The election result is clear and the MOU to form a 312-seat government in the 500-seat parliament is agreed. But who will lead Thailand and its economy for the next four years is unclear. Whether it will be a pro-equality government, pro-growth government, or even a pro-big-spending government remains in doubt.
While big boys are toying with the future of Thailand and the livelihoods of 70 million citizens, the economy continues to weaken. The Bank of Thailand has announced April's economic data a couple of weeks ago, and the data point in the opposite direction of a recovery. Readers can count the number of times a decline appears compared to the first quarter and decide for themselves. Here it goes.
Exports (in value) declined a further 4.9% compared to a contraction of 4.6% in the first quarter; the Manufacturing Production Index declined by 8.1% compared to a contraction of 3.7% in the first quarter; the capacity utilisation rate (seasonally adjusted) declined to 59% compared to 60.9% in the first quarter; the current account balance declined to a deficit of US$0.5 billion compared to a $4 billion surplus in the first quarter; and money supply growth declined from an already low-level growth to 2.4% compared to 3.3% growth in the first quarter.
Are you done with counting the word "decline"? GDP growth for the first quarter of 2023 was 2.7%. What will second quarter growth be like with all these negative numbers? Previously, most economists expected April's economy would benefit from political campaign spending. No such luck.
The World Bank, in its June 2023 Global Economic Prospect, raised the growth projection for the Thai economy this year to an impressive 3.9% from 3.6% (January's projection).
How could this be possible amid the political void and weak actual first-quarter growth? For such a projection to be accurate, GDP growth would have to be an average of 4.3% for the remaining three quarters of the year.
Back in April, I projected Thailand's GDP growth for a private research firm. The number was 2.5% growth for the first quarter and 2.6% growth for the entire year (base case). My projection accuracy has already beaten the World Bank's for the first quarter, and I am certain that 2.6% annual GDP growth would be closer to the actual number than the overly-optimistic 3.9%.
In April, I had no way of knowing the election outcome. I believed the Pheu Thai Party with its long-standing popularity and helicopter-money (cash giveaway) policy of 10,000 baht per person were likely to take them to a landslide victory.
For that reason, I simulated GDP growth in the event of their political victory. Readers might guess that with a strong pro-growth policy, GDP growth for 2023 would drastically improve. Wrong.
GDP growth for 2023 was slashed to 1.6% as a Pheu Thai government would be forced to run a large budget surplus to earn 400 billion baht to spend on its cash giveaway policy on Jan 1, 2024.
The hope that the policy would be financed from extra income tax and trimming the budget were delusions. The party forgot they would have only four months (assuming they get to run the government starting Sept 1), which would not give them enough time to collect more taxes such as VAT and income tax. Running an unprecedented budget surplus is a sensible option. The other option is borrowing. But…
This "but" is important. The full sentence is "But the Thai economy does not have enough liquidity for large government borrowing". This is the reason I keep showing the figure of declining money supply growth.
Without a proper liquidity position, no economy can grow. The biggest mistake most economists make is the assumption that liquidity is limitless. Based on this false belief, one can stimulate the economy without considering liquidity constraints.
The facts are to the contrary. If it were true, the US Fed and other central banks would not need Quantitative Easing programmes to inject liquidity into their economies to stimulate growth. Other tools to lure people to consume, such as tax reductions or even helicopter money, would be much better policies.
Using the IMF's method, I calculate Thailand's liquidity position on a monthly basis (as soon as the Bank of Thailand releases its monthly economic data) to check the direction of economic growth.
The excess liquidity position -- free money for anybody to use -- was negative 560,636 million baht in April and negative 516,201 million baht in March. With a tighter liquidity position, it is a no brainer to me that April would have weaker economic activity than March. And I was absolutely right.
May I make a small digression. I watch our country's foreign reserve movements on a weekly basis.
Thais are proud that Thailand has large foreign reserve holdings -- I believe they rank 16th in the world. But nobody tells them that Thailand also has external debt equal to our reserve holdings.
According to the Bank of Thailand's latest data, our foreign currency reserve position was US$199.1 billion (as of June 2) while our country's external debt was $199.8 billion (Q4/2022).
That's right. Effectively, we have negative net foreign currency reserves. It would break my heart to say that almost all of Thailand's foreign reserve buildup comes from external borrowing, not from current account surpluses.
This is an important reminder to whoever is lucky (?) enough to run the economy, that our economy is not strong but in fact fragile.
I have already talked about the liquidity constraints on Pheu Thai's helicopter money policy. The Move Forward Party (MFP)'s policy for a minimum wage increase from 350 baht to 450 baht (an increase of about 28%) is equally troublesome.
Given declining sales and profits, at best and most reluctantly, employers can afford a 50 baht increase or 14% raise. I suggest the MFP government takes responsibility for the remaining 50 baht. My further suggestion is this be done through the Social Security Fund (SSF). Would that bankrupt the SSF? No.
The SFF would be fully financed. First, let's look at employer and employee contributions. According to the SSF's law, for a 450 daily wage earned, an employer would contribute 22.5 baht to the SSF and employee would match that with another 22.5 baht.
The government adds another five baht and, voila, the remaining 50 baht wage reimbursement from the SSF is solved.
Then, the SSF would receive a government bond in exchange for 50 baht wage reimbursement. This will leave the SSF's financial position unaffected and the government would not have to find precious liquidity to finance its special bond issue.
All economic issues in Thailand are fragile. One can think of fancy economic policies like helicopter money and large wage increases in line with productivity increases on paper. But to successfully implement those policies, one must overcome existing economic realities and constraints.