Soft or hard landing for Thai economy?

Soft or hard landing for Thai economy?

Personally, I am sure the Thai economy will crash this year. I can even estimate the time when the crash will start. It is likely to be the month of May as several big economic bombs will explode that month. Confirmation of this belief came in December 2023's economic data. The most disturbing part is industry's capacity utilisation rate of 56.2% (seasonally adjusted), which is the second lowest in the world. The world's lowest is Nigeria!

Readers are not obligated to agree with my analyses. The IMF just came out with 2023 and 2024 GDP growth projections. Needless to say, they are in the opposite direction to my estimation of 1.8% for 2023 and 0.0% growth (base case) for 2024.

The IMF projects that growth for 2023 will be 2.5% and growth for 2024 will be 4.4%, assuming the digital wallet (DW) can be implemented. The IMF is most likely to be wrong about 2023 as the actual fourth-quarter economic data indicate a weak quarter.

The IMF is likely to be wrong about 2024 as well. To achieve 4.4% growth, the IMF makes an extraordinary assumption of robust private credit expansion of 3.8%, driving the money supply to grow by 5.6%. With money supply growth of 5.6% and inflation of 1.2%, real GDP growth would mathematically be 4.4% (5.6-1.2). The problem is that 3.8% credit expansion translates into 1.2 trillion baht of new loans. Does anyone in Thailand think that in a time of liquidity shortage and alarming levels of NPLs, banks will have the money and courage to issue such an amount of new loans?

I'll make a simple adjustment to the IMF's projection. If private credit growth is 1.3%, as happened in 2023, not the unrealistic assumption of 3.8%, based on the IMF's model, the Thai economy will grow 1.9% instead of 4.4%. Of course, the adjusted 1.9% growth includes the effect of the DW. Let us further assume that the DW will not happen in 2024, Thai GDP growth would be further reduced to 1.4%. Hmmm. Coincidentally, the number aligns with my projection of 1.5% to -1.5% growth for 2024 with a base case of 0% growth.

It is apparent that both IMF and I share a similar model of the economy. The difference is the assumption of private credit expansion. If Thailand can (mysteriously) obtain 1.2 trillion baht of new liquidity, the IMF would be right. But if Thailand fails to obtain new liquidity in 2024, I will be right. Simple as that.

From actual data, December 2023's liquidity shortage is -905 billion baht, an increase from -835 billion baht a month ago and an increase from -427 billion baht a year ago. Readers may decide who will likely be right about 2024's economic growth -- the mighty IMF or the author?

Hint -- there was a net capital outflow of US$2.9 billion, about 100 billion baht, in January 2024. The recent sharp depreciation of the Thai baht probably indicates more accelerated capital outflow.

In a challenge to the IMF and orthodox economists, this author goes a step further by offering a view that not only will it be zero private loan growth in 2024 but there could be negative loan growth arising from the liquidity shortage and bad loans. These combined factors would cause economic contraction and a financial crisis.

High levels of private debt of 201.9% to GDP as of Q2/2023 (178.4% to GDP from domestic borrowing and 23.5% to GDP from foreign borrowing) would exceed the ability of borrowers to pay. Loan repayments with local financial institutions can be postponed through debt restructuring, but loan repayments to corporate bondholders and foreign creditors cannot. Some 890 billion baht in corporate bond repayments are due in 2024 (excluding 2.75 billion baht of commercial papers, all due within 270 days), and foreign short-term loans of $58 billion (about 2 trillion baht) are also due this year.

If just 20% of the amount due, about 625 billion baht, is defaulted, the Thai financial sector would run into a crisis. One might argue that 625 billion baht, equivalent to 3.5% of GDP, is not enough to wreck the private credit market of 30.7 trillion baht. That is true, but there is a thing called the "domino effect". With such a level of default, creditors could recall all loans, not only the due amount. At the onset of the subprime mortgage crisis in the US in 2008, initially, only 9.2% was in default. But then the default spread like wildfire and brought down not only the US economy but the world economy, too.

Are there solutions to a financial crisis? The answer is that there are no solutions but options. The options are soft-landing and hard-landing.

An example of a hard landing is the financial crisis of 1997. The economic pain was beyond words. Unemployment jumped from 0.9% to 3.4%. NPLs peaked at 50%, and 25% of businesses went bankrupt. But five years later, the Thai economy rose like a phoenix. GDP growth from 2002-2006 averaged at 5.8%. It was a golden era for the economy, and some know that period of prosperity as the Thaksin years.

Why? Not entirely because of Thaksin but mainly because debt, which is the cause of economic collapse, was reduced by 40%. The private debt to GDP ratio of 234.2% in Q3/1997 was cut to 148.2% of GDP in Q3/2002. With a sustainable level of debt, the Thai economy, or any economy, would rise from the ashes like a phoenix.

The 2024 crisis would produce similar results if private debt to GDP ratio could be cut by 25% from the current level of 201.9% to GDP to 150% to GDP. Of course, for the next five years, it would be excruciating pain and 25% of businesses would go bankrupt.

I prefer this option of "no pain, no gain". However, because of past experience of excruciating pain, I am asked to think of a soft-landing strategy.

Thailand is not in the same league as China, the US, or even Japan in using the strategy of quantitative easing. If Thailand ever foolishly tries to increase liquidity by printing more money, there would be unstoppable capital flight in fear of deep depreciation. Türkiye already tried that route and lost half of the value of the Lira. If one wants to risk seeing the Thai baht at 70 baht to the dollar, one may try that money-printing strategy.

The much better soft-landing strategy of absorbing default corporate bonds is through a mega mutual fund. The idea was introduced by the Bank of Thailand in 2020. The so-called 400 billion baht Bond Stabilization Fund (BSF) was to be set up for such a purpose. But the idea was met with stiff resistance and legal threats.

Therefore, the BSF never took shape. The key argument was it was not the role of the Bank of Thailand, using public money, to be involved in corporate debt.

To overcome the BSF's flaws, my suggested fund will meet the necessary conditions of (1) zero funding requirements (cashless transactions), (2) full public acceptance, (3) no need for a government guarantee, (4) self-absorption capability of bad debts, and (5) an anti-corruption mechanism.

Before I end this article, let me make an important note. The good thing about the soft-landing option is that it is relatively painless. However, the drawback is that the debt level would never be reduced, and it would take a long, long time for economic recovery. If you do not believe me, ask a Japanese person about the phrase "lost two decades".

Chartchai Parasuk, PhD, is a freelance economist.

Chartchai Parasuk

Freelance economist

Chartchai Parasuk, PhD, is a freelance economist.

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