I am known for being pessimistic about the Thai economy. Apart from encouraging official economic growth figures of 1.6% in Q1, 2.2% in Q2, and 3.0% in Q3, I do not think anyone can be optimistic about the economy. It is obvious that GDP data and the actual economic situation do not go hand in hand. It is beyond my comprehension that the non-performing loan (NPL) level rose 14.1% in Q3 while the economy expanded 3.0%. Shouldn't it be the opposite when debtor's income rises?
A more important question about dubious GDP data is the replacement consumption of a sharp decline in housing and automobile sales, estimated to be over a 100-billion-baht loss per quarter. Actually, I do have the answer, but readers will have to wait for my upcoming article titled, "GDP figures do not seem to be aligned with the real economic situation."
October is supposed to have been the best month for the Thai economy in years, if not decades. The reason being that both fiscal and monetary policy were the strongest and moved in harmony. The government distributed cash to the tune of 145 billion baht, equivalent to 9.7% of monthly GDP and 16.8% of monthly consumption, during the last four days of September. Since this tranche of distribution was for welfare card holders, it was expected the bulk of the money would be used up in less than a month. In the government's idealised view, the cash handout scheme would produce a spending multiplier up to four times turnover. They nicknamed this multiplier effect an "economic cyclone".
The first rule is that a cash handout scheme would be not be possible if there was no cash to handout. The Bank of Thailand (BoT), therefore, printed bank notes worth 92 billion baht in September to pave the way for the government's cash disbursement at the end of the month. But that is not all.
The BoT also allowed the government to withdraw 249.4 billion baht from the fiscal reserves to finance the handout and the regular budget deficit. There was no sterilisation of any kind. With such a hefty liquidity injection, consumption should have gone into overdrive in October. Even without any multiplier effect, consumption should have risen 16.8% that month.
Unfortunately, such a harmonious move of fiscal and monetary policies proved a spectacular dud. Private consumption indicators increased 0.0% compared to the same month last year. Despite 145 billion baht of cash being handed out and a money supply increase of 610 billion baht, kindly provided by the BoT, they failed to get the job done. It is as if these extraordinary policy moves entered an "economic black hole".
I am sure readers know the scientific definition of a "black hole". According to Einstein, it is a region of spacetime where gravity is so strong that no matter or electromagnetic energy (for example, light) can escape it. A black hole economy is one where the problem is so strong that no policy stimulus -- fiscal or monetary -- can spur economic growth. The black hole theory might now become applicable to the Thai economy.
So how did this happen?
It occurs when the problem is too big for ordinary stimulus packages to become effective. The size of the package has to be gigantic. There are two examples of an economy experiencing the black hole anomaly -- the Great Depression of the 1930s and the subprime mortgage crisis in 2008. In the former, Franklin D Roosevelt's New Deal programmes lost to the black hole. In the latter, Fed chairman Ben Bernanke's quantitative easing programmes won over the black hole.
Mr Bernanke implemented quantitative easing (QE) programmes to stop the damage from the subprime loan losses. The original losses amounted to about US$600 billion.
QE1 worth $600 billion, the same amount as the subprime loan losses, was launched in November 2008. It made sense, theoretically, for a one-to-one replacement of bad money with good money. But it turned out the amount was "too small" and the economic black hole easily absorbed it. QE2 worth another $600 billion was launched in November 2010. Mr Bernanke lost again to the black hole. Then came QE-infinity, with monthly liquidity injections of $40 billion to $85 billion, starting from September 2012. Mr Bernanke intended to inject liquidity to "infinity", or for as long as was needed to destroy the black hole. This time it worked, and he was later awarded the Nobel Prize in Economics.
The total cost to the Fed for these QE programmes? It was $3.7 trillion US dollars -- or more than six times the value of the original subprime loan losses. That is equivalent to 25% of US GDP in 2008.
In the case of Thailand, the BoT might need to inject 4.5 trillion baht of liquidity, 25% of Thai GDP, to dissolve its black hole. However, what could be done in the United States cannot be done in Thailand.
Unlike the US, the Thai economy is not the number one in the world and, more importantly, the Thai baht is not the world reference currency like the US dollar. The BoT cannot afford to pump out that much money without destroying economic stability. More innovative ways than money creation and government spending would have to be sought. If not, the Thai economy would have to live with the "black hole" until it naturally subsides.
The next big question is, Where does the Thai economy go from here? What will happen before the black hole dissolves of its own accord?
I would like to bring back the three-market theory of the interconnected nature of the financial market, product market, and labour market. Mr Bernanke understood this theory well. That was the reason why he used all those resources, including the never-before-used tool of QE-infinity, to stop the crisis in the US financial market before it spilled over to the product and labour markets. It worked and he deserved the Nobel Prize.
For Thailand, it's already too late. The contraction in the financial market already occurred in Q2 and was much more severe in Q3, followed by a contraction in the product market in Q3, while Q4 is ready for a labour market contraction. I am sure readers have seen the news about automobile component companies only doing two-day working weeks, the closures of some factories, and lay-offs among several big businesses. The situation will only get worse.
The following are all theoretical readings. There is no guarantee they will happen.
The economy would collapse, much like the Tom Yum Kung crisis of 1997. No need to call in the IMF as our foreign reserves are more than adequate. Afterwards, all three markets will correct themselves. The theory of invisible hands would take effect. Wages, exchange rates, and the cost of production would be substantially reduced, causing the Thai economy to become highly competitive.
Then, foreign capital would pour in to take advantage of cheap production costs and good businesses for sale at deep discounts. The Thai economic phoenix would rise again to its full potential. It would be like 2002-2004 when our GDP growth averaged 6.5%.
Oh, I forgot to say: the phoenix has to be dead before it can be reborn.
Chartchai Parasuk, PhD, is a freelance economist.