If one thinks 2023 was a not-so-good year for the Thai economy because GDP growth is likely below 2%, 2024 could be worse owing to three major economic risks: liquidity inadequacy, high gasoline price, and high electricity cost.
These negative factors call for an economic contraction rather than expansion. However, government and non-government economic research houses foresee improved economic prospects for 2024.
The Bank of Thailand projects next year's GDP growth to be 3.2% (3.8% if the digital wallet scheme is launched), which is higher than the estimated 2.4% growth this year. The Office of the National Economic and Social Development Council (NESDC) shares the same 3.2% GDP growth projection. Krungsri Research, an economic research arm of the Bank of Ayudhya, has a more optimistic view of 3.4% growth.
I do not live in a dream world. The Thai Tom Yum Kung experience of 1997 and the US Hamburger Crisis of 2008 are examples where economists failed to incorporate economic risks into their GDP projections.
The NESDC then forecast 7.1% growth for 1997, while the World Bank projected 2008 global GDP growth to be 3.6%. Actual GDP growth rates for those years went in the opposite direction. Why? Because crises happened.
All GDP projections for 1997 Thailand missed the mark. Academic projections of 6.8%-7.2% GDP growth rates shamefully failed to give even the slightest hint of a troubled economy.
On the contrary, the projections showed stronger growth prospects over 1996's GDP growth of 5.7%. As we now know, the Thai economy was in deep trouble for several years, but economists blindly ignored it as the philosophy of "tomorrow must be a brighter day" overshadowed economic facts.
The economy exhibited signs of distress in the first half of 1997 as GDP growth rates were 0.4% in Q1/1997 and -2.0% in Q2/1997. The reason was a severe liquidity shortage, measured in terms of negative excess liquidity of 1.4–1.5 trillion baht, persisted throughout the first half of 1997. A severe liquidity shortage prevented the economy from growing in Q1 and Q2. The currency attack in June 1997 caused the economy to collapse in Q3 and Q4 with -3.0% and -6.2% growth, respectively.
The painful truth is that the liquidity shortage did not start in Q1/1997 but started a few years before. An increasing dependence on foreign capital was glaringly evident. By January 1996, negative excess liquidity was already at a very high level at 1.1 trillion baht. The liquidity shortage increased to 1.4 trillion baht by the end of 1996. All economists, except myself, did not recognise such a significant red flag and carelessly projected the economy to improve in 1997, assuming an infinite inflow of foreign capital.
Readers must be curious to know the most recent figure for negative excess liquidity. Using Bank of Thailand data, negative excess liquidity is 800 billion baht for October 2023. The economy has faced negative excess liquidity since August 2021, starting with a small liquidity shortage of 94.2 billion baht. The liquidity shortage peaked at 1.023 trillion baht in August 2023. After that, the figures (mysteriously?) improve.
How does the financial system survive an extended period of liquidity shortage? Much like before the 1997 financial crisis, Thailand borrowed from abroad to fill the liquidity gap. From 2020-22, Thailand borrowed an additional US$28 billion (900 billion baht) to fulfil domestic demand for liquidity, causing external debt at the end of Q4/2022 to rise to $200 billion or about 40% of GDP.
It must be said that external debt to GDP is not excessively high by international standards, but creditors can be cruel when things don't look too good. In Q2/2023, $9 billion of external debt was recalled, which was why the liquidity shortage passed the 1 trillion baht mark in August.
As such, there is no doubt that the main risk for 2024 is one of liquidity arising from dependence on foreign borrowing. To have GDP growth of 3%, the economy needs at least half a trillion baht of new liquidity to support it.
In a normal year, such liquidity would be attained by borrowing $15 billion from abroad. But with a high level of external borrowing, a bleak economic outlook, and the global credit risks of Argentina and China, more foreign borrowing would be next to impossible. Thus, 2024 will be another year of massive liquidity shortage. The problem is that no foreign funding might fill the gap.
But that is not the end of the story; a more serious risk could be hidden behind a slow economy. That is capital outflow risk triggered by credit defaults. Over the past two decades, local banks favoured household lending over business lending. Consequently, corporates sought funding from abroad to replace local financing. Corporates' foreign debt to GDP ratio rose from 18% in 2012 to 24% in 2022. With many years of low economic growth, we could see a string of defaults in 2024, leading to aggressive recall of loans from foreign creditors.
Some good news: readers can be assured that a crisis like 1997 will not be repeated in 2024. The Tom Yum Kung crisis was a "balance of payments" crisis stemming from inadequate foreign exchange reserves. Currently, Thailand has more than enough foreign reserves to cover 100% of external debt.
And now some bad news: a financial crisis like Japan's in the 1990s and the US's in 2008 could occur in 2024. Both Japan and the US have no problem with the balance of payments or capital outflow of any kind; bad debts caused their banking systems to collapse and pushed them into financial crises.
In 2024, rising bad debts from the household sector (outstanding loans 90.7% of GDP) and business sector (outstanding loans 81.2% of GDP) could bring the Thai banking system to near-disaster levels.
Even without a liquidity threat, the economy is set to face two more important risks in 2024. The first is the risk of rising fuel pump prices. After the government transferred the cost of subsidising 5 baht per litre of diesel fuel to the Oil Fuel Fund on July 21, the debt burden of the fund increased by 30 billion baht, averaging 7 billion baht per month.
Within three months from now, the fund's outstanding debt will exceed 100 billion baht, which makes the fund incapable of supporting retail oil prices and cooking gas. A 5 baht per litre increase in diesel pump price might be inevitable, and the impact on the economy, particularly on transport costs, would be tremendous.
Following in the footsteps of the Oil Fuel Fund is the issue of electricity. The government artificially suppressed electricity prices from 4.45 baht per unit to 3.99 baht per unit in September-December. However, there is no free lunch, and the Electric Generating Authority of Thailand (Egat) has borne the cost. The fair price, ie causing no extra financial burden on Egat, for January-April 2024 should be 4.68 baht per unit. As the government is under pressure to set the price lower than 4.2 baht per unit, Egat could bear the cost again.
But by the next round of electricity rate pricing for the May-August 2024 period, Egat will not be able to bear any further burden without bankrupting the organisation. Electricity prices could jump to as high as 5 baht per unit. That will be another significant blow to the economy. With all these three risks waiting in 2024, any GDP projections, ignoring to incorporate such risks, are nothing but wishful numbers from ivory towers.