New surge a blow to weak economy
Today's article is "breaking news" as I am in the midst of writing a five-part series about the liquidity crisis risk facing the country. I have already published the first two parts of the series -- origins of the risk and experience from 1997 economic crisis. I still have three more articles to go. They are: (1) warning signs of the risk, (2) shielding oneself from the risk, and (3) appropriate macro-economic policy responses. I do not want to break the series because warning signs are getting stronger every day such as the alarming US$8.4 billion (263 billion baht) outflow in March and the 154 billion baht government cash deficit in February.
However, the new outbreak (round three) needs to be discussed as it, even without the liquidity crisis, will have a profound impact on the economy. One source mentioned that the current round of the outbreak would cost the economy 60-100 billion baht. It is premature to assess the impact of the new outbreak, but, based on the experience of the two previous outbreaks, the number is far too low. Instead of making wild and baseless guessing, let's find out how the previous two outbreaks actually affected the economy.
The first outbreak roughly started in mid-March and ended in late-April of 2020. Total infection cases were fewer than 3,000 but the impact on the economy was tremendous as policy responses were too strong and people were in a state of panic. As a result, the economy shrank 610 billion baht in the second quarter of 2020. The economy would have contracted much more if the government did not give out 327 billion baht through cash-handout programmes and the Bank of Thailand did not allow borrowers to suspend their debt payments, estimated to save borrowers 300 billion baht. The isolated cost of the economic lockdown and panic factor was estimated (by me) to be 895 billion baht or about 5.7% of GDP.
The second outbreak covered the period of late December 2020 to the end of February 2021. This round, about 22,000 people were infected or seven times more than the first outbreak. But the impact on the economy was considerably less as there was no nationwide lockdown and little public panic. Life was pretty much normal outside the infected areas of Samut Sakhon. A research house estimated the cost of the second round outbreak to be about 200 billion baht. I have no actual GDP data of the first quarter of 2021 to confirm that number. However, I do know that private consumption contracted only 3.3% in January-February 2021 compared to a whopping 10.5% contraction in the second quarter of last year.
Before accessing the cost of the new outbreak on the economy, let me share a quote I found on social media: "In the first round of outbreak, the government gave us 15,000 baht in cash. In the second round of outbreak, the government gave us 7,000 baht in credit. In this round of outbreak, the government gives us water bowls."
This might give readers an idea what kind of support we can expect from the government for this round of outbreak which saw over 6,000 people infected in a period of two weeks. How this round will end is anybody's guess. But its impact on the economy will be substantial for three main reasons.
First, the outbreak is concentrated in Bangkok and major economic provinces which control about half of GDP. Samut Sakon's GDP is only 2.5% of total GDP. Therefore, a quarantine of Samut Sakon made no significant dent on the economy.
This time the virus hit it where it hurts. Second, the public is in a panic much like the first round of outbreak. Easy infections from new strains of the virus, infections hitting familiar names spreading across all professions, and slow inoculations cause deep concern. It reminds people that the threat of infection is near and real. The panic factor will cause people to slow down their economic activities without having the government imposing economic lockdowns.
Third, there is likely to be no substantial government support programme. Unlike 2020, the fiscal position is rather tight. Only five months into the 2021 fiscal year, the government has already accumulated up a 419 billion baht of budget deficit and borrowed 582 billion baht to finance its operation.
According to the 2021 Budget Act and a special law on revenue shortfall, the government can borrow up to a maximum of 720 billion baht before going to jail or changing the laws. This means the government has to live with a 138 billion baht borrowing limit for the remaining seven months of the 2021 fiscal year. Asking for extra money from the budget is out of the question.
Of course, there is a 1 trillion baht Covid fighting bill passed in April last year. So far, 383 billion baht has been utilised. Adding 220 billion baht in spending of various "We Win" programmes, there is still 400 billion baht left. Unfortunately, inadequate domestic liquidity will prohibit the government from using that remaining borrowing limit.
In a difficult time like this, many economists suggest the government should run a higher deficit to support the economy, citing Thailand's relatively low public debt to GDP ratio of 53.5%. Due to limited space, I cannot explain more. Thailand can certainly have a higher debt ratio, but slowly, over time.
The US government spent 80 years to increase its debt to GDP ratio from 30% to 110% -- averaging 1% of GDP per year. They did not achieve a 110% debt to GDP ratio in a few decades.
High levels of annual deficit, regardless of size or the might of the economy, can only be realised by having central banks printing money to buy government bonds or risk a liquidity crisis like Thailand.
Should the Bank of Thailand print money to buy government bonds? Given the strength of our international reserve, they can technically do so but must be prepared to accept associated costs like currency run and hyper-inflation.
In summary, the new round of Covid-19 outbreak will certainly have more impact on the economy compared to the second round. But will it top the cost of the first round of outbreak of 895 billon baht? Only time can tell.
Chartchai Parasuk, PhD, is a freelance economist.