Devaluation of the Chinese Yuan last weekend opened up a new set of challenges for Thailand and may have cemented the surprise interest rate cut on Wednesday. The move, it has now been reported, may have been suggested to Chinese authorities by the IMF mission in Beijing as a response to US tariff policies.

The Thai government will consider a ฿170 economic stimulus package to prime the Thai economy which will be presented to the cabinet on August 19th next. It comes as the economic situation falters even further. Thailand is now suffering from a credit squeeze which is showing signs of dampening consumer expenditure. This in addition to contracting exports and tourist numbers, means the country faces a growing challenge.

thailand-bank-loans-credit-credit-squeeze-government-economic-stimulus-package
Senior Bank of Thailand executive Tharit Panpiamrat (main photo) revealed data showing that non-performing loan indicators are rising across the board on the economy and that banks are getting stricter about loans and cutting back on credit to the consumer and small business sector. This is thought already to be feeding into a lowering of domestic consumption and consumer sentiment. It comes in a week when Thailand lowered interests rates but the trade war between China and the United States began to morph into an economic war as China lowered the value of the yuan amid predictions of even darker moves. The US President (inset) on Friday was bullish however and suggested that a meeting with Chinese trade negotiators may be cancelled by the US. Meanwhile, the Thai Finance Minister, Uttama Savanayana (inset bottom), is to chair an economic committee comprising of key economic heads including the Governor of the Bank of Thailand. This was hailed by Deputy Prime minster Somkid Jatusripitak as a positive move as he warned of future difficulties.

An economic stimulus package that Thai policymakers hope will boost the flagging Thai economy in the short term is to be presented to the cabinet for approval on Monday, August 19th. This was confirmed during the week by Lavaraon Sangsnit the director-general of the fiscal policy office of the Thai Ministry of Finance. The package is expected to be valued at ฿170 billion.

Thai State banks will be involved in the disbursement of economic stimulus funds

It is not known yet how the package will be implemented but indications are that it will be targeted at farmers, tourism and the small business sector. It is also understood that the package and its implementation will involve the state banks such as the Government Savings Bank and the Bank for Agriculture and Agricultural Co-operatives as well as government-owned banks dealing with small and medium-sized business.

Concern expressed by economists that the money may not reach those in need of help

The announcement of the stimulus package has prompted some concern among academics and banking experts that the exercise is coming in the midst of what is beginning to look like a contraction in the overall economy, will not get at the right sectors for it to be of value. Speaking with The Nation newspaper, during the week, Kiatanuntha Luankaew of Thammasat University feared that the money may end simply being pocketed by shopping malls and large business in Thailand when the financial data is showing that farmers and small business owners throughout Thailand are experiencing real economic hardship. The economics lecturer called on the government to run a publicity campaign to let people understand where the money is intended to flow.

Investment in state enterprises and soft loans for critical economic sectors suggested

Mana Nimitvanich is a vice president with Krungthai Bank which is 56% owned by the Thai state. He runs the bank’s Global Business and Strategy Group. He was more optimistic and suggested that the money will go to investment in state enterprises while he also suggested that allowing the state bank’s to provide soft loans to critical sectors would be part of the strategy.

Thammasat expert fears that subsidies to farmers may undermine long term competitiveness

However, Mr Kiatanuntha of Thammasat University had other concerns about the stimulus package and its impact in the long term. He warned that it could turn into an effective subsidy for Thai farmers and in this way discourage longer-term productivity improvement and curtail the sector’s real-world ability to vie in competitive international markets.

The farming sector, particularly in the north, has been severely damaged by the high baht leading to sluggish exports of agricultural products even at depressed prices as other Asian countries compete with Thailand. This year’s drought situation has also been one of the worst on record.

Package may be overtaken by an ongoing deterioration in the economy but is still critical

The economic stimulus package, like the surprise interest rate cut announced by the Bank of Thailand this week, may well find itself overtaken by a stream of oncoming negative developments for the Thai economy but for all that, it is still of critical importance right now as was the rate cut.

Credit squeeze in Thailand

Thailand is at this moment experiencing a credit squeeze which is hitting workers as well as small and medium-sized business the hardest. Data released this week showed that non-performing loans across a range of economic sectors are moving up. The monetary value, however, has decreased slightly by ฿3.3 billion and now stands at ฿450.6 billion. 

Banks reining in loans as Thai men and women feel the brunt of hard times as economy reels

This is thought to be from prudent bank management and a reining in of credit being advanced across the boards. It is still a lot of doubtful debt and when measured against the proposed stimulus package of ฿170 billion, it is easy to understand how some of that funding may end up not reaching Thai people on the ground.

It is there that the ordinary men and women in Thailand are now feeling the pinch. The economic jargon, data and IMF forecasts may say one thing these days on Thailand but the dogs on the streets know that times are hard.

Bad or non-performing loan rates ticked up in the second quarter according to central bank data

The data on non-performing loans was presented this week by the Bank of Thailand’s Tharit Panpiamrat who is the senior vice president of the bank’s risk assessment and analysis department. His data highlighted the ‘special mention’ category for loans which are in doubt or late. This rose to 2.74% overall in the second quarter from 2.56%. 

7.3% special mention rate on auto loans held by the banks but other figures spell bad news

The bad news was across all categories but some stood out such as business loans which rose from 2.35% to 2.53% or property which moved from 1.67% to 1.78%. Significantly also was the figure for consumer loans rising from 3.05% to 3.23%. The biggest problem and the reason for the Bank of Thailand’s intervention this year to tighten loan criteria from April 1st was in auto loans which rose from 6.9% to a scary 7.3%.

Lack of credit or ‘credit squeeze’ is driving a downturn in consumer spending and sentiment

There is no longer any point in denying that the Thai economy is decelerating and that lack of credit is one of the major causes of the downturn which is now feeding into consumer confidence and domestic expenditure. This is being stoked further by the country’s banks who are pulling back credit lines in an old fashioned credit squeeze.

Banks more cautious about extending loans

This scenario was confirmed by the Bank of Thailand executive this week when he said: ‘Banks are now more careful about granting loans to small borrowers. Some may have stricter criteria than others, resulting in some borrowers being given the SM status even though they have no history of overdue payments.’ Hard times indeed.

New economic committee chaired by the Minister of Finance contains the bank of Thailand Governor

Meanwhile, the deputy prime minister tasked with economic matters, Somkid Jatusripitak, has announced a steering committee this week to be chaired by the Finance Minister Uttama Savanayana and to include the Bank of Thailand Governor Veerathai Santiprabhob as well as the finance secretary, the secretary-general of the office of the Securities and Exchange Commission and the secretary-general at the office of the National Economic and Social Development Council.

Government fully supports the independence of the Bank of Thailand – Finance Minister

During the week, the finance minister underlined that he recognised and supported the independence of the Bank of Thailand to undertake its remit. He said that this would be respected by the government. Deputy Prime Minister Somkid said that he understood, however, that the minister had held discussions with the Bank of Thailand Governor about the economic situation.

Deputy PM Somkid: ‘difficult situation’ in the future

The deputy prime minister said that the committee was ‘ideal’ and would allow many of these leading economic figures to work together and address Thailand’s ‘current financial problems’ based on teamwork. The minister noted that the key executives were of the same age and had a similar vision for the country. He did indicate however that Thailand is also facing a ‘difficult situation’ in the future, a future which is developing right now.

The deteriorating world economy is a critical factor in the dramatic downturn that Thailand has suffered since July last year and which appears to be getting worse. 

Domestic demand is slowing as government capital projects are taking time to come on stream

At the end of July when the new government came to office, the International Monetary Fund expressed a view that Thailand’s economy would continue to grow this year driven by consumer expenditure and government capital expenditure programmes. Both these drivers are now in question as government capital projects involving third parties have been delayed by the need for proper oversight and the change of government. Consumer expenditure according to all the data, has taken a turn for the worse since the second quarter of the year in line with consumer sentiment.

Yuan devaluation this week in China signals a bigger and harder challenge for Thailand

Thailand’s interest rate cut on Wednesday is thought to have been a response to the US Fed’s softening of interest rate policy as US President Donald Trump continues to prod the Fed into lower rates. The US President on Friday as he flew out of the White House called for more than a 1 point drop in US interest rates over the foreseeable future, a situation that would further dire consequences for Thai exports. But the real clincher may have been the devaluation of the yuan last weekend allowing it this week to reach under the seven to a dollar range which has even stronger implications for Thailand’s business and export sectors which are very much linked with the greenback.

IMF in Beijing admits it advised the move

This is being seen also in a darker context suggesting that China is becoming more belligerent in combating the US trade moves which could lead the world into even more damaging trade war morphing into economic warfare. It has also been revealed that the yuan devaluation may have come about after the IMF advised the Chinese government to respond to US trade moves. 

On Friday, the head of Mission for the IMF in Beijing came straight out with this and confirmed to reporters that the US moves required ‘some kind of response’ by China. He explained that the Chinese currency ‘should remain flexible and market-determined’ in the future. This would mean ‘less interventions’ by the Chinese government.

Trump: ‘We have all the cards. We’re doing well.’ 

In the meantime, in the same briefing to reporters, a gung ho Donald Trump suggested that the US may not be interested in the proposed trade talks with China in September. He was heading off to New York and later to play golf in New Jersey. ‘We’re not ready to make a deal but we’ll see what happens,’ Trump said. ‘We have all the cards. We’re doing well.’

Current spate of economic bad news may still be the quiet before the storm to come 

The deteriorating economic conditions that Thailand is experiencing is being felt worldwide and especially in Asia, although the US seems isolated from the contagion for now. The only sliver of hope is that if the growing concern about the situation on markets explodes into a crisis, it will see a flight of investment capital back to the United States where the economy is considered stronger. This tends to happen in a crisis. This will ultimately lead to a stronger dollar in spite of interest rate policy. The question for Thailand is how bad can things get. For now, there is a feeling that Thailand is experiencing the quiet before an economic storm.

For further reading:

Bank of Thailand cuts interest rates in a surprise move as ING Bank predicts a second later this year

Senior Thai minister calls for weaker baht and a target value of ฿32 against the dollar at Bangkok forum meeting

Moody’s – debt is 98.5% denominated in Thai baht as two views of the economy are at odds

Thailand’s small businesses and farmers are facing a crisis. The bankers are the ones that know

Government to introduce new economic stimulus package to boost Thai economy in emerging downturn

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