Can a V-shaped recovery happen now?
This article is written especially for the Bank of Thailand.
If there had not been a second Covid-19 outbreak, the whole world would be preparing to embrace a V-shaped economic recovery. The IMF had upped its world economic growth forecast from a contraction rate of 5.2% to a lower contraction rate of 4.4% in 2020, before growing at a robust rate of 5.2% next year. The improved economic forecast was the result of large stimulus packages totalling US$11 trillion (343 trillion baht) provided by governments around the world, and success in outbreak control resulting in the rapid easing of lockdowns in most countries.
Alas, the "premature" easing of lockdowns induced the second wave of Covid outbreaks. The number of global daily new cases jumped from 70,000 cases in April when lockdowns came into effect to half a million cases recently. That is an incredible seven-fold increase, and there is no telling when this second outbreak will end. Spain, Germany, France and the United Kingdom are now imposing second lockdowns. There is a good chance that the United States might impose selective lockdowns after the presidential election as new infection cases have reached 100,000 cases per day -- a three-fold increase compared to the lockdown of April. New lockdowns would unavoidably bring severe economic contractions and will prompt the IMF to downgrade this year's and next year's economic growth forecasts. We will have to wait until December to see whether the new IMF forecast still expects a V-shaped recovery for 2021's global economy.
To achieve a V-shaped economic recovery, one needs to have three conditions. The first condition is a full resumption of economic activities, ie, no more lockdowns. In its October forecast, the IMF was hoping that this condition would be met in early 2021 as new infection cases were stabilising while vaccines might be available at the beginning of next year. The exploding second outbreak, however, puts this condition in serious doubt. The second condition is that consumers must be in a joyful mood to consume. In other words, people must trust that the outbreak is really under control and there is no hiding of facts. This condition has been met in China after successful outbreak management in Wuhan, with virtually no new infections thereafter. Chinese consumers are ready to consume. All they are waiting for is the last condition.
The last condition is a critical one and it is an absolute must for any economy under any condition to grow at a healthy rate. The condition is the availability of credit. Bank of Thailand, please take note here. After the pandemic ends, consumers must have cash to consume and business owners must have money to invest. The lucky Chinese got this condition right after the first two conditions were met. Easy credit made automobile sales in China rise by 13% in the third quarter as opposed to the expected 10% decline in sales. The result? The Chinese economy grew 3.2% in the second quarter before achieving 4.9% growth in the third. The envy of the world, indeed.
Thailand's last condition is the opposite. If China has "easy credit", Thailand is having "difficult credit". Thai banks are not only reluctant to issue new loans, but are also recalling loans from good customers. Loans to the private sector increased by 296 billion baht in the first quarter, declined to 188 billion baht in the second quarter, and plummeted by 90 billion baht in the third quarter. To make matters worse, the 90 billion baht credit growth in the third quarter is not real credit expansion. It is an accumulation of unpaid interest from loan payment holidays and restructuring agreements which banks kindly added to the existing outstanding loan, as if they were providing you with fresh new loans.
The figure is more troublesome for business loan portfolios as outstanding loans shrunk by 107 billion baht in the third quarter. On average, apart from not getting new loans, Thai businesses have experienced existing loans being recalled. How can businesses survive under an environment of low sales and loan recalls? I would not be surprised to see more and more business shut down in the coming months.
One cannot blame the banking system for this "heartless" behaviour. It, like any business entity, just wants to survive. To keep their business afloat, commercial banks will stop issuing loans under two conditions -- inadequate capital or lack of liquidity. The latter is easy to manage through interest rate hikes. When loan demand is high, banks raise deposit rates to call in more deposits. The law of supply and demand works here. The present low interest environment indicates that liquidity is still adequate.
Inadequate capital is a big problem for commercial banks. Without adequate capital, banks could be ordered to shut down and dissolved, as witnessed during the 1997 financial crisis. And what could be the main reason for the inadequate capital? Bad loans. The situation is deadly serious here in Thailand.
About 6.89 trillion baht of loans (27% of the total loan portfolio) is either under the Bank of Thailand's loan payment holiday programme or directly being negotiated with banks for debt restructuring.
These borrowers are unable to service their debt obligations at this moment. Under current tough economic conditions, it is difficult to tell how many borrowers will be able to resume debt payments.
Let me simulate the seriousness of the situation. If 10% of that troubled portfolio turns into bad loans, commercial banks in Thailand will lose all their reserves. If 30% of it turns into bad loans, no banks in Thailand will have enough capital to issue new loans. And if 50% of it turns into bad loans, banks in Thailand will have zero capital and go into bankruptcy.
All economies need credit expansion to sustain growth. This is currently not happening in Thailand. Therefore, a V-shaped or any shape of recovery is unlikely to happen until this is fixed. Fortunately, we have the Bank of Thailand to fix this problem. Am I right?
The Bank of Japan made a big mistake after the financial crisis of 1990 by not solving commercial banks' capital adequacy problems. Despite ample liquidity and zero interest rates, Japanese banks did not issue new loans, resulting in a 20-year economic standstill, widely known as the "lost two decades".
I do not think any of my readers have the patience to wait 20 years to see an economic recovery here.
Chartchai Parasuk, PhD, is a freelance economist.