One would expect the first article of the year to be about economic predictions. I will certainly do that but not in today's article. It will be in my next one. The reason being that my predictions will not be as positive as those of others.
Therefore, I need to explain the "bleak background" or the fundamentals of the Thai economy which form the basis of my 2025 predictions to convince readers that they are based on facts, not biased pessimistic views.
Economists tend to move in a pack when it comes to GDP projections. Last year, most economic research houses made 2024 GDP growth projections of around 2.7%. This year, they lowered it a little bit to 2.6%. I was the black sheep with a 2024 growth projection of 0.0%. Once readers see the "bleak background" of the economy, readers will understand why I had such unfavourable views about the economy in 2024.
For 2025, my GDP growth projection is xxx%. Please wait until the next article.
The situation in no difference from 1996, the year before the Tum Yum Kung crisis, when all economic research houses, from the Bank of Thailand to commercial bank's research units, projected 1997 growth numbers to be 6.8% to 7.2%. I had a rather dark view about the 1997 economy. My econometric model projected growth to be -2.0% to 2.0%. To avoid a backlash on my company, I politically announced the growth rate for 1997 to be 6.2%.
Luckily, I put money where my mouth is. I unloaded all investment in the stock market, doubled the liquidity position of the finance company where I worked, and purchased full exchange protection for the company's US$500 million (17.3 billion baht) borrowing. During the crisis, my small finance company had extra liquidity enough to lend money to Thailand's largest bank.
Of course, I became a black sheep and was even called in to be lectured about the fundamental strength of the Thai economy by the CEO of a top bank. With such experience, being a black sheep is okay with me as long as I am the "right" sheep.
Readers might argue that most research houses are likely to be right about economic growth in 2024 as the NESDC (National Economic and Social Development Council) will soon announce the 2024 GDP growth rate to be 2.6%.
I explained my position in the previous article that a 0.0% growth projection is likely to be a more accurate representation of the economic picture in 2024. In my professional view, no expanding economy will see a 14.1% rise in NPLs and 20% plus drop in automobile and housing sales.
Apart from questionable GDP figures, inflation is another key economic figure that needs to be overhauled so that policy-makers can make proper decisions. The 2024 annual inflation rate of 0.4% is against the fact that all members of the Thai economy complain of sharp rises in the cost of living. Readers probably hear the phrase "expensive all over the land" numerous times. Whether the government's inflation figure is right or people all over Thailand are right. The readers will be the judges.
Tell you what: since the Ministry of Commerce reports that the cost of living rose only 0.4% in 2024, the base salary of its employees should be be increased accordingly by 0.4%. I would not be surprised that, after the implementation of an inflation-based salary adjustment principle, the Bureau of Trade and Economic Indices might become the most hated unit in the ministry.
Why do I choose the word "bleak" to describe the background of the Thai economy? Please look at the attached table.
Before reading the table, I should point out two things. First, all numbers are GDP percentages. Therefore, rising numbers mean debt grows faster than GDP. "Debt growing faster than GDP" determines the past, the present and the future of the Thai economy.
Second, the business sector does not only borrow from domestic banks but also borrows from abroad to finance their operations. When Thai banks shunned them as in Q3/2024, they turned to foreign sources for funding. In Q3/2024, the Thai business sector borrowed $7.3 billion (254 billion baht) to finance their operations. This solves the mystery as to why the Thai business sector did not collapse in Q3 after domestic banks recalled their loans.
The table, covering 20 years of data, proves beyond doubt that the Thai economy can grow only when debt grows. Our income earning capability is limited, but our appetite for consumption is unlimited. Over the past two decades, debt has grown much faster than GDP, causing total domestic debt to GDP to rise by 60%. Therefore, when debt to GDP ceased to grow in 2024 because of fast rising NPLs, the Thai economy went into a coma.
It would be against logic for the NESDC to announce 2024 GDP growth was 2.6% because actual private credit growth was only 0.3%. The Thai economy expanded 1.9% in 2023 with the support of 2.4% private credit growth. Using the back of the envelope calculation method, 0.3% private credit growth would be enough to generate 0.0% GDP growth. A certain black sheep economist might be the "right" sheep again.
The table provides one more useful piece of information. The Thai business sector has been financially disciplined. The sector's debt to GDP dropped substantially, both in terms of domestic borrowing and foreign borrowing, between 2004 and 2014. Some might read this as a bad sign as it might be an indication that industrial production was contracting and investors were leaving Thailand for greener pastures. Therefore, there was no need for funding. The drop in Thai business borrowing coincided with a 4.6-fold increase in foreign direct investment in Vietnam.
With production declining, Thailand fuelled the economy with consumption. Household debt almost doubled between 2004 and 2014. The government stepped in after 2014 to keep consumption going when banks started being conservative about household lending due to the high level of debt outstanding. Government debt to GDP then almost doubled instead between 2014 and 2024.
No economy can go on borrowing relentlessly like this. For Thailand, the debt crisis erupted in 2024, taking the economy down with it. Foreseeing the looming debt crisis, my economic prediction for 2024 could not be positive.
It is not difficult to accurately forecast 2025 GDP growth. The Thai economy feeds on debt. One simply makes a good projection of private credit expansion and one will get an accurate picture of the economy.
Applying the back of the envelope calculation method again, if one wants 2.6% growth for 2025 as most economic research houses predict, banks need to expand credit by 3.5% or about 1.1 trillion baht. Possible?
My view of the economy in 2025 will be in the upcoming article.
Chartchai Parasuk, PhD, is a freelance economist.