The issue of a financial crisis hitting Thailand is of grave importance. If it happens, it will push the Thai economy back by five years, triggering indescribable pain and suffering.
But before I start, I will first comment on a report that the government-sponsored household debt restructuring programme, the so-called "You fight, We help," has failed, and the deadline has been extended by two months. The extension is not to allow more time for debtors to join the programme, as the original timeline of two and a half months was more than enough. The extension only postpones the embarrassment of admitting that the programme is a failure like its predecessor, the Informal Debt Resolution scheme. The failure of both programmes stemmed from the fact that Thai debtors have a low ability to service debt, whether they are restructured or not.
I have evidence that Thai debtors are in crisis. About three years ago, the Bank of Thailand surveyed informal debt. It could be calculated from the surveyed data that the informal debt outstanding was about 407 billion baht. A recent survey in Q4/2024 by the Faculty of Economics, Chulalongkorn University, and Krungthai Bank reported that informal debt outstanding has soared to 2.5 trillion baht.
Readers may ask why. Three years ago, the household debt to GDP ratio hit a historically high level of 94.6%, and all banks (and non-banks) slammed the brakes on household lending. Unfortunately, Thai people still have serious income-expense gaps. They are still resorting to informal debts despite astronomically high interest rates.
The word "crisis" is probably too soft to indicate today's debt situation. The Thai economy is dangerously weak now, and this "too weak" Thai economy will lead to a financial crisis in 2025.
Referring to my previous article on financial crisis risk, a long-term friend asked me over lunch how certain I am about the issue. I said I was 100% certain. My friend further asked whether the crisis would be caused by a "liquidity crunch" like in 1997. My answer was "no". The system is presently flooded with liquidity provided by the Bank of Thailand. This time, the crisis would be caused by a "credit crunch" as banks sit tightly on liquidity and make no credit expansion. Money shortage, prevalent among consumers and the business community, arises from the tough credit policy of financial institutions, not the Bank of Thailand's tight monetary policy.
My friend further argued that inadequate foreign reserves set off the 1997 crisis, which is not the case now. I replied that the spark for the 2025 crisis would be private debt securities (corporate bonds aka C-Bonds) defaults like the Hamburger Crisis in the US, where Lehman Brothers could not pay its debts. In 1997, C-Bonds outstanding were less than 200 billion baht (4.2% of GDP) and were not an issue of concern, but the current outstanding C-Bonds are 4.6 trillion baht (25.7% of GDP) and could easily wreck the financial system. Under a hostile credit environment, many C-Bond issuers would be unable to honour their debt payments, causing domino effects. It is more or less a Thai version of the subprime debt crisis. My friend turned quiet, and we continued our lunch.
It was recently the first time since the 1997 crisis that private credit growth recorded a contraction on a year-on-year basis. This shocking milestone occurred in December 2024. This means the corporate sector can no longer rely on the banking sector for financing. Without the bank's funding, there can be only one outcome -- crisis.
I explained in my previous article that the Thai corporate sector carries an overloaded debt burden of 129.4% of GDP and constantly needs more financing. There are three possible sources for corporate financing: (1) operational cash flow, (2) capital raising, and (3) more borrowing, ie, getting new, larger debts to service existing debts. In the present-day business environment, one can pretty much forget the first two sources. More borrowing is the only viable option. That is why credit contraction is a life-and-death matter.
Some corporates are lucky enough to have foreign funding sources. Last year, the C-Bond financing gap of 217 billion baht was filled by $7.3 billion (270 billion baht) of borrowing from abroad. However, there are two dangerous points about relying on foreign funding sources: (1) not every corporation has access to foreign funding, and (2) there are credit limits to borrowing. Thai corporations already borrowed an additional $11 billion in 2024. How many credit rooms are available for them in 2025?
Here is the essence of this article and the reasons for my confidence that the Thai financial system will collapse this year. It is the funding gap of non-investment grade C-Bonds. Before I start, I should point out that there are two classes of C-Bond -- investment grade and non-investment grade. To save space in the article, readers can easily find information about classes of bonds from the internet.
Still confused about two classes of corporate bonds? Just think of them as prime and subprime bonds and think of the subprime debt crisis in the US in 2008. Get the picture?
There are four matters to emphasise.
The first matter is not a small problem to brush aside. The size of non-investment grade C-Bonds is about 15% of the total C-Bonds outstanding or about 0.7 trillion baht. Therefore, out of 900 billion baht of maturing C-Bonds in 2025, 135 billion baht belongs to non-investment grade C-Bond issuers.
The second matter is limited access to funding. Being smaller and lesser-known corporates with weaker financial standing, the issuers of non-investment grade C-Bonds have limited access to domestic funding and no access to foreign funding. The payments of 135 billion baht of maturing C-bonds must come from internal cash flow or shareholder capital injections.
The third matter is shaky confidence in non-investment grade C-Bonds. Under a risky economic environment, investors want to switch from non-investment grade bonds to investment or government bonds. Therefore, it is most unlikely that newly issued non-investment grade bonds in 2025 will be fully subscribed. Let me remind readers that the refinancing need is 135 billion baht.
The fourth matter is the domino effects of defaults. Please note the use of the plural form of effect. Let me optimistically assume that two-thirds of non-investment grade bond issuers can find cash or ways to honour the matured bond payment. That would leave one-third, about 45 billion baht, of non-investment grade bonds to default. Then, the domino effects come to work.
The first domino effect will hit the healthy two-thirds of non-investment grade C-bond issuers as investors would want to avoid all non-investment grade bonds, causing most non-investment grade issuers to default. Then, the second domino effect will hit weaker investment grade C-Bond issuers, causing some to default.
The final matter is the collapse of the entire financial system. I do not have the heart to describe the likely scenario of the system-wide collapse. But one can learn from the 1997 crisis that it started with the closure of a few small, insignificant finance companies, and then panic hit the financial system. The history of the 1997 crisis can be read on the internet.
Believe it or not. There are measures to prevent or substantially lessen the effects of the five above-mentioned matters. However, one needs to have a smart plan executed by a sensible and strong-willed government and cooperative opposition parties. None of these conditions currently exist in Thailand.
In conclusion, I am 100% confident about this issue.