Read this article well. It will explain the risk of economic recession that Thailand is facing.
Most people think deflation is a welcome phenomenon as it means lower consumer prices. But for experienced economists, it is the most feared economic indicator because it signals an economic downturn, leading to a recession or depression.
So, when news agency Bloomberg published a headline early this month: "China slides to brink of deflation, adding stimulus urgency," it sent shivers throughout China's economic community, fearing stagnation and the holding back of investments.
The threat of deflation arose in China when the consumer price inflation rate (CPI) plunged to 0.0% in June after starting the year with a 2.1% rate.
Deflationary pressure in Thailand is worse than that of China. While Chinese authorities panicked about a 2% fall in consumer prices and issued various measures to maintain demand, Thai authorities seem unconcerned about a 5% drop in prices.
Our CPI inflation rate was 5.02% in January before nosediving to 0.23% in June. On the contrary, we are even happy about the situation as super-low inflation means better economic management.
However, consumers (and economists, particularly at the Bank of Thailand) forget one little thing -- the only reason prices drop sharply is our demand also drops sharply.
By the way, June's CPI inflation of 0.23% is the lowest in 22 months, which means it is as low as the inflation at the onset of the first big Covid-19 wave in 2021 when the Thai economy contracted by 2.5% in Q1/2021.
This could indicate that current demand is as bad as during the Covid period. Surely, not a pleasant reminder.
One could argue that consumer prices drop rapidly because of external factors such as lower world oil prices and declining food prices. Weakening domestic demand plays a minor role. Even though Chinese authorities do not see it that way, it is theoretically possible.
However, another type of inflation indicator called "core inflation" takes out the effects of swinging energy and food prices.
For Thailand, core inflation rates also sharply declined from 3.04% in January to 1.32% in June, undeniably reflecting weakening domestic demand. In China, core inflation merely plunged 0.6% in the first half of 2023.
For the benefit of readers with no economic background, inflation is when prices rise, which is a sign of an expanding economy. An inflation rate of 2% (for an advanced economy) to 5% (for a developing economy) is desirable. Conversely, deflation is associated with a contracting economy, ie, consumer prices moving below 0.0% growth.
Economists try to avoid deflation at all costs. Just to scare readers -- the last time the world saw a sharp drop in price levels, about a 25% decline in CPI, was during the Great Depression of the 1930s. It's needless to explain further the dreadfulness of deflation.
The question is, why has inflation dropped so fast in Thailand? The answer could not be simpler -- consumers are too broke to consume.
As demonstrated in a previous article, consumers borrow money to consume. Consumption behaviour is 100% affected by changes in household debt. In 2022, household debt increased by 139 billion baht per quarter. The increased borrowing is only 88 billion baht in Q1/2023.
Household borrowing will likely increase even less in Q2/2023 and later quarters as commercial banks claw back their household lending. Out of the 88 billion baht increase in consumer lending in Q1, only 1.1 billion baht belongs to commercial banks.
It is no surprise to see this hostile consumer lending behaviour. Thai household debt hit 90.6% of GDP in Q1/2023; bad debts are quickly rising, particularly in the auto loan sector, and this will surprise readers -- banks are running low on cash. That is right.
The monetary system showed 715.6 billion baht of negative excess liquidity in May 2023. Banks must wait for repayments from existing customers before having cash to make out new loans.
This might be slightly too technical, but Thailand's liquidity shortage results from declining NFA (net foreign assets) and NDA (net domestic assets).
In plain English, declining NFA reflects capital outflow. In the three months of April to June 2023, about US$6 billion left Thailand. This is a net figure, ie, outflow from investors amid less inflow from foreign tourists.
The capital outflow was triggered by fear of a trade deficit arising from negative export growth, low Thai interest rates, poorly performing stock market, and political issues. In my opinion, the net outflow situation is unlikely to stop.
Declining NDA comes from our banks (and other financial institutions) not generating enough loans. More loans mean more cash is provided to the economy. Private credit growth slowed from 4% last year to 3.2% in May 2023. The concern is this might not be real loan growth but could be the effects of debt restructuring, where banks pretend to issue new loans to cover overdue payments. This might partly explain why bank's NPLs are only 2.8%
Luckily (or unluckily), the public sector still borrows at full steam. In the first five months of the year, the public sector borrowed 371.6 billion baht. This could be considered lucky because it pushes the economy up. This could also be considered unlucky because public sector borrowing is to be paid back (with interest) by little people like us. As of May 2023, outstanding public sector debt is 10.96 trillion baht, equivalent to 61.63% of GDP.
Let me conclude. The deflation threat is real in Thailand as inflation is dropping unnaturally fast. It should not be recognised as a welcome economic development because it indicates severe weakness of domestic demand and could easily lead to economic recession. If deflation is a thing to appreciate, Chinese authorities would not have pumped an enormous amount of money into its economy with 12% money supply growth, lower lending reserve requirements, relaxed borrowing rules, giving direct loans to help ailing real estate companies, and even cutting lending rates. But people are still not consuming, and inflation still keeps dropping. Because once an economy plunges into deflation mode, it would take almost an act of god to pull it out.
Optimists now see that low inflation is good as much higher energy prices from supply inadequacy and higher agricultural prices from severe weather are waiting. Therefore, there is no need to fix deflation and demand weakness. I could not agree more with the expected higher global inflation. But then, Thailand would have stagflation -- the worst of both worlds: high inflation with stagnant demand.