BoT is absolutely right in holding rates
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BoT is absolutely right in holding rates


Prime Minister Srettha Thavisin, followed by Bank of Thailand governor Sethaput Suthiwartnarueput, right, enters a meeting on the 10,000-baht digital wallet handout scheme at Government House, in October last year. (Photo: Chanat Katanyu)
Prime Minister Srettha Thavisin, followed by Bank of Thailand governor Sethaput Suthiwartnarueput, right, enters a meeting on the 10,000-baht digital wallet handout scheme at Government House, in October last year. (Photo: Chanat Katanyu)

The whole country -- the government, its economic agencies, private economic research houses, the private sector, and academics -- is accusing the Bank of Thailand (BoT) of being stubborn for refusing to lower interest rates to support the weak economy, aka, the economy in crisis.

The pressure to do so is particularly strong after official Q4/2023 GDP figures were released a few days ago. I have the opposite view and am siding with the BoT as economic fundamentals support a high interest rate environment.

Believe or not, if I were the BoT governor, I would have raised the policy interest rate (1-day repurchase rate), instead of maintaining it at 2.5%, to stop consumption madness.

Critics will probably think that I have lost my mind, particularly after the Office of the National Economic and Social Development Council (NESDC) announced Q4/2023 GDP growth to be merely 1.7% bringing whole year growth in 2023 to 1.9%. According to critics, the Thai economy needs lower interest rates to spur growth not higher interest rates to slow down growth.

After examining the components of 2023 GDP, critics might change their minds. Despite low GDP growth of 1.9%, private consumption growth is 7.1% for the year, higher than 2022's consumption growth of 6.2%. On a quarterly basis, consumption growth was 5.9%, 7.3%, 7.9%, and 7.4% in Q1 to Q4 2023 respectively. Judging from these numbers, consumers are not suffering but having great times.

While the government views low GDP growth as an economic crisis, the BoT sees rising consumption levels as dangerous warning signs of self-destruction. How can an economy with negative manufacturing growth finance robust consumption activities? The answer is simple -- borrowing and skipping debt repayments.

Household debt increased by about a trillion baht in 2023. Obviously, that amount is not enough to finance consumption desires. According to National Credit Bureau data, consumers skipped paying 1.7 trillion baht of debt to help finance consumption. With these facts, does anybody still think that Thailand should have lower interest rates to encourage more consumption and more debt? Or should Thais work hard, consume less, save more, and, most importantly, pay off debts for the sake of a sustainable economic future?

The defaulted amount of 1.7 trillion baht, about 12.4% of the total household debt portfolio of 13.7 trillion baht, is of great concern. First, the amount is rising fast. Second, the amount mentioned does not include 1 trillion baht of restructured debt. If included, total household debt in trouble would be 2.7 trillion baht or 19.7% of the total portfolio. That is a crisis level, not economic crisis, but household debt crisis.

It would be even more shocking if readers knew in which consumption category Thais spend their money. It is the category of "Restaurants and Hotels". Consumption growth in this category were 91.2%, 42.1%, 39.5%, and 35.4% in Q1 to Q4 2023 respectively. It has been argued that high spending growth in this category is mainly due to tourist spending. Sorry: tourist spending is recorded separately under the category of "Export of Services" which rose 14.7% in Q4/2023.

Thai consumers do not buy food, they buy booze!

This has come to my attention. Foreign tourist numbers increased 97.9% in Q3/2023 and 49.1% in Q4/2023 but their spending increased only 35.7% and 18.1% in corresponding quarters. Are tourists spending much less nowadays? If that is the case, state agencies should focus on tourist spending rather than the number of incoming tourists.

This point is important. Private consumption expenditure, accounting for 59% of total GDP, rose 7.1% in 2023 but overall economy growth was 1.9%. There must be serious contraction in other GDP components. Which components are the culprits?

The most concerning one is "Investment", particularly in the sub-category of inventories. Normally, manufacturers stock raw materials and finished products for future production and sales -- on average about 200-300 billion baht per year. It was minus 72 billion in 2023. Do manufacturers feel that futures sales will be much less than 2023's and there is no need for inventories. Is that the reason why the Manufacturing Production Index dropped 5.1% in 2023?

If there is something that seriously needs fixing in this country, it would be the manufacturing sector not consumption. Cash handouts and lowering interest rates should never be discussed. Economic policies should target raising productivity and competitiveness. The NESDC, please take note: It is your job.

The nasty by-product of lowering interest rates is the creation of more debt burden. The BoT, and all central banks around the world, do not possess a magic wand which can make domestic interest rates go in any direction it wishes. The bank affects interest rates through the law of demand and supply. If a central bank wishes to lower domestic interest rates, it would have to pump money into the system. Things work the other way around when a central bank wants to hike interest rates.

In January to June 2011, the BoT lowered its policy rate from1.25% to 0.5%. To achieve the target, the bank released more cash into the economy, causing money supply growth to rise from 4% to 11%. The BoT performed the opposite to raise interest rates. The bank cut money supply growth from 3.6% in January 2023 to 1.3% in August in order to raise the policy rate from 1.5% to 2.25%.

"Moral suasion" has low or no effectiveness in the business world.

Therefore, to effectively lower the policy rate from 2.50% to 2.25% or whatever rate, the BoT would have to increase the money supply. When commercial banks receive a fresh new money supply, they issue more loans to earn more income. It would be a nightmare for the BoT if the new liquidity is used to repay expensive foreign debt, charging a 6-8% interest rate.

If anyone in this country can assure the BoT that a liquidity injection to achieve lower interest rates would be put to good use -- such as the consumption of domestic manufactured products not cheap imports, buying food not booze, and raising production efficiency not repaying foreign loans -- I am certain it will have no hesitation in doing so.

Many countries are supporting their economies by lowering interest rates --Japan and China are cases in points. Private consumption expenditure must be falling fast in those economies.

In Japan, Q4/2023 consumption growth contracted 0.2% after a similar rate of contraction in Q3/2023. China is facing a large oversupply in the real estate sector and has no choice but to support consumption. It is estimated that unsold properties could last over 5-10 years.

Moreover, the real estate sector accounts for 31% of Chinese GDP. A collapse of the real estate sector means a collapse of the entire economy. However, Thailand has no such excuses when private consumption growth was 6.2% in 2022 and 7.1% in 2023.

It would be very unwise to run an economy on popular demand. Economic fundamentals must be considered. Unfortunately, many governments are not wise like past governments in Venezuela and Argentina.

Chartchai Parasuk

Freelance economist

Chartchai Parasuk, PhD, is a freelance economist.

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