Banks that don't want money bode ill
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Banks that don't want money bode ill

Visitors at Money Expo, a major bank loaning event, in Bangkok on May 16. (Photo: Varuth Hirunyatheb)
Visitors at Money Expo, a major bank loaning event, in Bangkok on May 16. (Photo: Varuth Hirunyatheb)

When is the last time readers experienced a situation like this? One takes money to deposit in a bank and the bank says please take your money elsewhere as we have no use for it. Such an unusual situation is happening in Thailand at this moment. Thai banks are reducing their credit portfolios and, consequently, reducing their needs for funding.

This is no laughing matter. It's deadly serious. A contraction in credit portfolios means both consumers and producers must cut their economic activities accordingly as less money is available. Before discussing the economic impact of this issue, let us look at the disturbing data.

The following data pertains to private credit -- all types of loans given to the private sector -- paired with GDP. The data are in parenthesis, comprising private credit expansion in the cited quarter and real GDP growth of the same quarter. They are Q1/2023 (133 billion baht, 2.6%); Q2/2023 (247 billion baht, 1.8%); Q3/2023 (151 billion baht, 1.4%); Q4/2023 (114 billion baht, 1.7%); Q1/2024 (158 billion baht, 1.5%).

I can extend the coupling of private credit expansion and GDP growth back 20 more years to prove that without credit expansion, there would be no GDP growth. Even during the Covid years of 2020-2021 when economic activities were disrupted, the average credit expansion per quarter was 337 billion baht. Money is always essential in a capital economy.

Here is the shock. The credit expansion for the months of April and May combined was minus 14.35 billion baht -- not an expansion but a contraction. If this contraction continued in June, it would be the first time we have seen a quarterly contraction since 2015 (the longest data range I had on hand). To be fair, we will have to wait for the June data to come out at the end of this month to be sure of that. There could be a miracle of credit expansion to the tune of more than 150 billion baht in June to compensate for the credit contractions of April and May; however I seriously doubt that, for three reasons.

First, Thai banks returned foreign loans with a value of US$5.4 billion (about 192 billion baht) in Q1/2024. The amount returned is equivalent to 15% of total foreign lending in the preceding quarter. Please go back to the last sentence of the first paragraph to understand why banks did that.

Second, Thai banks are reducing their borrowings in the form of debentures. At present, they are issuing about 500 billion baht of debentures to help fund their lending activities. This piece of information comes from a friend of mine who actively invests in Thai bank debentures. His investment in a 10-year subordinate debt debenture of a major Thai bank was called at the 5-year option, ie, the bank no longer needs funding and can return the money to investors before maturity. Another Thai bank exercised a similar call option by calling 40% of the amount issued.

An argument could be made that banks might be raising deposits to replace the expensive funding cost of foreign borrowing and debentures. The actual data does not confirm that, as deposits only increased by 46 billion baht in May compared to March.

Third, the number of complaints from small and large business owners that sales suddenly plunged in the second quarter. If there had been a healthy credit expansion in June, sales would have picked up sharply that month. But I have heard of no such thing in the media.

I am sorry that my data collection only extends to 2015, but I can probably safely say that the last time Thailand witnessed a contraction of its credit portfolio was after the financial crisis of 1997 when the bad loan level (NPL) reached 42%. Banks only make money by issuing loans, and they make a loss when taking in deposits. Therefore, when banks do not want more money to give out more loans, something is quite wrong.

My prediction of a "silent" financial crisis might already have come true. During a financial crisis, whether it be the Great Depression, the Tom Yum Kung crisis or the Hamburger crisis, banks stop functioning, causing the economy to contract due to a lack of liquidity. However, to err on the side of optimism, one would need to wait for another quarterly credit contraction to be 100% certain a financial crisis has already hit Thailand.

What are readers' views about the credit situation in the third quarter? Will the NPL level suddenly reverse and banks appear happy to extend loans again?

The president of the National Economic and Social Development Council (NESDC) said just this in a recent interview. The economy has no chance to recover on its own strength but has to rely on world economic growth. I second his opinion.

There are three intertwined markets in an economy. They are the financial market, the product market, and the labour market. Their relations go like this: the financial market provides money to product markets; consumers use the money provided to buy products, and producers use the money to produce products; and, finally, producers, with incoming orders, hire workers to produce their goods and services. The transmission time from one market to another is about three months or a quarter. Let me give readers an example.

The Thai financial market contracted in Q2/2024, as the data has shown. Thai consumers consumed much less as there was no credit to buy products. Products that are usually bought with credit, like housing and automobiles, got hit immediately. (Are we seeing that right now?) Non-durable product sales would therefore be markedly affected in Q3. With such sales contractions, producers will have no choice but to reduce their workforces. Substantial layoffs would then occur in Q4.

The three markets theory triggered Ben Bernanke, chairman of the US Fed during the Hamburger crisis, to immediately jump in and provide liquidity through quantitative easing so as to prevent an excessive credit crunch. But even with such a massive liquidity injection, the US economy shrank by 2.6% in 2009. And without such bold move, the world economy would surely have slipped into a deeper recession.

Should the Bank of Thailand inject massive liquidity to save the product and labour markets and follow in the footsteps of Ben Bernanke and the suggestion of the World Bank? The answer is: sure, go ahead -- if the Thai baht were the world's reference currency like the US dollar. If not, be prepared for capital flight and the depreciation of the baht, similar to what happened during the 1997 financial crisis.

Currency investors have not been kind to the Japanese yen and they are unlikely to be kind and understanding when it comes to the Bank of Thailand's liquidity injection.

Can the government's much-touted 10,000-baht digital wallet scheme save the Thai economy? On this, I'd like to echo the opinion of the NESDC president, if I may.

The Thai economy has no chance to provide 500 billion baht of liquidity on its own strength to fund the digital wallet scheme; rather, it will have to rely on global liquidity. The problem is that, as of May, excess liquidity stood at negative 710 billion baht.

Chartchai Parasuk, PhD, is a freelance economist.

Chartchai Parasuk

Freelance economist

Chartchai Parasuk, PhD, is a freelance economist.

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