loans.
The average size of the package is roughly equivalent to 10% of GDP. But the size of the package keeps increasing as the Covid-19 economic blow is anticipated to be much greater than previously thought.
Singapore announced a S$59.9 billion package (equivalent to 12% of GDP), while Japan just unveiled a 108 trillion yen package (equivalent to 20% of GDP). These two newly announced packages outshine the US's $2.2 trillion coronavirus rescue bill signed a week ago.
The Thai government is following a similar tack. The cabinet this week passed a 1.9-trillion-baht stimulus package, roughly equivalent to 12% of GDP, roughly comparable to Singapore's package.
The package consists of three parts. The first is a government debt issuance of 1 trillion baht to finance income loss compensation and public health improvements. The second is the Bank of Thailand (BOT)'s soft loans for small- and medium-sized enterprises (SMEs) to the tune of half a trillion baht. The last is the establishment of a 400-billion-baht corporate bond fund managed by the BOT. The last measure offers no help to the economy as it merely provides cash to investors who want to unload corporate bonds for cash. And, theoretically, the BOT has to absorb the new cash back to prevent inflation. It is a zero-sum game for the economy. Therefore, the focus should be on the 1 trillion baht in government borrowing.
Most people likely have one question in mind: "Is that 1 trillion baht sum enough to shore up the economy?"
The answer is a confident "No".
Based on assumptions used in the most recent BOT GDP projection, I estimate the economic damage or the income loss this year due to the Covid-19 situation will be a minimum of 2 trillion baht -- a 1.2-trillion-baht loss in tourism revenue and an 8-billion-baht loss in export revenue.
I skipped adding the loss from domestic consumption and private investment because I think the BOT underestimates them.
My concerns are less focused on the package's adequacy than its affordability. Can the monetary system finance that 1 trillion baht in new government debt? And, more importantly, what will happen to the stability of the economy with an additional 1 trillion baht of liquidity? I can theoretically tell you. It will add on 5-7% extra inflation with a significant depreciation of the Thai baht.
The monetary system presently does not have enough cash to buy 1 trillion baht of government bonds. Calculating from the BOT's Monetary Survey, February 2020 data shows that less than 300 billion baht is freely available to buy new debt instruments.
With insufficient cash in the system, there are two possible options to finance that magnitude of government debt. One is to borrow from abroad. Now you understand why Deputy Prime Minister Somkid Jatusripitak earlier mentioned that the International Monetary Fund's borrowing would be available. But he later insisted Thailand would not seek an IMF loan. The other option is to finance from the country's international reserves.
I understand Singapore is choosing the second option. Borrowing from abroad or digging into the country's reserves is practically the same thing. But utilising the country's own foreign savings just sounds nicer than borrowing from foreigners. That's all.
Thailand's Fiscal Responsibility Act of 2018 put the limit of government debt to GDP at 60%. With the current debt level of 43% of GDP, there is plenty of room to borrow. Roughly speaking, the government could create new debt of up to 3 trillion baht without breaching the law. But the question here is not how much debt the government can create under the law. The question is: How much government debt can the country withstand before the economy risks bankruptcy?
Latin American economic crises have been the direct result of over-leveraged governments. Thailand experienced its own debt crisis in 1997. Please do not argue that the Tom Yum Kung crisis was caused by short-term private debt, and not long-term government debt. Just ask Argentina. They can provide a full answer to the dangers of long-term government debt.
Proponents of large economic stimulus packages might argue the Singaporean government has debt equivalent to 108% of GDP, and yet are issuing a 12% of GDP stimulus package. Shouldn't they be more concerned? The answer is Singapore has a solid domestic savings base of 54.5% of GDP, which can easily absorb new government debt. Affordability is never a question there. It is the same situation in Japan.
Even with a 200% government debt to GDP ratio, most of it is financed by domestic savings. The issue there is not the availability of domestic cash but negative bond rates. Unfortunately, cash is inadequate in Thailand.
All governments have their limits on spending. Let's look at Denmark. The Danish government's management of the Covid-19 crisis is hailed around the world as a well-balanced policy between containing the spread of the virus and providing economic support to the economy.
When new Covid-19 cases passed the 250 mark on March 11, the government decided to contain the outbreak by closing is borders and locking down the country. To relieve the impact on the economy, the Danish government decided to support its citizens by paying 75% of wages to employers to keep their payroll intact and halt layoffs. Meanwhile, freelancers got 90% of lost income.
As a result, the one-month lockdown caused no economic misery for the citizenry. But the cost of supporting the economy put a very heavy toll on the government budget.
The one-month lockdown in Denmark ends next week. The latest figures show that new daily infections still top 300. But the government will ease the lockdown and accept higher level of infections. Why? The government simply cannot afford the wage/income compensation cost any longer.
The cost of economic support must be balanced with a tolerable level of infection. As rich as Denmark is, it is not without financial limits.
I am all for a large aid package as Thai people are truly hurting. But the issues of affordability and the long-term effects on the economy must also be considered.
Chartchai Parasuk, PhD, is a freelance economist.