I have made several dire predictions for the Thai economy this year such as high inflation, a liquidity crisis, interest rate hikes, bank collapses, a currency run, and, of course, an economic recession.
At present, the economy is certainly not in the best of shape, but going into a crisis seems too remote to be true for most economists. In fact, many believe the economy might have already passed its lowest point as foreign tourists are returning to Thailand. Things can only get better after the Thailand Pass requirement was lifted.
Am I too pessimistic? Am I applying wrong theories to wrong situations, and, thus, producing wrong analyses? After re-examining all issues, I'm more confident that those dire projections will eventually come true because economic theories are never wrong and economic data never lie. Let me give readers an example of why economic theories are never wrong and how economic data never lies. At the beginning of the year, I said that 2022 would be the year of high inflation driven by high oil prices. This was said a month before Russia's invasion of Ukraine on Feb 24.
Readers might not believe me, but I believe in economic theories.
To put money where my mouth is, I bought oil stocks at the end of January. The price was $84 per barrel (dbp) and I sold that batch of stocks when I made a targeted 30% profit. After the invasion, theories pointed out that oil prices would rise further and could be as high as $140 dpb by the summer of 2022. I invested in another batch of oil stocks at the price of $108 dpb. This time my new selling price target was $130 dpb.
Since then, world oil prices have swung up and down according to news of the day. At one point, they fell below $100 dpb. My investor friend urged me to liquidate the stocks but I remain unwavering as underlying demand and supply conditions confirm that the theoretical price would most likely be reached. Actually, I promised myself to invest more if the oil price dipped below $95 dpb. Well. The world's oil price on June 1 was $115.4 dpb and summer has just begun.
By the way, I am just showing the theoretical determination of price movements. Anyone who wishes to invest in oil stocks must bear his/her own risk. Like oil price movements, I firmly believe that my economic predictions for 2022 will become a reality. Let me go over the issues one by one.
High Inflation. This is an easy topic to reaffirm. Government-published consumer inflation data does not reflect the real inflation situation in Thailand. Based on April 2022 figures, US producer price inflation (PPI) is 11.03% while Thai PPI inflation is 12.76%, indicating a stronger inflationary pressure.
In the US, owing to an efficient market system and lack of government price intervention, that 11.03% rise in producer's cost translates into 8.3% consumer price (CPI) inflation. But in Thailand, only a portion of the 12.76% increase in producer cost is transferred to consumers, causing April's CPI inflation to be merely 4.65%.
Government price control/support and market distortion cannot last forever, particularly in the wake of rising world commodity prices. Eventually higher producer costs will be fully reflected in consumer prices. Until then, the actual Thai inflation rate will surface which could be at a double-digit level.
Furthermore, Thailand has a much higher risk of inflation from rising world commodity prices compared to developed economies such as the US. Food and fuel items account for 48.8% in the Thai CPI basket while similar items of food and transport account for 30.5% in the US CPI basket.
Liquidity Crisis. It is already happening but people just do not realise it. The Thai banking system has been experiencing negative excess liquidity, meaning no cash lying around for more lending, since August of last year, or nine consecutive months. As of the end of April 2022 (latest data available), negative excess liquidity was 244.7 billion baht.
Under negative excess liquidity circumstances, banks have to wait for cash from loan repayments before they can release new loans. Fortunately (or unfortunately), Thai borrowers have been repaying their loans more than getting (or wanting) new loans which hides the seriousness of the liquidity situation. It is unfortunate because without fresh new loans businesses cannot expand and the economy has no chance to move forward. Even the government cannot move forward because deficit financing gets harder by the day. It is not surprising the government has to stop supporting diesel prices. It is not the deficit of the Oil Fund that worries them. It is getting financing for the Oil Fund that worries them.
Why does the Thai banking system have such a continued negative excess liquidity period? That is because money keeps leaving Thailand. From the beginning of the year to May 20 (latest data available), $18.4 billion (396.1 billion baht) of capital left Thailand. The capital outflow trend is likely to continue, particularly with rising world interest rates and the stubbornness of the Bank of Thailand wanting to keep domestic interest rates unchanged. I want to reiterate that inadequate liquidity is deeply serious and requires immediate attention from authorities before the Thai private sector collapses from a liquidity shortage as it did after the Tom Yum Kung crisis.
Interest rate hikes, currency depreciation and bank collapses will be by-products of capital outflows and the liquidity crisis. No further explanation is needed. If all these events -- double-digit inflation, high-interest rates, a liquidity shortage, currency depreciation, and bank collapses -- do happen, there is no doubt the Thai economy will experience an extended period of recession.
Can Thailand's robust export income and the return of foreign tourists save the economy? My answer is that it's highly unlikely. Thailand's export performance of 18.9% and 6.6% growth in March and April is misleading. If one deducts gold and petroleum product exports, the growth figures drop to 5.0% and 0.2% respectively. The sharp decline in export growth indicates the export sector is sensitive to world demand. Given the fact that the world economy will keep slowing down, the export sector might not be Thailand's best economic weapon as we all hope.
The Tourism Authority of Thailand expects that, at worst, 5 million foreign tourists will visit Thailand this year. And, at best, the number could be as high as 15 million contributing 1.3-1.8 trillion baht (equivalent to 0.8%–1.1% of GDP) to the economy.
In the first four months of the year, 0.69 million foreign tourists visited Thailand. However, the worldwide economic recession, crazy inflation rates, and high transport costs might not make the expected 5 million tourists achievable.
The fate of the Thai economy might not be favourable. The solution is not to panic, but to devise appropriate macroeconomic policies. This will be the subject of my next article.