Liquidity is the most ignored issue in economics. Liquidity is considered to be like "oxygen" which is readily available when needed and, thus, has no intrinsic value.
Human beings forget the fact that they can live for only three minutes without oxygen, three days without water, and three weeks without food. I have been warning about an increasingly distressful liquidity shortage in the Thai financial market for quite some time. I even make GDP projections based on liquidity adequacy. Alas, my warnings seem to fall on deaf ears.
Recently, the liquidity shortage has had a real impact on the financial system. I do hope this will be a wake-up call for those who brush aside the liquidity issue. Let me warn that this incident is just the tip of a very large iceberg. Please read the story.
TRUE corporation, one of Thailand's largest corporates, with an asset size of almost 800 billion baht and with an A+ (stable) credit rating, has failed to secure full subscription to its latest debenture offering on Nov 6. The issuing amount is relatively small for the company's size -- 14 billion baht -- and the interest rates offered are reasonable from 3.15% (1 year) to 4.6% (10 years).
Through book building, ie, a survey of investor interest, underwriters were confident the offering would be oversubscribed as usual. Another 4 billion baht of debentures were prepared in case of oversubscription. The actual subscription was 12 billion baht, which I am sure that underwriters make the hardest effort to sell. The news shocked the stock market and TRUE's share price fell 6.61% on the morning of Nov 8.
If this is not a sure sign that Thailand's domestic liquidity situation is in deep trouble, I do not know what else to say. If an A+ corporate cannot be successful in securing funding of 14 billion baht, just imagine what is happening to the funding situation of lesser companies, particularly SMEs.
The liquidity shortage brings me to another interesting issue. How can the government be certain that funding to the tune of 500 billion baht can be secured?
After months of persistent claims that funding for the 10,000 baht cash handout would be from fiscal budgets, on Nov 10, the prime minister announced the scheme would cover 50 million Thais and a Fiscal Borrowing Act for 500 billion baht would be proposed to provide funding for the scheme.
This took everybody by surprise, especially me. Most people were surprised because it is in contrast to a promise that the scheme would not be a burden on taxpayers. I was surprised because there is no dormant 500 billion baht available for borrowing.
This is already in the news. True or not, the news has to be confirmed with official minutes of the meeting. During a meeting to consider the new 10,000 bath cash handout proposal on Nov 10, the Bank of Thailand governor announced his organisation disagreed with the proposal and would not participate in considering it. However, the committee passed the proposal and the new scheme was announced by the prime minister few minutes later.
The government knows very well that large scale borrowing under the present liquidity situation is impossible. That is why the option of borrowing never came up until the last meeting. In fact, according to a rumour, the government had already asked the Bank of Thailand to create liquidity for commercial banks so that it could borrow. That could be the reason why the governor disagreed with the proposal as the bank would have been pressured at the meeting to provide liquidity.
To prove there is no dormant 500 billion baht in the banking system, one can examine the consolidated commercial bank (CB) balance sheet compiled by the Bank of Thailand. At the end of August, CBs had total deposits of 16.7 trillion baht and total loans of 18 trillion baht (14.5 trillion baht of credit loans and 3.5 trillion baht of money market loans). To fill the funding gap, CBs borrow from the money market and abroad. As of the end of Q2/2023, the banking system had borrowed US$37 billion (about 1.2 trillion baht) to help close the liquidity gap.
If the government demands 500 billion baht of funding, CBs are left with three options -- selling existing bond holdings (to who?), recalling credit loans and money market loans (triggering a domino effect of bankruptcies), and borrowing more from abroad (good luck!).
If it is impossible to find 500 billion baht of liquidity, why bother to propose a new scheme? Critics say the announcement of the new scheme is nothing but a time-buying tactic. They feel the government hopes that the issuance of the Fiscal Borrowing Act would violate Section 53 of the State Fiscal and Financial Discipline Act (2018) and Section 140 of the constitutional law.
They require the government to use a regular route for the annual fiscal budget unless there is an emergency situation. The government is allowed to find funding for any scheme it wishes through checks and balance procedures under the Budget Act.
Section 53 of the Fiscal and Financial Discipline Act defines "emergency" as a situation where such spending cannot be included in a timely fashion in the regular annual Budget Act. Section 140 of the Constitutional Law says the government must spend only what is specified in the Budget Act unless there is an urgent situation.
The fact that (1) the 2024 Budget Act is waiting to be submitted for approval by parliament in December and there is ample time to add the cash handout scheme and funding needed in the 2024 Budget Act; and (2) the disbursement of money is scheduled for May 2024, making the argument of "emergency" and "urgent" sound unreasonable. Anyway, I am no legal expert. But as an experienced economist, I am confident the new scheme will never get off the ground due to inadequate funding.
How do Hong Kong and Japan fund their cash handout schemes? Thailand is not the only country that hands out cash to their citizens. Hong Kong has done it three times under the "Consumption Voucher Scheme". The funding is not from domestic borrowing but from its Fiscal Reserve (money saved from fiscal surpluses) placed abroad.
Japan, on the other hand, funded cash handout schemes through domestic borrowing. The super-large fiscal deficit is possible because of the Bank of Japan's massive quantitative easing programmes. The cost to Japanese citizens is 150 plus yen to the dollar. Of course, the Thai government can borrow $14 billion from abroad as a last resort to fund the scheme.
I will close this article with good news. Remember my Christmas wish of asking Santa Claus to bring in capital inflow? The good Santa did just that. In the first week of November, there was a net capital inflow of $3 billion causing the Thai baht to strengthen to 35.5 baht per dollar. But the recent re-weakening of the baht to more than 36 baht to the dollar might be signalling that Christmas will not last long.
Good news, albeit short-lived, is better than nothing.
Chartchai Parasuk, PhD, is a freelance economist.