Thai Economy Unlikely To Bounce Back

Source: Bangkok Post

by: Chartchai Parasuk, Freelance economist

The world is having great economic news. All international economic agencies have upgraded world economic forecasts for 2021. The latest one is the OECD (Organization for Economic Cooperation and Development) who raises global economic growth forecast from 4.2% (December 2020’s forecast) to 5.6% (March 2021’s forecast). A higher growth prospect is the result of a fast roll-out of Covid-19 vaccination; super-large US economic stimulus package; and accelerated growth of the Chinese economy.

The OECD projected that the US economy would grow by 6.5% while the Chinese economy would expand by 7.8% this year. These two giant economies account for 41% of the world economy. Therefore, high growth from these two countries is likely to induce high economic growth in other economies as well.

By the way, China is not the fastest growing economy in 2021 according to the OECD. The winner is India with an amazing 12.6% growth.

Unfortunately, such good news does not apply to all economies depending on each individual economic fundamental. The case in point is Japan. While world average economic growth is 5.6% and average G20’s growth is 6.2%, the OECD forecasts that Japan’s economy would grow by a mere 2.7%. Despite higher volume of exports to US and China, domestic consumption is too weak to pull the Japanese economy out of the Covid slump. In January, Japan’s domestic consumption declined by 6.1% which put a doubt on the new OECD’s forecast for the overall growth of 2.7%.

But what about Thailand? The OECD does not make a separate forecast for Thailand as our economic size is only 0.56% of global GDP. But if the OECD does make a forecast for the Thai economy, it will be far from accurate as the organisation does not understand our economic fundamentals. According to my analysis of available data from the Bank of Thailand, the economy in 2021 will not rebound from a negative growth of 6.1% last year and could risk facing a financial crisis like in 1997.

I fully understand that this is a very strong statement and I must have solid proof or evidence or I risk losing credibility as an IMF-trained economist.

The root cause of the 1997 financial crisis was not attacks from currency speculators like many were led to believe, but was from inadequate domestic liquidity. The bubble economy prior to 1997 led to high demand for loans, particularly from the real estate sector. To satisfy loan demand, banks and finance companies borrowed from abroad in dollars and yen as domestic money was not enough. Many institutions borrowed short-term money because it carried much lower interest rates.

At that time Thai banks and finance companies, and, most importantly, the Bank of Thailand, did not realise that foreign borrowing was not limitless. Towards the end of 1996, the borrowing limit was reached causing domestic interest rates to rise. By the last quarter of 1996, Thai references to domestic interest rates (Inter-Bank Borrowing Rates) hit double-digit levels. With such a high cost of borrowing, loans began to default. Foreign creditors of Thai banks and finance companies were uncomfortable with a quickly rising level of bad loans and started to recall loans, particularly short-term loans.

The rest was history.

In 1996, I was working in a Thai finance company and accurately foresaw all these things to happen. Let me say this, that finance company had 500 million dollars in foreign loans but did not lose a single baht from massive currency devaluation. While all financial institutions were struggling to find liquidity during the crisis, that finance company had liquidity surplus and lent money to the Bank of Thailand’s FIDF fund.

This year, history is likely to repeat itself. The condition of inadequate domestic liquidity is almost the same as in 1997 but the actors differ. At that time, the culprit was Thai financial institutions who borrowed beyond their capacity. But this time, the culprit is the Thai government borrowing beyond its capacity.

I am fully aware that accelerated government borrowing in recent years comes from good intentions to stimulate economy and to lessen the impact of Covid-19 on the economy. But everything in this world has its limit. The borrowing capacity of governments also has its limit. If not, we will never hear a phrase like “Latin American (government) Debt Crisis” which has haunted Latin American economies for decades.

In the fiscal year 2020, the Thai government borrowed 1.033 trillion baht to cover its deficit and finance Covid-19 relief programmes. Did Thai savers have enough “free” money to buy that 1 trillion baht of government debt? The answer was no. The economy was dead and was not generating much new cash. The debt financing came from foreign money which flowed in (US$30.5 billion, or about 1.2 trillion baht in this fiscal year). With 1.2 trillion baht of foreign money, financing of the deficit was a piece of cake in 2020.

This is an important note. Because liquidity was ample and money was cheap, the government (unwisely) financed its deficit in short-term loans. The amount was 572 billion baht or 55% of the year’s financing needs.

Two pre-conditions of a financial crisis — foreign financing and borrowing short — were met. Here comes the third one — reaching a limit.

In the fiscal year 2021, the government will need another 1 trillion baht to cover its deficit and finance Covid relief programmes. The amount is 609 billion baht for the budget deficit, an additional 120 billion baht for revenue shortfall, and 220 billion baht for numerous “Win” programmes. The problem is this year the government cannot rely on foreign inflows. Money is flowing out of Thailand.

Things started to change at the beginning of this year. There were net capital outflows of $1.3 and $2.9 billion in January and February respectively. (Now you know why the Thai baht is falling.) This trend is likely to continue throughout the year as interest rates in the US start rising, investment in other emerging economies looks more promising, and, most importantly, our currency devalues quickly.

Within a few short months, the government will have difficulty financing its humongous debt requirement. In adequate domestic liquidity, borrowing short, and a reversal of capital inflow.

A sure formula for disaster.

Of course, I might not be right like back in 1997. Starting from March, divine beings could induce foreign capital to flow back into Thailand and the 1 trillion baht government financing needs would be easily met just like the previous fiscal year. Why would foreign money flow back to Thailand? Economists like me have no idea. Only divine beings would know.

Chartchai Parasuk, PhD, is a freelance economist.