During the debate on the extra-fiscal budget for 2024 of 1.22 billion baht to fund the digital wallet (DW) scheme, the government presented the bright side of the figurative coin. This article will present the dark side of the scheme.
Most economists give opinions, I give numbers. According to my estimation, the launch of the DW scheme would cause a severe contraction of private credit to the tune of 161.4 billion baht. Thousands of businesses, big and small, could go bankrupt due to a liquidity shortage from loan recalls. Because of a liquidity war between the government and commercial banks, interest rates could rise to double-digit levels.
Is this analysis too far out? Readers can look at the table and judge for themselves.
The table shows the sources and uses of liquidity in Thailand for 2023 and 2024. Data for 2023 and January to May of 2024 are actual. Columns for 2024 (June to December) show estimates of the "No DW" case and the "with DW" case. The DW funding is set to be 450 billion baht.
Simply put, without a sharp increase in the money supply (broad money increase), a rise in government borrowing would take money away from commercial banks from on-lending to the private sector. In the case of No DW, the economy would be weak, but not in a crisis. Private credit is estimated to expand by 356.3 (143.7+212.6) billion baht for the whole of 2024, which is considerably less than the year before. No wonder people complain right and left about a suddenly weak economy. The answer lies in diminishing private credit expansion.
In the case of DW (the last column), private credit would contract by 161.4 billion baht while government borrowing balloons to 711 billion baht because of the DW funding. Thai depositors would withdraw cash from banks to buy attractively priced government bonds, causing banks to be in a cash shortage position. In theory, commercial banks would first stop issuing new loans and then start recalling loans to provide cash for withdrawals. As of May 2024, the banking system, 30 commercial banks combined, have cash holdings of just 274 billion baht available for withdrawal.
Apart from the liquidity data, the table also gives vital information about Thailand's economic health. In 2023, economic health was normal as the private sector led the economy with 731.5 billion baht of borrowing. In the first five months of this year, the situation reversed with government borrowing 3.8 times higher than the private sector's. Wait until the Q2 GDP figures come out, one might see a much weaker private sector. If the DW scheme should ever be implemented with a liquidity supplement, the private sector could be damaged from mass bankruptcies. Policymakers be warned.
The tug of war between keeping depositors' cash at banks and luring savers to buy government bonds to finance the DW scheme would surely cause interest rates to rise. It is possible that interest rates could rise to the double-digit level.
The Thai government is not the only one in the world that has launched cash hand-out schemes. How do other countries avoid such a liquidity tug of war? I will give the examples of Hong Kong and Japan.
Hong Kong's government brought money back from abroad to fund the schemes. Hong Kong's government handed out cash to its citizens not once but three times. The Thai government may ask them about the "economic cyclone" experience, if any. The name of the scheme was "Consumption Voucher". The funding came from "fiscal reserves", which is to say, cumulative fiscal surpluses, which were invested abroad. At its peak, the fiscal reserves amounted to 1.17 trillion Hong Kong dollars. Therefore, there was no fight for domestic liquidity.
The Japanese government asked the Bank of Japan (BOJ) to print money to fund various cash handout schemes so as to avoid a liquidity war. The BOJ did not "print money" specifically for the schemes, but performed broad base quantitative easing of purchasing government bonds. At the end of 2023, the BOJ held 53.8% of total government bonds outstanding.
Should the "print money" option be considered by the Bank of Thailand? The experience of Japan, particularly from the depreciation of the yen, which lost about 15% of its value in a year, should provide enough reasons for the Thai central bank to say no.
Because of the liquidity issue, which the government has completely overlooked, as demonstrated in the table, I personally have less than 20% confidence that the 450 billion baht DW scheme will materialise. If the cash handout scheme were to become a reality, it would be much reduced in size. Perhaps we would see a 150 billion baht handout to government welfare card holders.
If funding is difficult, the task of creating software to handle the 47 million DW user accounts (45 million for the general public and two million for participating businesses) could be equally difficult. The digital money transaction software is new to Thailand and has to be created from the ground up. Bangkok Bank, the largest bank in Thailand, has 17 million user accounts. Just imagine the technical requirements of handling 47 million user accounts of digital money transfers.
At the onset, the public heard about an application called "Super App" supposedly based on blockchain technology. I am not sure the development of such an application, which is rumoured to cost 10 billion baht, is still on or not. However, Prime Minister Srettha Thavisin told the public the registration process would commence on Aug 1.
The application used is likely to be "Thang Rath", which was developed a couple of years ago to be a portal application, not a financial transaction application.
I just checked Apple's App Store. The Thang Rath App received a 3-star rating and 623 people have downloaded it so far. I am one of them.
I do not think the government really believes the DW scheme can be financed, particularly when the Bank of Agriculture and Agricultural Cooperatives' funding of 172 billion baht had to be replaced by a budget cut.
Therefore, issues regarding operations -- the day-to-day administration of 47 million accounts, firewall and data security control, and, most importantly, a budget for operating costs -- never receive their due attention.
I hope readers understand the purpose of this article is not to criticise the economic merit of the scheme. My goal is to show the impact of a 450-billion-baht scheme on private credit and financial markets.