What Thailand needs is money, money -- and money. The government needs 560 billion baht to run its 10,000 baht cash handout programme next year, and the country needs (at least) 420 billion baht to prevent the 4th quarter economy from collapsing.
The 560-billion-baht financing of the cash handout programme is impossible due to a lack of liquidity and it would be a waste of space to discuss the issue further. Anyway, let me tell readers some gossip. I heard this through the grapevine and, thus, it could not be confirmed. The government has apparently asked the Bank of Thailand (BoT) to purchase bonds from commercial banks' 1.5-trillion-baht government bond holdings to create free cash at banks. That free cash could then be used to finance the 560-billion-baht programme.
The BoT politely declined. The reason was not that it didn't want to cooperate but because commercial banks needed this 1.5 trillion baht of government bond holdings to provide reserves for possible NPLs. The 1.5 trillion baht is enough to cover about 8% of outstanding loans. A reduction in government bond holding could mean a risk of destabilising Thailand's banking system.
This is the time of the year when economic research houses come out with their GDP growth estimates for the year, and projections for next year. It is always the same story. Things are not too good this year, but, trust me, they will be better next year. Why? Do the tarot cards say so?
The BoT estimates GDP growth to be 2.8% in 2023 and 4.4% in 2024. The latter is based on the assumption the digital wallet scheme is implemented. The Fiscal Policy Office at the Ministry of Finance gives a 2.7% estimation for this year GDP growth and a 3.2% projection for next year.
I do not mean to rub it in, but rather to show that these numbers should be taken with a grain of salt. Around this time last year, the Fiscal Policy Office estimated 2022 growth to be 3.4% and projected 2023 growth of 3.8%. The actual GDP growth number for 2022 is 2.6% and the 2023 growth has since been downwardly revised to 2.7%.
Would the reader be surprised if I say that, according to my estimation, 2023 GDP growth will be 1.8%? The growth per quarter stands at 2.6% (Q1, actual), 1.8% (Q2, actual), 1.4% (Q3, estimated), and 1.5% (Q4, projected).
Readers who follow me regularly know that I do not adopt conventional methods of applying econometric models and computable general equilibrium (input-output table) models, as I see the current economic environment is not a conventional one. Instead, I choose Milton Friedman's optimal quantity of money method, where money supply growth is the main determinate of economic growth.
Money supply growth of 3.3% in Q1/2023 would produce 2.6% of real GDP growth and money supply growth of 2.0% in Q2/2023 would yield real GDP growth of 1.8%. For curious minds who may ask why 2.0% money supply growth does not result in 1.3% GDP growth, as was the case in Q1, the answer lies in the inflationary differences between these two quarters.
Money supply growth is estimated to be 1.3% for Q3/2023. According to its regular schedule, the BoT is supposed to release actual liquidity data for September on Friday Oct 27. They did not. Therefore, I have to estimate the money supply growth for September based on $4.5 billion of capital outflow. The result is 0.9% growth for September, which would put the average quarterly money supply growth at 1.3%.
Stop right there. I have a disturbing piece of information to report. The BoT released its liquidity data on Tuesday. It shows 1.8% money supply growth for September. Instead of incorporating the impact of a $4.5-billion capital outflow, the liquidity data reflects a capital inflow of $3.7 billion, pushing net foreign assets up by 298 billion baht. Is this a Halloween joke, or an intentional error to report a higher level of domestic liquidity? Ill let you readers be the judge.
I stand firm with my money supply growth estimation of 0.9% as it is in line with weekly foreign reserve data and exchange rate movements.
Using Friedman's formula, the 1.3% money supply growth produces 1.4% real GDP growth for the quarter. The actual 3rd quarter GDP growth figure should come out in a couple of weeks. Then we will know whether my estimation of 1.4%, the Fiscal Policy Office's 3.2%, or the BoT's 3.4% would be the closest to the truth. I would be surprised if I am proved wrong, as the manufacturing production index contracted 6.2% in Q3, compared to drops of 3.7% and 5.5% in Q1 and Q2, respectively.
But, in Thailand, actual data is sometimes manipulated.
The final quarter of this year is very troublesome. Based on the assumption there will not be any more capital outflows, money supply growth would be flat at 0%, which would create 0.2% real GDP growth for the quarter. With capital outflows, Thailand's Q4/2023 GDP growth would be negative. The BoT has already released its actual capital outflow figures for the first three weeks of October. These show a net outflow of $2.1 billion, or about 77.3 billion baht.
If Thailand wishes to see positive GDP growth in Q4, I need to make an extraordinary assumption that there will be a huge capital inflow. The way of calculating the required liquidity is straightforward. Q4 money supply growth must increase by 420 billion baht to support 1.5% GDP growth. That means $13.7 billion of net capital inflow from Oct 20 till the end of the year. Too much to ask for?
Where would this $14 billion come from? Santa Claus? The academic answer is from foreign borrowing. Domestic liquidity, truthfully estimated to be 1.3 trillion baht of negative excess liquidity by end-October, would force Thai banks and corporates to seek foreign funding or risk bankruptcy due to a lack of cash to operate their businesses.
In Q2, Thai banks and corporates repaid $8.9 billion of foreign loans. Are these voluntary repayments of forced repayments? I really do not know. But I do know the economy needs this money back and more to sustain economic growth. The recent strengthening of the baht could indicate that Thai banks and corporates are borrowing more.
A final note to the BoT: honesty is always the best policy. There should be lessons learned from manipulating foreign reserve data in 1997.