Debt levels are a time bomb

Debt levels are a time bomb

While vaccines remain a source of great hope in 2021 against the new wave of the Covid-19 virus outbreak, there is a fundamental problem that poses a risk of becoming a ticking time bomb for the economy.

The Bank of Thailand revealed last week the critical problem concerning skyrocketing household debt.

According to the central bank data, Thailand's household debt level jumped to 86.6% of gross domestic product (GDP) in the third quarter last year, the highest level recorded since the data was made available in 2003.

As of September, household debt, which was already among Asia's highest, had risen to 13.77 trillion baht, from 13.58 trillion baht at the end of June when it was equal to 83.8% of GDP.

That 86.6% figure suggests Thailand could soon find itself in the top 10 countries with the highest ratio of household debt to GDP.

The current to 10 are Switzerland, Australia, Canada, Denmark, Norway, Netherlands, South Korea, New Zealand, Sweden and the United Kingdom, where household debt to GDP in the second quarter of this year was at 87.7%, according to the Bank for International Settlements data.

Rising domestic household debt can be mainly attributed to the sluggish economy and a virus crisis in which a fresh wave will likely only heap more financial pressure on the nation. Local banks have already stopped extending new consumer loans, pushing many households to borrow from informal lenders or loan sharks.

Consumption is expected to continue to fall significantly and to salvage the economy the government will need to spend heavily on ways to encourage people to do the same.

Kasikorn Research Center said Thailand's household debt could well exceed 90% of GDP when fourth-quarter figures are released and could reach 91% or more this year if the pandemic continues to hobble the economy.

The high debt ratio reflects structural problems in the economy which need to be addressed following the urgent job of curbing the virus outbreak and current financial hardships it is causing, the research centre said.

In fact, the current level of household debt is just the tip of the iceberg, as the 86.6% figure only includes debt to financial institutions and not informal debt taken on with curb-side lenders.

If these informal household loans are included in the tally, the figure might well be close to 100% of GDP.

The reason why Thais quickly accumulate debt is because incomes generally rise at a slower pace than consumer demand. And that gap sees demand being filled by easily awarded credit from financial institutions.

Currently, the one-two punch of a flagging economy and virus-induced hardships are also a catalyst for the rising level of household debt.

Since the economy has not been bolstered by revenue from production for decades, it is clear that most of its expansion has come as a result of consumer spending-financed loans. However, when debt reaches a certain point, it starts to hinder growth, and in this case the recovery too.

There is also a real risk that there will be a concurrent jump in non-performing loans as a faltering job market leaves people struggling to pay back the debt they have taken on. The Covid-19 pandemic has dealt a heavy blow to the economy which is only likely to be exacerbated as the true extent of household debt becomes apparent.

Editorial

Bangkok Post editorial column

These editorials represent Bangkok Post thoughts about current issues and situations.

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