The election result is already out and Thailand is heading for a big policy change. As the party with most seats, the Move Forward Party will form the government. The second place-getter -- the Pheu Thai Party -- has agreed to be in the coalition. These two parties, however, have totally different views on how to run the economy.
The Move Forward Party is in favour of a welfare state model starting with levelling the playing field by diluting monopolistic power and providing more opportunities to SMEs, closing the income gap, and raising taxes on the rich to finance its social programmes.
According to their campaign, their generous welfare package would cost the government 650 billion baht a year. To finance such a package, 350 billion baht would come from budget cuts and the rest would come from new taxes which include a land tax, large corporate tax, and a wealth tax.
While for this party growth takes a back seat to structural reform, Pheu Thai's economic policy, by contrast, makes growth its first priority by aiming to push GDP above 5% annually.
The key instrument is a 10,000 baht digital money handout to 52.4 million Thais to jump start the stagnated economy. They hope this massive demand push would drive the production system full steam and, after that, a high-growth cycle would begin.
In my view, Move Forward's welfare scheme and Pheu Thai's 10,000 baht handout cannot easily co-exist as they would require too much fiscal spending.
The combined cost is close to 1.2 trillion baht, about 7% of GDP. I do not know what the final economic package of the new coalition government will look like; only time will tell.
Before trying out such new policies, existing macro-economic problems must be fixed first. These time bombs are waiting to destroy the economy. They are (1) household debt (2) public debt (3) liquidity adequacy and (4) the cost of living.
The first bomb is household debt. As explained previously, the household debt situation in Thailand is beyond being "serious" but is already in "crisis". Some argue the household debt level might be high at 86.9% of GDP, but is still lower than many countries which have a ratio above 100%.
However, this does not consider the fact that the household debt of most countries comprises mainly long-term, low-interest mortgage debt. Take the example of Switzerland which has the world highest household debt ratio of 129% of GDP. Subtracting mortgage debt of 125% of GDP out, Swiss non-mortgage household debt is merely 5% of GDP. In the case of Thailand, the non-mortgage household debt ratio is 60% of GDP.
Because of an income-expense imbalance, Thai households are still acquiring more debt even with their limited ability to pay it back. A survey of the household debt situation among workers earning less than 15,000 baht a month by the University of Thai Chamber of Commerce in April 2023 showed that the household debt among those surveyed had increased 25.04% from a year before.
This is outrageous in light of the fact that employment has improved significantly since the Covid-period. Survey results indicate that 41.4% of borrowed money is used for daily consumption while 21.6% goes to repaying existing debt.
Still desperate to find money to supplement income? Too bad, banks are no longer willing to finance cash-strapped consumers. With no better choice, consumers turn to non-bank sources for financing, regardless of the loan conditions and interest cost.
Household debt borrowing from traditional bank sources declined from 117 billion baht in Q3/2022 to only 15.6 billion baht in Q4/2022. Thai households were turning to non-bank sources for a rescue. Quarterly borrowing from non-bank sources jumped from 33.8 billion baht in Q3/2022 to 155.1 billion baht in Q4/2022.
What happens when the "new" funding source reaches its limit like the bank source? A collapse of the entire consumer finance system?
The second time bomb is public debt. As of March 2023, Thai official public debt stands at 10.8 trillion baht or 61.2% of GDP. The amount is lower than the 70% to GDP limit imposed by the State Fiscal and Financial Disciplines Act, indicating the new government has some room to manoeuvre. But, in fact, public debt has already breached the limit because of two hidden and upcoming expenses.
First, the government has public debt hiding in various state banks and agencies such the cost of agricultural price subsidy programmes at the Bank of Agriculture and Agricultural Cooperatives, the cost of SME loan guarantee programmes at the Government Savings Bank, and Covid cash advances from the Social Security fund.
All this spending has already occurred but hidden debt is about 1.24 billion baht or 7% of GDP.
The second point I would raise is that fiscal year 2023 doesn't end until September. Based on the Budget Act, the caretaker government has room to borrow 400 billion baht more, or about 2.4% of GDP. Adding these two times to current public debt outstanding would push the figure to 70.6% of GDP.
The new government will find that financing is campaigned programmes will be difficult. Of course, the government could revise the debt limit upward. But it should be prepared to face harsh public criticism if it does. Even if the government survived such criticism, there is the third bomb waiting.
The third bomb is liquidity constraint, ie, inadequate money supply to finance public and private economic activities. The fact that "money does not fall from heaven" is often ignored by economists. They assume that liquidity would be magically waiting whenever needed.
From my own estimation, the Thai monetary system has been experiencing negative excess liquidity for 20 consecutive months. As of March 2023, Thailand excess liquidity position is negative 528.4 billion baht. This is the main reason the Thai economy grows much slower compared to that of our neighbours. The new government will find out the hard way that finding large amounts of money to finance its programmes is next to impossible.
The last economic bomb is the cost of living. In Thailand, personal income does rise alongside moderate GDP growth but rises much slower than the cost of living, causing the need for more debt. Readers should not be fooled by the 2.7% inflation report for April 2023. This mild inflation comes on top of a high inflation rate of 5.9% in April 2022. To the average consumer, a price increase of 8.6% (2.7+5.9) is felt over the year which is higher than rise in income. There must be a way to fix this problem.
Unfortunately, the new government will not start its administration with a clean slate. I advise its members to fix these time bombs before launching new projects. If not, their hopes and dreams will never be fulfilled.
