A tale of liquidity and (too much) debt

A tale of liquidity and (too much) debt


Before starting the article, I want to convey a message to the government. The message is "Nothing is free; everything has to be paid for". Acting like Santa Claus is nice, but the government should be aware that every handout gift comes with a price tag.

For instance, the current diesel price subsidy of 7 baht per litre -- 2 baht from excise tax reduction and 5 baht from the Oil Fund -- bears a 14 billion baht monthly financial cost. Hopefully, the government team has already calculated that the economic return of the diesel price reduction scheme to the economy is higher than this 14 billion baht per month.

Now: the article on liquidity and (too much) debt. Apart from writing bi-weekly articles for Bangkok Post, I'm also the chief economist at a private research firm. My assignment is to produce Thai Economic Outlook reports every quarter. The outlook for the entire year is to be submitted in February, which includes a projection of annual GDP growth. Revisions of the outlook are done in May, August and November.

In February, I projected 2023 GDP growth to be 2.6% against popular projections of 3.5% to 4%. In the May revision, I maintained the 2.6% GDP growth projection but, with available data, put the number on Q1 growth to be 2.5%. The official Q1 GDP growth figure was unavailable then and came out a few weeks later. However, I cautioned that there was a good chance that 2.6% annual GDP growth might be difficult to attain. In the July revision, the annual GDP growth figure was revised downward to 2.1%, which implied that the remaining quarterly growth would be about 1.9%.

When official GDP numbers came out, growth was 2.6% for Q1 and 1.8% for Q2. I am not writing this to boast about my accurate projections but to demonstrate that a different approach produces a different result.

Remember the formula of MV=PQ? Most economic research houses -- IMF, World Bank, Bank of Thailand, National Economic and Social Development Council -- directly project Q (GDP) with sophisticated econometric models.

Myself, learning from the financial crisis experience of 1997, estimate M (money supply) first. After obtaining a good estimation of M, I put the estimated M in the formula and get a projection of Q. The econometric approach can be accurate only when money supply is not a constraint.

Under today's tight liquidity environment, money supply constrains economic growth, which surprisingly, most economists are unfamiliar with. In fact, I revised the 2023 growth figure downward because the actual Q1 household debt increased by 88 billion baht instead of the original estimation of 120 billion baht. Less money supply growth can only mean less GDP growth.

A note of respect to Prime Minister Srettha Thavisin. If he wishes to see Thai real GDP growth of 5% in 2024, he would have to manage money supply growth to be at least 7%, equivalent to adding an additional 1.75 trillion baht to current domestic liquidity. If the prime minister fails to do that, a 5% growth target will only be another advertisement. To me, economic stimulus packages of oil price subsidies, electric bill cost reductions, and even the 10,000-baht digital cash handout programme would be futile if Mr Srettha cannot boost money supply growth.

Money supply growth is 3.3% for Q1/2023 and 2.0% for Q2/2023. Unsurprisingly, the corresponding quarterly GDP growth is 2.6% and 1.8% for those two quarters. Money supply growth further declined to 1.6% in July and 1.4 % in August. The government team should be deeply concerned about the consistent and continued decline of money supply growth.

Liquidity equals life. And the lifeline of the economy is getting thinner by the day. The government and the Bank of Thailand should fix the liquidity problem before fantasising about fabulous GDP growth figures. It should be noted that negative excess liquidity surpassed 1 trillion baht in August, a sharp deterioration from negative 858 billion baht in July.

There are two reasons why the Thai domestic liquidity situation is at near-crisis levels.

First, money keeps leaving Thailand. Second, banks are not issuing new loans. In the IMF's language, those two factors are called "Net Foreign Asset (NFA)" and "Net Domestic Asset (NDA)".

Sounds technical? Not at all. When foreign money flows into Thailand, it has to be converted into Thai baht and thus increases domestic liquidity. The opposite happens when foreign money leaves Thailand. In August, US$3.5 billion left Thailand, taking about 120 billion baht out of domestic liquidity. In the first three weeks of September, another $3.3 billion left Thailand. With the exchange rate approaching 37 baht per dollar, foreign money is leaving Thailand unabatedly.

The other way to create money supply, ie increase domestic liquidity, is through banks issuing more loans. The problem is that banks, at the moment, are most reluctant to issue new loans, and thus, less and less new liquidity is added to the system. Private credit growth was 2.0% in July compared to 4.8% a year ago. Private credit growth was as high as 10% during the economic boom.

Remember the homework of raising money supply growth to 7% given to Mr Srettha? It is not an impossible task. The prime minister can achieve this goal when private credit growth expands by 10%. There are two simple answers to why banks are most reluctant to issue new loans. One, a shortage of cash. Two, frighteningly rising loan delinquency.

At present, commercial banks in Thailand issue 17.5 trillion baht of loans but only have 16.7 trillion baht of deposits. That implies a 830-billion-baht financing shortfall. To solve the financing gap, banks borrow US $37 billion (about 1.2 trillion baht under the borrowing cost of 33 baht per dollar exchange rate) from foreign creditors.

The concern is that $20 billion of foreign borrowing is short-term, which banks are obliged to repay in less than a year. Net short-term loan repayment is $2.2 billion in Q2/2023.

The second answer is quickly rising loan delinquency, particularly in the household sector. According to the National Credit Bureau, 7.4% of household loans, about 1 trillion baht, officially qualify as non-performing loans (NPLS) as of Q2/2023. More importantly, 480 billion baht of household loans will become official NPLs within a few months. With 11% of non-performing loans at hand, why would banks want to issue more credit? Thai household debt is 16 trillion baht, 90.6% of GDP, out of total private credit of 30 trillion baht.

(Too much) debt surely equals death. To be precise, death to the Thai economy.

If the prime minister does not want to waste his time and the people of Thailand's time, I strongly urge him to solve these two problems of negative excess liquidity and exploding household debt delinquency before attempting to achieve the GDP growth target.

Chartchai Parasuk

Freelance economist

Chartchai Parasuk, PhD, is a freelance economist.

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