This year must be my lucky year. One of the key points of this article is to underline the risk of financial crisis compared to 1997. But this time it would not come from bank failures, it would come from defaults on corporate bonds and commercial papers. The reasons are the low cash position of corporates from many years of weak economic performance and, most importantly, today's super-tight domestic liquidity to refinance matured bonds and papers. I am a little wary that readers may scorn such a bold opinion. However, out of the blue, my opinion was proven correct on Monday when Italian-Thai Development (ITD) announced the postponement of payments on its bonds due in 2024 to 2026 with a total value of 14.45 billion baht for two years.
Many more corporate bonds and commercial papers will be rescheduled and delayed. Is it time to prepare yourself? Why? Because money doesn't fall from the sky.
If money could fall freely from the sky, the mainstream projections of Thai economic growth of 3.2% for this year would be easily achieved. If money never falls from the sky but has to be earned, the author's growth projection of minus 1.5% to plus 1.5% would likely become accurate.
To attain 3.2% GDP growth, the money supply would need to increase by 5.2%, meaning about 1.3 trillion baht is needed -- and that is impossible for 2024.
There are three ways to create 1.3 trillion baht of new money: (a) through domestic credit expansion of 10% or more; (b) additional foreign borrowing of US$37 billion; or (c) by the Bank of Thailand performing quantitative easing (QE) of 1.3 trillion baht.
The latest figures for November 2023 show the money supply has only increased by 1.5%, and commercial banks' loan growth rate is at 1.4%. Moving the Himalayas would be easier than pushing those two numbers up to 5.2% and 10% in 2024.
For Q2 and Q3 of 2023, Thailand experienced an external debt outflow of $11.8 billion of gaining more. Therefore, to hope that Santa Claus will bring $37 billion for Thailand is too much to ask. And for the last possibility of having the Bank of Thailand print 1.3 trillion baht to shore up liquidity, the answer from the Monetary Policy Committee would likely to be "over my dead body".
Under the assumption that "no money falls from the sky", the economy will be cash strapped in 2024 and economic activities will be severely curtailed. The result would be low to negative GDP growth. Some may say this is a hypothesis of pessimistic economists. I have a real example to prove it however -- what happened in Thailand in 1996/1997.
These are the GDP growth figures of the four quarters prior to the financial crisis of July 1997. They were 7.4% for Q3/1996, 5.1% for Q4/1996, 0.4% for Q1/1997, and minus 2.0% for Q2/1997. Why did the GDP growth rates suddenly nosedive from 5% to almost 0% in six months? The explanation is that foreign creditors stopped lending to Thailand, causing the financial sector to become cash-strapped. Without new money to support economic activities, the economy nose-dived.
The direction the economy moves this year will greatly depend on Thailand's ability to borrow from abroad. Under the assumption there will be capital inflow (more foreign borrowing) of $7.5 billion, a positive economic growth of 1.5% would be achieved. Under the same principle, if $7.5 billion of external debt is recalled or not renewed, the economy would contract 1.5%. For the base case, I assume a neutral external debt position and, thus, 0.0% economic growth would be the result.
There is no point arguing that the economy has the growth potential of 3.5%. Hence, why mainstream economists can give growth projections of 3.2%. The issue here is liquidity adequacy, not economic potential. The Thai economic potential of Q4/1996 (when it saw 5.1% growth) was no different than that of Q1/1997 (when it saw 0.4% growth). Liquidity was adequate in Q4 and suddenly became inadequate in Q1. That's all.
Much more important than low or negative GDP growth is that a cash-strapped Thailand in 2024 could lead to a financial crisis like in 1997. To explain this, I need some help from the attached table.
With data from the table, the explanation is straightforward. First, Thailand's 2023 debt level is as high as that of 1996. Therefore, the ability to service debt is as bad as in 1996. Strictly speaking, the ability to service debt in 1996 was better because that year GDP growth was 5.7%, while 2023's GDP growth is likely to be around 2.0%.
Second, with a decade of high demand for debt, domestic liquidity becomes inadequate and the liquidity has to be supplemented by foreign borrowing. This is a high-risk manoeuvre. In 1997, when foreign creditors stopped lending to Thailand, Thai GDP growth turned negative. And when foreign creditors recalled loans, Thailand went into a crisis.
Sorry for using data from Q2/2023. It is the latest data available from the BIS, as updated in November 2023.
However, the financial crisis of 2024, if it happens, will not be similar to that of 1997 as the structure of the financial sector, the economy, and foreign exchange reserve levels are now totally different. Most importantly, the ability of the Bank of Thailand to control the banking sector has been much improved.
Therefore, I do not think we will see a banking sector crisis. The crisis will happen in the private corporate bond and commercial paper markets. Unfortunately, the size of the private debt market is quite large, with 4.7 trillion baht of bonds and paper outstanding, roughly equivalent to 25% of commercial banks' corporate sector loan portfolio.
The large size makes it vulnerable to economic shocks. Even worse, unlike banks who can turn to the Bank of Thailand for funding in time of needs, private corporates have no lender of last resort. Their only choice is to default or, to use a milder term, "reschedule payments".
The government has the silly idea that a fund could be set up as a lender of last resort to support defaulted corporate bonds. Where is the money to set up such a fund? This year, the government will have the hardest time to finance its 6.93 billion baht of fiscal deficit and should not harbour any ambition to support others.
I do not need to explain how corporates could make defaults on bond payments. ITD has already served as an example of that. But this is the tip of a large iceberg. Thai corporates, apart from borrowing from the Thai debt market, have borrowed a total of $118.8 billion (equivalent to 4.2 trillion baht) from abroad.
The danger is that $58 billion (2 trillion baht) of the total amount is short-term in nature. If this short-term debt is not substantially renewed, one can say BYE BYE to the Thai economy and the baht.
I will stop here, as I have no intention to describe the consequences of a 2024 financial crisis -- should it happen.
Chartchai Parasuk, PhD, is a freelance economist.