Employment levels have fallen for nine months in a row and growth of 3 to 3.6% this year is dependent on a government-led economic stimulus and capital expenditure as Revenue Director-General, Ekniti Nitithanprapas, suggests a challenging final 3 months of the year after a boost in tax receipts to the end of June.

The government defended its flagship programmes last week in parliament against stinging attacks from the opposition who questioned and revealed what was happening to the ‘grassroots’ economy. Opposition MPs and leaders asked how the government planned to find the money for the huge capital expenditure plans. The finance minister intervened on Friday and revealed a reserve of ฿500 billion in addition to an emergency fund of ฿100 billion and a central fund balance of a further ฿500 billion. The announcement by Moody’s that Thailand’s debt and sovereign rating had been upgraded also lent the government a lot of credibility to swipe away the real doubts and questions raised by the anti-government alliance. However, in the Moody’s review of Thailand, one startling figure emerges. Thailand’s government debt as of April 2019 was 98.5% denominated in Thai baht.

Thai Prime Minister Prayut Chan-ocha vigorously defended his Eastern Economic Corridor flagship project on Thursday and Friday when the opposition in parliament questioned funding of the EEC while they highlighted the deteriorating condition of the ‘grassroots’ economy. The Finance Minister Uttama Savanayana came to the PM’s defence by highlighting ฿600 billion in emergency and reserve funding as well as strong government central fund. The endorsement of Thailand and the Eastern Economic Corridor by the international rating agency Moody’s this week also strengthened the government’s hand and claims. The rating agency has identified that 98.5% of Thailand’s borrowing was denominated in baht as of April 2019.

There is no denying that Thailand is facing an economic slowdown. Employment levels have fallen in the kingdom for nine months in a row in addition to a contraction of exports and worried hoteliers across Thailand are slashing rates as the tourist number have been down. Small businesses are closing, banks are cutting back on loans and yet this week, Moody’s the rating agency, upgraded Thailand’s debt status to BAA1 and the outlook from stable to positive. It follows a similar international endorsement the week before from the IMF.

Opposition championed the ‘grassroots’ economy

The opposition parties referred this week to the ‘grassroots’ economy in Thailand wherein some urban centres up 75% of families have high levels of household debt, often at multiple times the household’s annual income.

The opposition questioned the government’s flagship policies such as the Eastern Economic Corridor. The ambitious project was defended, however, fiercely and passionately by the Prime Minister, Prayut Chan ocha, who said that it had the potential to boost Thailand’s growth to the same level of its competitor for investment and trade in the region, Vietnam.

Thailand’s growth rate, despite years of consistent growth, has been dogged by issues such a high level of personal debt and an underlying cause that is rising in prominence, it’s ageing workforce who are simply moving off the treadmill.

Thailand 4.0  is the government’s grand vision of a high tech, high-income economy

The answer according to the government is the Thailand 4.0 programme, the new government’s grand vision to transform Thailand into a high tech high-income economy.

The PM’s finance minister, Uttama Savanayana, was called in last Friday to explain that the government could fund the EEC scheme which is a key component of Thailand 4.0. The minister was also quick to highlight the government’s latest international endorsement, an upgrade from Moody’s, the highly respected international ratings agency.

In response to the plight of small business and the contraction of bank lending to the sector, the new finance minister offered another solution, nano financing, loans of up ฿100,000, unsecured at an interest rate of 36%. He did not say who was offering these loans and how any business could make progress with such a high loan rate.

Remarkable feat by Thailand’s financial leadership that raises questions about government funding

One startling bit of information that struck out of the Moody’s report which explored the reason for the upgrade and all the challenges faced by the country. Only 1.5% of Thailand’s debt is denominated in foreign currencies. Looked at one way, this is a remarkable feat or achievement by the Thai government and its financial leadership. It explains how Thailand may well be well ‘ringfenced’ to weather any financial storm but also begs the question who is lending the money to the Thai government in loans denominated in baht and on what basis?

Political tensions in Thailand have not gone away but at least now they are in parliament

This week’s policy debate in Thailand highlighted two things. One is that the Thai government is heading into an economic challenge and secondly, that political tensions in the country have not gone away.

On Friday, a row led Thai Senator Kittisak Rattanawaraha to invite Pheu Thai MP Yutthapong Charassathien to engage in a fistfight. The senator even approached the MP physically in the chamber. At one point, when the Pheu Thai MP hurled a jibe at the government MPs in the house comparing them to low paid actors, the senator retorted by calling Mr Yutthapong a ‘bandit’s lackey,’ thought to be a reference to Thaksin Shinawatra, the ex-premier living in exile whose spirit still haunts Thai politics and who has now been sentenced to a two jail terms in absentia by Thai courts. 

Thaksin back in the news in Thailand this week

The former premier was back in the news this week with a video broadcast from Dubai to supporters in Los Angeles where he criticised what he called the democracy of the Bangkok elite and took issue with the behaviour of the Thai army. He also offered to advise the government on the economy if they wish to reach out to him. That is thought to be unlikely.

Stoutly fought debate that offered new information and insight on Thailand’s economic outlook

While the tensions and political rifts have not waned, it was encouraging to see it played out this week in parliament where the government and the opposition engaged in what might have been a bitter and stoutly fought debate but ultimately one that shed light on the future of the country and the new government’s economic challenges. This was good for democracy and both sides emerged stronger.

Prime Minister: Eastern Economic Corridor project will raise Thailand’s growth to Vietnam’s level

In the face of strong questioning from the opposition on the new government’s expensive flagship projects such as the Eastern Economic Corridor development and the Thai China high speed rail link, the prime minister vigorously defended the Eastern Economic Corridor project saying that it had the potential to raise Thailand’s GDP growth rate to levels enjoyed by Vietnam which has an economy less than half the size of Thailand but which is growing by over 6% per annum.

Finance minister reveals emergency and reserve funds of ฿600 billion to MPs in parliament

The opposition raised valid questions during the debate that forced the Finance Minister Uttama Savanayana at its conclusion on Friday to come forward and guarantee that Thailand had the financial ability to pursue the new government’s projects and maintain financial stability in the country for the remainder of the year. He pointed to a ฿500 billion balance in the government’s central fund and revealed that there was a ฿100 billion emergency fund in addition to a ฿500 billion reserve. This indeed sounded impressive but the government is spending over ฿2 trillion per annum and there has been a slowdown due to lack of money in the economy. 

International endorsement for prudent financial management by the last government

However, what has emerged this week is a ringing endorsement of the prudent financial handling of the country by the government in the previous five years. It came from a rating agency and some of the details clearly show why international investors and hot money are in love with Thailand right now.

The new finance minister referred the opposition this week to the upgrade in Thailand’s rating which was announced by the rating agency Moodys who raised Thailand’s credit rating to BAA 1 and changed the outlook on the Thai economy from stable to positive.

Thailand debt to GDP at 45% well below other countries and must be looked at positively

Significantly, the rating agency didn’t have qualms about the high budget deficit which Thailand has been running and pointed out that Thailand’s debt to GDP ratio of 45% was well below other countries certainly well below developed countries. To put this in perspective, the UK has a debt to GDP ratio of 85% while France is at 99%. Even Germany’s debt to GDP ratio is running at 64%.

Growing anxiety in the world economy is driving mobile financial funding to Thailand

One of the reasons that money has been pouring into the Thai investments including bonds has been the government’s healthy finances and trade balances. The growing uncertainty in the world economy caused by trade tensions and political upheavals such as Brexit is making Thailand appear attractive. There is a feeling at the moment that any future shock or financial crisis that develops in the world economy will see governments this time come under pressure as opposed to financial institutions. However, as the last crisis in the US and Europe showed, the two are very much linked. Thailand’s last government has done well and kept the country’s foreign borrowing not only at very prudent levels but also on the right basis. Moodys highlighted this during the week.

Only 17.8% of bonds issued local government in Thailand held to non-residents

The commentary on Thailand from Moody’s reveals facts that show the rationale of many hedge fund executives and institutional investors who are flocking to Thailand right now. For a start, only 1.5% of Thailand’s outstanding government foreign debt is held in foreign currency. The ratings agency qualified this figure was as of April 2019. It also highlighted Thailand’s local government financing where only 17.8% of bonds are held by investors resident outside the kingdom. These are accomplishments that the outgoing government can indeed be proud of. However, they also suggest that increased government borrowing may be more directly hitting the domestic economy.

Moody’s sees a renewal of political turbulence as the biggest threat to Thailand’s rating

Significantly, the rating agency noted that it would review Thailand’s outlook again and consider a downgrade if the country reverses back into political turbulence. It suggested that at this time, the prospect of such turbulence was diminishing. 

Ratings agency praised the EEC project as a magnet for inward investment in Thailand

The Easter Economic Corridor project according to Moody’s is a very positive development. It has led to increased inward investment into the country with an increase in approved projects submitted to Thailand’s Board of Trade for 2017/2018 of between ฿700 and ฿800 spread across 10 targeted industries. This was twice the level of 2016. Projections from the current year according to government sources are said to be higher again.

Ageing population is the underlying and growing problem that Thailand must address

The rating agency has also identified Thailand’s other great challenge as the ageing population or its demographics issue. It highlighted a shortage of skilled workers to work in the artificial intelligence industry particularly in moving Thailand’s automobile production base to the next level. This is a key goal of the Eastern Economic Corridor project. Mr Apichart Thongyou, the Chairman of the state body tasked with recruiting Thai staff for the project said in June that his organisation could only find 30% of the personnel needed in the three provinces at the heart of the ambitious project Chonburi, Rayong and Chachoengsao.

Personnel boss for EEC talked about retraining older workers as there is a shortage of young people

Mr Apichart, the boss of the Human Resource Development Centre of the EEC (Eastern Economic Corridor) even suggested that authorities would have to begin training older workers and criticised Thai parents for encouraging young people to shun technological jobs accessed through vocational training. He said right now was an opportunity for many young people to get into high paying jobs that would elevate them to the middle class.

New training regime to develop workers for high technology workplaces in key provinces

In response, schools and colleges in the provinces designated have been working to new education curriculums developed with authorities designed to prepare students for technology careers with a new emphasis on practical experience in real work environments. The goal is to move the education process itself closer to industry. This is similar to the methodology used in Germany.

Prayut passionate about EEC project

Prayut came across as passionate about the project in the debate and also defended the government’s budget deficits. ‘The government’s budget deficits are spent in generating economic value in the country,’ he told the debate. 

Two different economies now seem to exist in parallel

However, there seem to be two economies emerging in Thailand right now with the government working with big business and the technology sector to develop the Thailand 4.0 vision and what the opposition this week referred as the ‘grassroots’ economy comprising of small business and the vast majority of less well off who are struggling.

Nano financing for small business at 36% per annum

At a time when huge amounts of foreign money are flowing into Thailand, the Thai Finance Minister this week held out to small business owners the prospect of using nano finance to help them deal with the current downturn that is being reported by banks and observers. This was a government initiative approved by the Bank of Thailand in 2015 which offered small loans of not more than ฿100,000 to small businesses at an interest rate of 36% but significantly with no collateral.

Household debt driving a large number of Thai people into the hands of loan sharks and financial peril

The opposition also struck home this week in highlighting Thailand’s rising and chronic problem with household debt. There is no doubt that Thailand has a huge and burdensome household debt problem. Four years ago, it was reported up to one-third of all Thai households simply do not have enough money coming in to pay for outgoings. Inevitably, those people have been driven into the hands of loan sharks or financial peril and strain. It is also a root cause of mental illness in Thailand. Since then, the situation, while it got better for a short period has in the last 12 months again reached crisis proportions so much so that the Bank of Thailand has stepped in to tighten up on loan criteria and lending practices.

Bank loans to small and medium sectors are contracting with non-performing loans rising

However, it also clear that banks are at the moment withdrawing lending from the small business sector in spite of the finance minister’s suggestion last week of nano financing. The banks revealed last week that non-performing loans in the sector are rising. It is clearly in crisis. The minister also referenced the National Savings Scheme which is a pension scheme established by the government in May 2011 for self-employed individuals or informal workers. This also raises the question of the pension needs of many older workers as they reach retirement age. Thailand’s ageing workforce is increasingly manned by older workers working beyond retirement to fill the labour shortage that exists.

Growth rate of 3 to 3.5% for 2019 still predicted but dependent on economic stimulus and government capital expenditure pushing ahead

Moody’s itself has projected a growth rate of between 3 and 3.5% for Thailand this year and next year. However, the effect of declining output, exports and employment levels is likely to change that if action is not taken. Chatchat Payuhanaveechai, the Chief Executive Officer of the Government Savings Bank has this week suggested that growth this year will come in at 3.6%. He said that this was dependent on increased government capital expenditure and economic stimulus measures. Mr Chatchat predicted a lower growth rate of 3.5% for 2020

Tax receipts rose in the nine months until June

This week also Thailand’s revenue department reported that tax receipts were up  8.5% in the nine months to the end of June 2019. The total tax take was ฿1.471 trillion, up by ฿115.4 billion. The Director-General, Ekniti Nitithanprapas, pointed to an increase in the tax take in all areas for the 9 months to the end of June this year.

Warning that the last three months may be more challenging from Thai Revenue boss

However, the Revenue boss appeared to warn that the tax yield may not be so robust for the last three months from July to the end of September. The Director-General accepted that the Thai economy had experienced a slowdown. He pointed to lower loan approvals for homes as well as world trade tensions as factors.

‘For the rest three months of this fiscal year (July to September 2019), we have foreseen many challenging factors, which are the slowdown in the economy and the decline in exports due to the trade war between the US and China, lower oil prices, the baht’s appreciation, and the trend for a decline in interest rates, the slowdown in the value of granted loans and the enforcement of measures to curb lending for second homes,’ Mr Ekniti outlined. ‘The Revenue Department, however, has been tending to raise its efficiency for tax collections, especially with digital in order to improve productivity in the working process.’

Some light at the end of the tunnel for manufacturing despite drops in May and June

A Reuters poll this week showed a pick up in inflation but well within the Bank of Thailand’s stated range. It suggested that the manufacturing production index fell in June by 3.15% against the year earlier. A fall off of 3.99% was recorded for May 2019. This coincides with a respected manufacturing PMI survey which showed a drop to 50.6 from 50.7 in May. It highlighted the fact that employment levels in Thailand are falling and have done so now for nine months.

However, it indicated that output and new orders have recently increased including orders from overseas. The prediction is that the manufacturing index will rise by up to 3% by the middle of next year. 

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Further reading:

New Education minister and his deputies face a digital test as Thailand needs more bright minds

Foreigners in Thailand should find out more about Thailand 4.0 and be part of the change that is coming

Thailand’s high tech eastern corridor faces a shortage of skilled technology workers in the next five years