It is a pitiful dilemma, isn't it? When the economy is in a bad shape, you want the government to spend money (more money, and lots of money) to help shore up the economy. Like we are seeing in our country now. Alas, by spending money (more money, and lots of money), the government itself induces another kind of economic crisis -- a liquidity crisis.
Let me tell you this. The famous economic crisis of 1997, also known as Tom Yum Kung crisis, was triggered by a liquidity crisis. It was not triggered by currency speculators like George Soros as many wanted to believe. Speculators just seized the benefits arising from the crisis, particularly the fixed exchange rate system adopted by Bank of Thailand then. A sudden and sharp outflow of foreign capital caused liquidity in Thailand to dry up and drove up domestic interest rates to over 20%. Without money and given the high cost of money to run businesses, firms had to trim down their operations and/or stop doing businesses. And that was the real cause of the collapse of the economy in 1997.
Why am I talking about an old story in 1997? Because this year, 2021, there is a good risk that Thailand might face a liquidity crisis again.
The government has been running budget deficits for over a decade and never had problems financing them for two obvious reasons. First, the deficits and financing needs were relatively small. Second, during those normal years, the economy was awash with liquidity form domestic business activities, foreign trade, foreign tourist income, and healthy capital inflow. Therefore, an average issue of 280 billion baht of government bonds per year was snapped up by domestic and foreign investors in no time. But everything changed in 2020.
It started like a typical year. The government set the FY2020 (Oct 1, 2019 – Sept 30, 2020) budget deficit at 469 billion baht, slightly higher than the 450 billion baht deficit of FY2019. Then Covid-19 hit the world.
Struggling under the impact of the coronavirus, Thailand is braced for another liquidity crisis. PORNCHAI KITTIWONGSAKUL
The budgeted 469 billion baht deficit turned out to be a 722 billion baht deficit mainly due to lower revenue collection of 368 billion baht. With the launch of economic stimulus packages like "Leaving no one behind", farmer income support, and others, total borrowing by the government that fiscal year exceeded one trillion baht.
Who in Thailand has free cash of one trillion baht to buy government bonds/bills in 2020? The answer is no one. Particularly after losing almost two trillion baht of cash from foreign tourist income. The source of funds for deficit financing must come from abroad. But there are two sources of foreign funding -- good and bad. Some might argue that Thailand has many multi-billionaires who might be able to help the government. The people who say this can't have much money. No smart billionaires hold cash as cash yields almost nothing. They hold assets like lands and stocks. Moreover, the five-year bond yield is only 0.713% and probably is not an investment of choice for those multi-billionaires.
The "good" source of financing from abroad is from the balance of payments surplus. This was US$17 billion or about 526 billion baht when converted into Thai currency. Okay. That was half of the one trillion baht in financing needs. What about the other half? Sadly, that came from the "bad" source.
There is a type of capital inflow called "hot money" which flows into a country for speculation, usually in foreign exchange, not for actual investment. Normally, central banks will get rid of this kind of unhealthy inflow through a process called sterilisation. I estimated that, based on differences between foreign exchange reserve movements and balance of payments movements, there was $12.2 billion of hot money flowing into Thailand in 2020. Once converted into Thai baht, it was about 400 billion baht which nicely satisfied the remaining financing gap for the government.
Most of the money flowed in in March and April of 2020 when the USD/baht exchange rate was about 32.5 baht per dollar. At today's exchange rate of 30.06 baht/dollar, those speculators have already made a 7.5% profit. Normally, currency speculators work on leverage which is about 10 times their initial investment. Therefore, their actual profit on the March-April lots of transaction is 75%. That's a handsome profit! But that is their businesses and their profits, I really do not care. My deep concern is, since this hot money did not get sterilised when it flowed in, what will happen when it flows out? The Thai monetary system will be 400 billion baht short of liquidity is the answer. Does it sound like what happen in 1997?
This is an important observation. Do I have other clear evidence of hot money other than foreign reserve movements? In March and April 2020, savings deposits in the Thai banking system increased by 715 billion baht and 303 billion baht respectively. Normally, the deposits will increase by about 50 billion baht a month from local savers. The data on foreign exchange reserve movements and abnormal increases in local deposits confirmed the inflow of unsterilised hot money.
Things might not be that bad if there is no need for more large funding requirements. The horror is the government is estimated to need another 1 trillion baht of financing this year to finance (a) the budgeted FY 2021 deficit of 600 billion baht (b) the estimated revenue shortfall of 332 baht and (c) the 220 billion baht needed for the "We Win" (Rao Chana) and other programmes. I know the numbers add up to 1.152 trillion baht, but the government will get about 125 billion baht in revenue from state enterprises to lessen its financing needs.
Luckily, there is still about 750 billion baht of excess liquidity left in the system. But that still leaves a financing gap of 250 billion baht and, if hot money does flow out, the gap will increase to 650 billion baht. That's enough to trigger a liquidity crisis. Unavoidably, the country will have to rely on foreign financing once again. Will the balance of payments surplus save the country like in 2020? The numbers for October and November 2020 (latest data available) are not encouraging as they show balance of payments deficits, instead of much-needed surpluses, of $1.4 and $0.4 billion respectively due to the lack of foreign tourist income. Therefore, before the government thinks about spending, do remember that "money just does not fall from heaven."