Beware of debt pitfalls from bailout
By all accounts, the ongoing coronavirus (Covid-19) crisis will bear far-reaching ramifications for Thailand's economy and politics. The Thai economy is projected to contract by around 5% this year, owing to a precipitous collapse in domestic demand, dismal export conditions, and broader supply-chain disruptions amid a sharp global economic downturn. Although currently suppressed by the government of Prime Minister Prayut Chan-o-cha and its virus-handling measures, Thailand's simmering political tensions are likely to resurface when a new normal emerges. Under these circumstances, the government's ability to stay clear of hazards and pitfalls in its recently announced 1.9-trillion-baht economic rescue package will be critical in keeping the country together.
To be sure, the Prayut government faced political and economic headwinds well before the Covid-19 crisis. From air pollution and drought to cabinet-level corruption allegations and power manoeuvres against opposition parties, the government had been on the back foot. Flash mobs led by a youth movement to reclaim Thailand's squandered future had threatened the government's longevity.
In a way, Covid-19 was the temporary bell which saved the government from a ring of rising dissent and discontent among a population intent on regime change. Yet Covid-19 also poses a different crisis for government stability. If job losses and the resultant unemployment, corporate bankruptcies and structural deficiencies of the Thai economy cannot be mitigated and rectified, Thailand may well face a perfect storm that would whip up pre- and post-Covid-19 grievances and hardships into an unprecedented crisis.
The government's 1.9-trillion-baht bailout is thus crucial. It represents 11% of Thailand's GDP, which is worth 17 trillion baht, according to figures from the Bank of Thailand and the Public Debt Management Office. The need to loosen fiscal purse-strings to cushion such a massive virus-induced external shock is understandable. Other countries are resorting to fiscal levers of all types. The problem for Thailand is that the Prayut-led government has already incurred nearly 1.8 trillion baht of debt since 2014, when Gen Prayut seized power and imposed junta rule until elections took place in 2019.
Between 2014-19, the Prayut-led government borrowed 356 billion baht per year on average. It reached a low of 45 billion baht in 2015-16 before peaking in 2016-17 at 567 billion baht. But proportional to Thailand's economic base and traditional fiscal conservatism, overall public debt has stayed just over 40% GDP, in view of modest economic expansion.
But the new bailout package will more than double the debt accrued during 2014-19. As a result, public debt is forecast to rise to 57%, just under the legal limit of 60%, a ceiling the government wants to legally raise soon. This rising indebtedness is a moral hazard, because it passes debt burdens down to future generations.
Let it be known for the record that the Prayut-led government is the most heavily indebted administration in contemporary Thai history. During the 1997-98 economic crisis, public debt went up from 19% to 57% of GDP, but the big jump was a one-off bailout cost -- declining markedly with economic recovery and renewed growth in the early 2000s. In 2014-19, it was poor economic management which ran up the debt while growth prospects were murky.
We need to keep an eye on how the new rescue package is allocated and spread around. Without effective budget scrutiny and management post-pandemic, Thailand risks exacerbating its inequality gap, already one of the widest in the world. It is imperative that lockdown measures do not make the poor and downtrodden worse off, or enable the rich and well-heeled to further entrench their oligarchy.
While the 1997-98 crisis was white-collar led, devastating the financial sector and overleveraged corporates saddled with foreign debt, the Covid-19 adversity afflicts smaller companies and those on the lower rungs of the society. Big firms also suffer, but their capacity to absorb and re-emerge is greater.
Small- and medium-enterprises (SMEs) in the services sector -- from travel and tourism to retail and restaurants -- are particularly vulnerable. Employees in these industries, such as cleaners and security guards, are wage-earners who come and go with demand. With Bangkok's ubiquitous shopping malls and office buildings shuttered, they lost their jobs. These sectors also include small proprietors and entrepreneurs who are more sensitive to sudden drops in revenue.
While the 1.9-trillion-baht stimulus package is a necessary lifeline, at issue is how it will be spent. As Covid-19 impacts are likely to hit individuals and small entrepreneurs the hardest, the primary objectives should be to directly save jobs and protect the livelihoods of those who are most vulnerable.
With such a high number of small entrepreneurs and SMEs who may not have access to bank loans due to their size, the critical measure which would assist the most is the 5000-baht a month handout scheme. This explains the overwhelming public response to the scheme -- around 19 million people have applied, despite the government's estimation of only 3 million applications.
Although all businesses suffer alike, those which are larger and more established would have the means and resilience to withstand this external shock. It is crucial that the loans are used to protecting the jobs of employees and workers rather than bailing out companies out of their financial difficulties which started before the outbreak. In addition to loans, measures that could specifically ease the burdens for SMEs -- such as deferrals of contractual obligations, including rent payments -- will be more effective than having an unclear, generically-aimed budget, which is prone to misuse and corruption.
At the same time, policymakers and regulators must not allow SMEs to weaken as it will strengthen the oligarchic hold of big corporations in many industries. With less financial means, many SMEs may end up bankrupt if the lockdown disruption continues for more than a month or two. If big businesses are allowed to gobble up SMEs without proper competition measures, the Thai economy will end up more skewed towards big businesses.
As the virus itself does not discriminate between the rich and the poor, policies which may favour big corporates over smaller peers should be carefully monitored. For example, curfews and operating hour restrictions should be evenly applied to small privately owned local mom-and-pop stores, 7-Elevens and other giant hypermarkets owned by big conglomerates. Independent retailers should be allowed to operate on a level playing field with their big-business competitors.
According to the Credit Suisse Global Wealth Databook 2018, Thailand is already considered the most unequal country in the world, with the richest 1% owning more than 65% of national wealth -- up from 59% when Gen Prayut took over in 2014. The risks that this glaring inequality will worsen in view of bailout funds being rolled out will mount, unless there is in intensified public scrutiny for government accountability and fair distribution in favour of smaller firms and lower-income households.
Pavida Pananond, PhD, is an Associate Professor of International Business at Thammasat Business School, Thammasat University, and Thitinan Pongsudhirak, PhD, teaches at the Faculty of Political Science and directs the Institute of Security and International Studies at Chulalongkorn University.