20 years of errors can't be fixed easily
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20 years of errors can't be fixed easily

ECONOMY TALK

This Jan 17 photo shows pedestrians crossing an intersection in Bangkok. The 1.5% economic growth rate reported by Thailand in Q1 of 2024 was the lowest in Asean. (Photo: Bloomberg)
This Jan 17 photo shows pedestrians crossing an intersection in Bangkok. The 1.5% economic growth rate reported by Thailand in Q1 of 2024 was the lowest in Asean. (Photo: Bloomberg)

I have a strong feeling that piecemeal measures are what the economy is going to get from the government to combat Thailand's long-standing economic problems.

The problems have become too big and too complicated to be fixed. It is such a jumble, policymakers have no idea where to start. More importantly, the government and Bank of Thailand do not have the guts to fix them as it would require "out-of-the-box" thinking.

Where is the beef? I want my hamburger with a thick piece of juicy meat, not a plant-based meat substitute, theoretically correct organic bun, and IMF-approved dressing.

Thais deserve real economic measures to fix the economy once and for all, not whimsical measures like more loans to SMEs by state banks and on-again, off-again debt restructuring. We have seen measures like that since dinosaurs roamed the Earth and time has proved that these measures do not work.

The prime minster is right to say Thailand's economic problems are caused by high levels of household debt. But what the prime minister may not realise is that the problem started 20 years ago.

For a middle-income economy, a sustainable household debt level should be around 40%-45% of GDP. Household debt levels beyond 65% of GDP invites financial crisis risk.

Thailand is certainly a middle-income economy with per capita income of US$7,000 (256,700 baht). Unfortunately, the country passed the sustainable household debt threshold with 43.5% of debt/GDP 20 years ago, in 2004, and broke the crisis debt level of 66.2% of debt/GDP in 2011 after the launching of the "First Car Programme" in which the government offered up to 100,000 baht in rebates.

After that programme, Thais seemed to be addicted to debt acquisition causing household debt to GDP to balloon to 91.3% at present.

Debt is the first big problem of the economy. The second big problem is the alarming deterioration of economic potential (productivity) which can be seen in 18 months of continuous contraction in manufacturing activities.

Before the Tom Yum Kung crisis in 1997, Thai economic potential was about 7.2%. That is why GDP growth was able to bounce back to 7.2% in 2003 after the economy stabilised. It is estimated that economic potential receded to 2.8% after Covid, a figure which I think could be overestimated.

By the way, I was told that the manufacturing index would rise for the first time in April 2024. But it is nothing to be cheerful about as it is a result of a low production base in April last year. Songkran in 2023 was the first real Songkran after two years of Covid and travel restrictions. Workers took leave and went home longer than usual, causing MPI in April 2023 to drop 8.7%.

The reason why economic potential plummeted so fast is a lack of investment to improve productivity. For a developing economy, investment growth should increase at least 5% a year to maintain economic potential. Three years prior to the Covid outbreak, average investment (fixed capital formation) growth was 2.6%. After Covid, average investment growth for 2022-2023 dropped to 1.75%. Investment growth for Q1/2024 is, drum roll please, negative 4.2%.

Try to relate movements of investment growth figures and subsequent GDP growth figures. With inadequate investment to raise (or, at least, maintain) productivity, no one should be surprised to see the Thai GDP growth rate drop and drop and drop.

To become a healthy economy, Thailand must change from a consumption-led economy to a production-led one. The problem is that the country cannot afford the 10-20-year timeframe for proper structural change. Structural change is an ideal concept, but as Keynes once said, "in the long run we are all dead".

Thailand needs efficiency improvement NOW. The only possible option is "cheating" through deep depreciation of the baht.

The Bank of Thailand is right to say that deprecation would not help exports much. The bank tried and failed. The reason is that Thailand mostly exports intermediate products, not finished ones. Thailand is a small part of the global supply chain and has no command over world markets. Even finished products, such as motor vehicles, are exported under foreign brands. Therefore, the depreciation has to be very deep -- say over 20% -- to make a change in the supply chain.

It always amuses me when the government says we must find new markets for exports. How? Does the government means finding new markets for Thailand-produced Toyotas and Hondas? Or finding new markets for printed circuit boards fabricated under Taiwan's specifications?

Deep depreciation comes with deep, expensive prices. The first one is import inflation. When the Japanese yen depreciates 11.3% within one year, it triggers 2.4% of import inflation with Japan imports equivalent to 21.2% of GDP. But a 20% depreciation of the baht would cause 13.6% of import inflation with imports equivalent to 68.1% of GDP for Thailand.

The second problem is wide-spread bankruptcies among Thai corporates. As of Q4/2023, corporates borrowed $121 billion from abroad. A 20% depreciation would mean an additional 890 billion baht of debt burden. Most corporates would fail to come up with the additional baht to repay foreign loans.

However, the second problem could be eliminated by the Bank of Thailand selling "backward" foreign exchange forward contracts. This could not be done during the 1997 crisis as the BoT had inadequate foreign reserves. The first problem of import inflation is much more difficult to manage but not impossible.

Some 20% of baht depreciation probably would raise productivity by 10% which would put Thailand back in the global competitiveness game. I am fully aware that "cheating" has prices to pay but it is probably the only option available for a quick fix. Structural changes would need 10 years to take effect. I, and most Thai people, cannot wait that long.

The crisis of 1997 did not have this problem of household debt. Household debt was probably less than 40% of GDP at that time (and government debt was merely 15% of GDP). The effective way to solve 91.3% of household debt to GDP is to cut the debt level by half to 45.6% of GDP. It is not possible to do through the banking system as all banks would go bankrupt. It has to be done through a government/BoT mechanism.

If one gives the job of debt restructuring to banks, they would only do a "window dressing" job so as to minimise financial/accounting losses. Therefore, most debts would not be "restructured" but would simply be "postponed".

A "cashless" fund (or many cashless funds) would be set up to purchase half of household loans from financial institutions. The payment terms would be extended to 25 years, carrying an interest rate of a 25-year government bond (currently 3.4%) plus a 3% management margin.

Interest payments should be made current but a stepped-payment method should be applied for principal repayment, possible with a 2-year grace period.

If the Thai government wants to have "BEEF", please take my advice on deep depreciation and "cashless" debt restructuring funds. At least, it would be a constructive discussion topic during dull economic cabinet meetings where everybody speaks like a broken record.

Chartchai Parasuk, PhD, is a freelance economist.

Chartchai Parasuk

Freelance economist

Chartchai Parasuk, PhD, is a freelance economist.

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