I announced in a previous article that today's story would focus on liquidity and debt. But after careful consideration, I have decided to postpone this for another fortnight. The main reason being that I want to wait for the Bank of Thailand's economic data release for August due out on Sept 29.
Instead, I propose an equally interesting article about the flip side of that coin -- which is to say, the downside -- of the Pheu Thai Party's highly anticipated 10,000-baht cash handout programme, which is expected to cost 560 billion baht.
We have already heard about the upsides of this program, which include (1) the introduction of new technology in the guise of digital money and a digital wallet, (2) promoting local economies, and (3) boosting GDP through the money multiplier effect, which can contribute an extra 5.9% to nominal GDP growth and 3.6% to real GDP growth.
My immediate observation is to ask why no country has ever attempted to exercise such a brilliant idea before. Ben Bernanke, ex-Fed chairman and a Noble Prize winner, once proposed a similar concept dubbed "Helicopter Money" to Shinzo Abe, the then-prime minister of Japan. Abe did not put the proposal into practice and continued with his so-called Abenomics of large fiscal spending.
The reason could be that the cash handout programme has downsides as well as upsides. I can think of four of the former. They are (1) its impact on a modern, open economy, (2) the risks associated with financing such a programme, (3) the much-less-than-expected benefit for the domestic economy, which remains highly import-dependent, and (4) the low level of tax revenue that will be generated.
The first downside is the failure to consider how our economy has evolved from a traditional to a modern one. Policymakers may still live in the romantic dream of old Thailand. Let's put it this way. There is a village in which family A catches fish and sells them to other villagers. Family B raises hens and roosters and sells chicken meat and eggs for a living. Family C makes clothing for villagers. Then the story goes like this. It starts with Family A selling fish to Family C for 100 baht. Family A uses that 100 baht to buy chicken meat from Family B. And, of course, Family B, with its income of 100 baht, buys clothing from Family C. I can almost hear some faint Thai music playing in the background.
Under the traditional village economic model, the first 100 baht induces 300 baht of economic activities (fish catching, chicken raising, and cloth-making). Therefore, the money multiplier is three, and that number is all Thai policymakers remember when they awake from their dreams about the Thailand of old.
Sadly (or fortunately), the modern-day village economy bears no resemblance to that. Family A, instead of catching fish, drives 100 kilometres to a Central Fish Market to buy fish raised by aqua-cultural methods. Family B obtains chicken meat and eggs from a large national food supplier. Family C is the best of the lot. Instead of laboriously spinning yarn, weaving fabric, and tailoring self-made materials into clothing, the family uses a smartphone to order clothing from e-commerce platforms. The production sites for their orders vary. The last order features "Made in Bangladesh" labels. This idealised view of the local village economy vanished a long time ago. Mass production is far cheaper than locally produced products.
What is the money multiplier effect in the modern day? For such villages, the multiplier is always one because products are now sourced from outside the village -- definitely more than 4km away. For Thailand, the answer will be one in the case of Family C, as the source of production lies outside the country.
The second downside is the financing risk. If it is not handled properly, the economic consequences could be disastrous. Under Milton Friedman's "helicopter money" theory, financing has to come from a central bank printing new money. Quantitative easing by a central bank buying up bonds in exchange for cash would not work. Under John Maynard Keynes's theory, financing has to come from excess liquidity, which is certainly not applicable to the present situation in Thailand.
At this point in time, I don't think the government has a clear idea of how to properly finance this 560-billion-baht programme, as every option seems to have limitations. The government's answers to questions from the public are murky and sound like a time-buying tactic. During its election campaign, Pheu Thai proposed that financing would come from the 2023/24 fiscal budget, or as follows: 260 billion baht from higher tax income collection, 100 billion baht from VAT revenue generated by the programme, 110 billion baht from expense budget cuts, and 90 billion baht due to the abolition of a certain welfare scheme. No extra government borrowing was apparently required.
Unfortunately, this was just an advertisement.
Using money from the fiscal budget, if any is available, is not only complicated but comes with a high level of legal risk. The former government of Yingluck Shinawatra avoided that and opted for non-fiscal budget spending. This may be, in theory, the best option for the current government of Srettha Thavisin.
Under Yingluck's rice mortgage model, the Bank of Agriculture and Agricultural Cooperatives (BAAC) was assigned by a cabinet resolution to advance rice mortgage payments. A total of 881 billion baht was advanced from 2011-2014. After selling off mortgaged rice, the financial loss (if any) would be reimbursed by the government.
The financial loss so far is 523.4 billion baht. In the nine years since the last programme ended, only 252.7 billion baht has been reimbursed through subsequent fiscal budgets, averaging 28 billion baht a year.
Following Yingluck's model, state banks would advance the 560 billion baht in cash handouts. Business owners would be required to convert digital money into "real" money at state banks. But an immediate reimbursement from the government to state banks? Not possible. The figure I've heard is that it would happen over a period of 10 years.
A more important issue is that state banks have no cash with which to make such advances. To solve this, the government might set up a fund, like the Vayupuk fund, to sell debentures worth 560 billion baht. When state banks are short of cash to make such advances, the fund would lend them the money.
The risk is this could lead to the collapse of the Thai banking system via a deposit run. Depositors would withdraw their money to buy higher-yield Vayupak debentures. Why bother to deposit money in banks and earn 1.5% when the debentures offer a higher return?
Neither such advances from the state bank nor the Vayupak debentures count as part of the fiscal budget, so they are not subject to the legal limit on public debt.
Downside number three. The money multiplier will not be three, but rather 1.42, as 68.1% of Thai consumption comes from imports. With every 100 baht spent, 68.1 baht would pay for imported content. Family C is an example of this. With this reduced money multiplier, the real GDP growth-boosting effect would drop from 3.6% to 0.8%.
Downside number four. With a much lower impact on GDP, the expected VAT income of 117.6 billion baht generated from a 3x spending multiplier would be halved to 55.7 billion baht. Can I be mean and add that $24.7 billion would disappear from foreign reserves to pay for imports induced by the cash handout programme?
A low impact on GDP, disappointing tax revenue, a large reserve outflow ... what should Thais expect from this programme? A noted economist, Dr Supavud Saicheua, has put it correctly that it would lead to undesirable twin deficits for the fiscal and current account.
Maybe an alternative economic stimulus programme would be more apt?