Third-quarter GDP growth for 2022 (Q3/2022) is 4.5% -- substantially higher than the expected 4%. The main driving factor is robust private consumption -- not tourism income -- which expanded 9% in real terms and 15.7% in nominal terms, compared to the same quarter last year. On the surface, this high growth phenomenon may look normal as most Asean countries have enjoyed similar benefits of low Covid infections and pent-up demand. For instance, Malaysia's private consumption also expanded 15.7% in the same third quarter.
This high consumption growth bothers me a lot. The question is, where do Thai consumers find money to finance their consumption? To be exact, Thai consumers spent 328 billion baht more in Q3/2022 compared to Q3/2021. Other economies financed their high demand for consumption after Covid subsided through left-over government support programmes, current account surpluses and domestic savings. Current account surpluses, aka external savings, provide the economy with extra cash to be spent when needed. Higher domestic savings, a result of savings during Covid days, is another source of money to spend on pent-up demand. Malaysia has all three factors, while Thailand has none.
The Q3/2022 Thai private consumption growth of 9% not only grew twice as fast as GDP growth of 4.5%, it was also 4.9% higher than the Q3/2019 consumption level. In other words, Thais spent more on consumption than in pre-Covid times. That would be okay and even welcome if it weren't for the fact that Q3/2022's GDP was 2.4% less than Q3/2019's GDP. Less income but more consumption? How could that be possible? The following are plausible explanations of this paradox.
Santa Claus money, namely, the government's deficit spending spree. With 9 trillion baht in government debt outstanding, and another 1 trillion baht of off-the-books debt, the Thai government has been penny-pinching lately. The government's Q3/2022 budget deficit was trimmed to 142 billion baht as opposed to 310 billion baht in Q3/2021. Worst of all, revenue collection is 5% less than last year. Do not look to Big Brother for money, as he is broke too.
Borrowing and more borrowing. Borrowing seems to be Thailand's national pastime. If a Thai does not have enough money, they just walk into a bank (or contact a loan shark) and borrow. What is complicated about that? The complication is that Thai consumers have already borrowed to the max. Before Covid, Thai household debt was 69.2% of GDP. After Covid, Thai household debt rose to 89.6% of GDP. Adding informal debt to official debt obligations, the household debt to GDP ratio could be as high as 120%. I have serious doubts that an average Thai consumer has the ability to borrow for consumption.
Tourism income. A nice thought, but there's not enough. In Q3/2022, Thailand welcomed 3.6 million tourists, generating approximately US$4.5 billion (159 billion baht) in income. Unfortunately, import bills increased by $13.5 billion in the same quarter from high energy prices and freight costs. A small plus but large minus results in $7 billion of the current account deficit. In plain language, Thailand paid foreigners more than they pay us by $7 billion, equivalent to 5.8% of GDP, which means that less money is available for domestic consumption.
Not from Big Bro, not from borrowing, and not from external sources. Who gave Thais extra money to consume then? As a mean economist, I can only think of one source -- delaying (or defaulting) on loan payments. Thailand's outstanding household debt is about 15 trillion baht.
Therefore, its interest and principal repayment are roughly 250 billion baht per month. What if certain consumers decided to spend money on necessities like -- a nice pair of shoes, restaurant dining, bar hopping, and weekend travel -- rather than servicing their debts? The logic is that, under the current circumstances, one has no ability to service the entire amount of debt anyway, so why not enjoy life while one can?
If my guess is accurate, it is almost certain that the current high level of consumption cannot be sustained as secured financing sources cannot be identified. Coupled with the gloomy global economic outlook, the Thai economy will likely be in bad shape from the fourth quarter onwards. Household debt could turn from an economic issue into a social one.
In my previous article, I warned that the fourth quarter of 2022 will not be like the previous three, and it will be a downhill journey. This analysis is applicable to both domestic and global economies.
The Ministry of Commerce just announced that Thai exports declined by 4.4% in October 2022, the first time in 19 months. The decline is broad-based, from agricultural products to manufacturing products, indicating a weakening global demand. In my view, this is a sign of a long and harsh economic winter.
Prices of second-hand Rolex watches plummeted by 19.5%, while prices of second-hand Patek Philippe watches declined 18.6% in the last six months, reflecting reduced global demand for luxury watches. If one does not trust economists, trust Rolex price movements.
The Thai economy is highly dependent on the world economy as the export of goods accounts for 64.1% of GDP, and exports of services account for another 9.8%. Because of the weaker-than-expected world economy in 2023, one major economic research house lowered its Thai 2023 GDP growth rate forecast from 3.8% to 3.4%.
However, this projection is based on an assumption that the number of foreign tourists will increase from 10.3 million this year to 28.3 million next year. Well. If major economies were to enter a deep recession next year, where would you find 28.3 million tourists to enjoy the temples and beaches of Thailand?
It is easy to be a pessimist these days. Although US core inflation dropped slightly from 6.6% to 6.3% in October, it is still far higher than the 65-year average core inflation of 3.61%.
Therefore, many more rounds of rate hikes from the Fed are to be expected. This will lead to turmoil in world financial markets. The $ 2.84 trillion crypto market has already lost 72% of its value and is expected to lose more. The next market to collapse will be the real estate market.
After the real estate market collapse, it is the turn of the banking sector. This warning to all central banks came from the IMF in September 2022, which said: "To ensure banking-sector resilience, stress-testing large declines in commercial real estate prices should be conducted to inform decisions regarding the adequacy of capital buffers for commercial real estate exposures."
I would be more optimistic if anyone could confirm that Thai consumption is sustainable and could assure me that the world's real estate market will not collapse.