Financial crisis looms over Thailand
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Financial crisis looms over Thailand


The definition of an "economic crisis" is much debated in Thailand. This is because one of the requirements for enacting the emergency fiscal borrowing decree is that the economy must be in crisis.

Otherwise, the law suggests the government use the annual budget bill to stimulate the economy. Many state agencies have given definitions of an economy in crisis. The Bank of Thailand says there are five types of crises: A financial crisis, a balance of payments crisis, a fiscal crisis, an inflation crisis and an unexpected crisis such as a pandemic.

The Bank of Thailand is not entirely wrong. But these five crisis types are not economic crises but events (conditions) that can lead to an economic crisis.

An economic crisis happens when the unemployment rate exceeds 10%. Such an excessive and sustained level of unemployment induces economic instability and, thus, warrants stimulus packages from government.

I recommend government agency economists read John Maynard Keynes' The General Theory of Employment, Interest and Money to understand the theoretically correct purpose of economic stimulation. Examples of economic crises in the US were the Great Depression with an unemployment rate of 25%, the sub-prime crisis with an unemployment rate of 9.9%, and the Covid pandemic with an unemployment rate of 14.7%.

The latest Bank of Thailand Labour Force survey data from November 2023 showed an unemployment rate of 0.85%, which is an improvement on the 1.22% unemployment rate in January 2023. Therefore, using unemployment as a benchmark, the Thai economy is nowhere near a crisis. The good news ends there, however, and the bad news is about to begin: the financial crisis of 2024.

As I have mentioned several times before, I provide assessments of the economy on a quarterly basis to a private research firm. My assessment for the year 2024 is due for submission today.

In this year's assessment, I opine that I am 90% confident that the economy will run into a financial crisis like 1997's, despite the fact that Thailand is now under a flexible exchange rate regime and the country has adequate foreign reserves to cover an entire external debt of US$190.1 billion.

Economic fundamentals like production capacity and tourism income are irrelevant to economic growth in 2024. The economy is dictated by liquidity adequacy, not fundamentals. The effect of a liquidity shortage on economic growth was already seen in 2023 with economic growth likely to be 1.8%, despite growth potential of 3.6%. In 2024, the liquidity shortage will be severe enough to cause massive debt repayment defaults, particularly from the corporate sector. There are three main causes leading to massive repayment defaults.

First, no income growth for the past five years. The real GDP level of Q3/2023 was 0.8% less than that of Q3/2019 and, it is likely that real GDP for the entire year of 2023 will be 0.33% less than the real GDP level of 2019, too. No income growth means that both consumers and the business sector have to rely on borrowing, not income or profit, to finance economic activities.

Second, the private sector acquiring too much debt during the past five years. Debt to GDP ratios increase, on average, 8.44% per year, which is much faster than GDP growth. A high level of debt acquisition means high repayment levels as well. The most concerning point is corporate debt because it has a fixed schedule of repayments, especially on bonds and foreign loans. It is calculated that Thai corporates borrowed an additional 3.2 trillion baht during the past five years to satisfy their cash deficits despite no production expansion. Such a high level of borrowing is clearly beyond their ability to service debts.

Third, substantial repayments are due in 2024. There is 1.2 trillion baht in scheduled repayments for corporate bonds (890 billion baht) and commercial paper (235 billion baht). If just 20% of the scheduled repayment amount -- 240 billion baht -- is defaulted on or postponed, that would be more than enough to create chaos in the 4.7-trillion-baht private debt market.

The payment postponements of Italian-Thai Development (ITD) to the amount of 14.45 billion baht and Siamnuwat (SNW) to the amount of 520 million baht are two examples of much bigger things to come.

More dangerous than domestic debt is foreign debt. Thai corporates have borrowed $118 billion, equivalent to 4.2 trillion baht, from abroad. Half of that amount is short-term loan repayments due in 2024. How much will be renewed and how much would be recalled is hard to assess; however, domestic bond and paper defaults could trigger the "cross-default" clause in which foreign creditors are obligated to recall all loans given to a defaulted company.

I simply ignore the 10 trillion baht corporate loans from local banks as the due amount would be managed through a debt restructuring process.

One might ask why corporates do not issue more debt instruments to refinance the payments? Two simple answers. First, no excess liquidity is available. The TRUE Corporation, regardless of an A+ rating, can sell only 12.3 billion baht of its 14 billion baht bond issuance. Second, the private sector has to fight for precious liquidity with the government as it needs 693 billion baht to finance this year's fiscal deficit. This liquidity war is guaranteed to be ugly.

Massive domestic bond and commercial paper defaults, foreign debt recalls, and a liquidity war give me a 90% level of confidence that a financial crisis will happen in 2024. Why not 100% confident? I leave that 10% chance to a "miracle" such as the sky raining cash, not water, during the rainy season.

Possible consequences of a financial crisis are: panic selling of corporate bonds as investors have no clue who will default next; an unprecedented level of capital outflow from foreign debt recalls, causing a rapid drying up of domestic liquidity and a deep depreciation of the baht; interest rates rising to double-digit level from bond selling, a liquidity war, and capital outflow; the unloading of Thai government bonds by foreign investors who hold about 900 billion baht of such bonds owing to market to market losses and foreign exchange losses; and the collapse of the stock market.

How to manage a crisis at the policy level if it happens? There are two options -- a soft landing and a hard one. It would take another article to explain the two options properly.

How to manage the crisis at a personal level? The first rule is to protect your investment. I was badly burned from last year's 15% stock market tumble. With no dividends from my investment in mutual funds, I have to cancel my dream trip to Egypt scheduled at the end of this year. But more importantly, there seems to be no way to escape receding net asset value.

Wouldn't it be nice if mutual fund companies could offer investment funds gearing towards minimising the impacts of the mentioned consequences? May I name them "sheltering from the storm" investment funds.

Hmmm. I am thinking out loud. I would be happy to advise mutual fund companies to set up such funds. I am serious about this proposal. Mutual fund companies can contact me through the Bangkok Post.

I hope the editor does not mind. Anti-crisis investment is good for the general public, especially those saving for retirement like me.

Chartchai Parasuk

Freelance economist

Chartchai Parasuk, PhD, is a freelance economist.

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