Money to boost economy tough to find
Wow. What a difference two weeks makes! In my previous article, I wrote, with grave concern, that over 6,000 people had been infected with Covid-19 within just two weeks of the third outbreak. Two weeks later, the number of cases from the third wave alone, which started early this month, has skyrocketed five-fold to over 30,000 cases. Who knows when and how this round will end?
The Covid-19 pandemic teaches economists a very valuable lesson -- do not make a fool out of yourself by trying to predict economic growth or impacts during times of great uncertainty.
In March of this year, the Organisation for Economic Co-operation and Development (OECD) predicted that India would be the fastest-growing economy in the world with 12.6% GDP growth. Today, the country is falling apart, as the total death toll has surpassed 200,000 -- with the latest daily death toll at 3,293 and an additional 360,000 new cases in the past 24 hours. It does not make academic sense to perform economic projections for the Indian economy until after the outbreak is under control.
Similarly, Thailand's Office of National Economic and Social Development Council's projections earlier this year -- that predicted GDP growth for the year 2021 of 2.5-3.5% -- are no longer reliable.
My latest projection for 2021's GDP growth, which incorporates the impacts of the second and third wave of outbreaks, is negative 2.3%; I nevertheless made a fool of myself by forecasting the third wave of Covid-19 would have a lower number of infections -- with the total cases coming in lower than 20,000, and that no strict lockdown or semi-lockdown measures would be triggered. Obviously, such assumptions are no longer valid.
In the second quarter of last year, the government spent about 400 billion baht to cushion the economic impact caused by the pandemic. To fund relief packages, an emergency decree that allowed the government to borrow up to one trillion baht was enacted in April 2020. Now, only 240 billion baht remains available for future use. Not surprisingly, the government is being pressured to use the remaining sum to provide remedies for the social and economic impacts caused by the current outbreak. If that 240 billion baht is not enough, just borrow more. I have seen a suggestion that another one trillion baht emergency decree should be enacted.
To these people, money must be falling from the heavens. Haven't any of them read my articles about a possible liquidity crisis in the country? Apparently not. The University of the Thai Chamber of Commerce (UTCC) proposed that the remaining 240 billion baht be used to stimulate the economy to maintain 2.5% economic growth. The Thailand Development Research Institute (TDRI) went further by suggesting a budget of 2.4 trillion baht for Covid-19 fighting packages.
Under this proposed packages, 400 billion baht is for economic relief during the third outbreak and another two trillion baht for post-Covid structural adjustment. Well. I have no objection to either idea as long as they can find the money for the Thai government.
I have three facts to dispute those who believe that "money is never an issue".
Fact No.1: There is no huge sum of free money lying around for the government to borrow. Most people, including one deputy prime minister, have the misunderstanding that money deposited in banks is available for use. According to the Bank of Thailand's (BoT) latest figure for February, all financial institutions in Thailand have a combined deposit base of 22.6 trillion baht while they lend out 26.3 trillion baht worth of loans to customers. Apparently, deposits in all banks are not enough to fund lending. To be exact, banks are about 3.7 trillion baht short of funding needs. Thai banks cover this liquidity shortage by issuing 2.7 trillion baht of debt instruments and borrowing the rest from abroad.
If the government wants to borrow from Thai banks to fund deficits, the answer is "please look elsewhere". If the government wants to borrow directly from Thai investors by selling bonds to the public, Thai investors will withdraw money from banks to buy bonds, causing banks to suffer a liquidity shortage.
This leads to Fact No.2: Government financing needs for the remainder of 2021. I estimate that total government financing needs for the remaining 10 months of 2021 at 533 billion baht, based on the latest figure in February. The amount covers a 138-billion-baht budgetary deficit for fiscal year 2021, 220 billion baht for financing the "We Win" programme, and 175 billion baht of budgetary deficit for the first quarter of fiscal year 2022. The amount does not include a budget for the third outbreak's relief programmes.
Despite the tightness of liquidity in the Thai banking system, our country still has some "freely available money" lying around called "excess liquidity". I again estimate that the amount of excess liquidity is 566 billion baht, just enough to fund the government's needs. But hold your horses. The government is not the only entity in Thailand that needs liquidity. Private businesses and Thai consumers need liquidity too. The war for liquidity will be fierce. How fierce? Read Fact No.3.
Fact No.3: In 2020, Thailand was "blessed" with two extraordinary items -- a balance of payments surplus of US$18.4 billion (577 billion baht) and short-term capital inflows of $12.1 billion. These two contributing factors added about one trillion baht to Thai liquidity. Therefore, last year, our government enjoyed a trillion baht of borrowing without feeling the slightest pressure.
Thailand is not so lucky this year. Instead of having a surplus, the balance of payments is in deficit because of a lack of foreign tourist income and an increase in spending on imported products. Moreover, short-term money is no longer flowing in, but flowing out. In the first quarter of this year, the deficit and outflow caused a $12.6 billion loss from our international reserves, resulting in a reduction of about 400 billion baht from the Thai liquidity market. While demand for money is rising, the supply is receding. There will be no winner in the liquidity war. According to my calculations, Thailand will experience a liquidity shortage of 600 billion baht this year, which is would be more than enough to trigger a liquidity crisis. For those urging the government to spend more, please kindly find them the money.
Chartchai Parasuk, PhD, is a freelance economist.