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Household debt squeezing the nation

Customers apply for a home bload with the Government Housing Bank in Bangkok in January. (Photo by Somchai Poomlard)

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The single most pressing economic problem in Thailand is household debt. Actually, the household debt issue is currently the world’s most important economic issue too. With the prevailing level of household debt in major economies, it is difficult to see the world’s economy moving beyond a 2% annual growth rate.

The household debt problem has already triggered a global financial crisis, namely the Lehman Brothers crisis in 2008. And it can trigger a similar crisis in China any time. That is why the Chinese government has no choice but to lower its 2019 GDP growth target to 6.06.5% -- the lowest in three decades -- so as to avoid such anomalies.

Chartchai Parasuk is a freelance economist..

Let me tell you, the situation in China is rather serious. Before the Lehman Brothers’ crisis, the US economy spent US$3 (95 baht) to generate $1 of GDP, but in China, the Chinese need $4 to generate $1 of GDP. It is clearly an over-leveraged economy.

The household debt problem in Thailand is not entirely about the level of the debt which has reached an alarmingly high level of 78% of GDP. Mind you, this figure only includes debts to financial institutions. It does not include informal debt from curb-side lenders. If one includes informal household loans, the total household debt figure could easily be near 100% of GDP. Despite the high debt-toincome ratio, the real culprit is the consistently increasing debt.

The Bank of Thailand’s figures show the progression of household debt in both baht terms and relative to GDP over a 15-year period. This information shocks me. One would expect that as the economy grows, the debt level might grow naturally, but the ratio to income or GDP would drop. In other words, spending is expected to increase less than income.

Why not? Consumers become richer. But that is clearly not the case for Thailand. The Bank of Thailand’s information also reveals that, for the past 15 years, the economy did not grow from production efficiency, but from pure borrowing. Debt rose at a far greater rate than GDP growth. Consumer’s purchasing power increased not from economic activities, but from borrowing. If this is not a cause of serious concern, I don’t know what is.

Similar figures are surely more frightening in China. Have you ever wondered why after decades of extreme poverty, China has started buying up the world? Where did the money come from?

Before I get to the 1 million-dollar question as to what might be the causes of all this, let me further explain the severity of the problem. The figures you see in the table is the national average. It assumes that all Thai citizens are in debt and acquire the same level of debt. That is not true in the real world. If one assumes that half of the Thai people acquire debt, the other half do not. Then the average debt/ income ratio of the debt-ridden group will be about 1.6 times. And if you further subdivide the group, there could be about 20% of Thais who have debt levels three to four times their income, which means that their ability to service debt is in serious jeopardy. And 20% of the population is how many? 13 million people.

The reason why Thais quickly accumulate debt is because their income rises much slower than consumption demand. And demand is fulfilled by easy credit from financial institutions.

Forty per cent of the Thai population is involved in agriculture, in which their income is tied to world crop prices. Needless to say, farm income is never enough to sustain a decent living. What choice do the farmers have but to borrow? Another 10 million Thai workers earn a minimum wage, where again borrowing is the only option to maintain a modern lifestyle. In that case it shouldn’t be any surprise that the debt/GDP ratio keeps rising.

During the past year, I have seen one annoying set of economic figures -- consumption of durable goods. During this difficult economic time, it is expected that consumption would slow down, and the figures show it. However, while consumption on essentials was sluggish, the consumption of durable goods boomed at double-digit level growth. (Surprise, surprise -- last year’s motor vehicle sales were at the highest level.) Why? Easy financing. It is impossible to get loans for food, clothing, and medicines. But it is easy to get loans for housing, cars, and motorcycles. Banks, don’t come crying to me when the NPL rises.

Two notes before I analyse the consequences of an over-leveraged economy. First of all, there is no such thing as “good” credit as some would argue; that because the increase in debt comes from good, productive borrowing such as housing, it should be no cause for concern.

Let me remind you that the Lehman Brothers crisis arose from housing loans. The separation between “good” and “bad” credit lies not in the use of funds, but the ability to pay back the principal and interest. Second, the debt/GDP ratio appears to have slowed down somewhat in recent years. That is not because Thai borrowers are more disciplined, it is because the ability to borrow has maxed out coupled with unusually high GDP figures.

Since the Thai economy has not exhibited production strength for decades, it is clear that the economy expands from domestic consumption which is financed by debt. As credit growth slows down, the economy will slow down accordingly. Under the current debt situation, a further slowdown of the real economy is inevitable. (The government’s GDP figure does not represent the real economy.) The situation cannot be improved until the debt problem is resolved, and consumer purchasing power is restored. My catch phrase of the day is “if you think the economy is bad, tomorrow will be worse”..


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