Top Thai bank official Dr Daranee Saeju this week assured reporters that Thailand’s strong financial position made it impervious to speculation and was quite unlike the position in 1940 and 1997. It comes as the baht hit a new 16-year low on Friday amid concerns about second-half GDP growth and the performance of the economy with deeply disturbing reports from Beijing as the western world grapples with inflation and the fallout of the Ukraine war which the World Bank has predicted will lead to a return of 1970s era stagflation.
Senior executives at the Bank of Thailand, this week, moved to reassure the market with one senior director pointing to up to $250 billion in foreign exchange reserves and a net inflow of capital into the country amounting to ฿97 billion. It comes as the bank signals it will hold to its policy of raising interest rates smoothly and not follow the aggressive policy of the US Federal Reserve. The tense situation with economic uncertainty and talk of speculation on the Thai baht is coming amid disturbing reports from China where many analysts believe the Chinese economy, once the juggernaut of the world, is in contraction with even darker concerns about a banking and property crisis. On Thursday, former government minister Narumon Pinyosinwat also warned that there are signs of deterioration in loan quality in the Thai financial system and called for the government to act urgently on debt restructuring measures.
There is growing speculation about the policy of the Bank of Thailand as it indicates that it intends to raise interest rates smoothly rather than in reaction to the aggressive policy of the Federal Reserve in the United States with some market watchers suggesting that short positions on the Thai baht as well as the Philippines’s peso and Singapore dollar are at their highest level since 2018.
However, in Thailand, those who know the economy including senior executives with the Bank of Thailand are more concerned about a sudden rise in interest rates.
Ex-minister and MP calls for debt restructuring action pointing to deteriorating loan quality
A senior Thai MP in the ruling Palang Pracharat Party, economist and former minister in the government of Prayut Chan ocha has warned that central bank data points to signs of deteriorated loan quality among credit card holders and customers of retail banks as inflation in the kingdom begins to bite harder.
Narumon Pinyosinwat, a former Deputy Minister of Labour who was fired last year by Prime Minister Prauyut following an unsuccessful parliamentary coup against his leadership led by ex-minister and now Setthakij Thai Party (Thai Economic Party) leader, Thamanat Prompow, said that rising inflation which came in at a 13 year high in June on 7.66%, was hitting lower paid and even struggling middle-class families hard while it was also raising production costs for the business sector.
Ms Narumon is currently head of policy for the ruling Palang Pracharat Party led by Deputy Prime Minister Prawit Wongsuwan and expressed her fears in a social media post online this Thursday.
She said she was particularly concerned by the latest economic data released within the last 48 hours in the United States where inflation hit another 40-year high at 9.1% in June.
She warned that this may feed into an even bigger hike in interest rates by the US Federal Reserve when it meets on July 27th next.
Higher and more aggressive Federal Reserve action will increase downward pressures on the Thai baht
A rate hike of at least 0.75% is expected but Ms Narumol, on Thursday, said that she feared it could be as high as 1% which would increase pressure on the value of the Thai baht whose lower value is beginning to feed its way into the country’s underlying inflation rate which is being driven primarily by higher oil and food prices.
The US-educated economist, who has worked at the National Institute of Development Administration (NIDA), the Ministry of Finance and as a government spokesperson before becoming a minister, acknowledged that Thailand’s financial system was exceptionally strong but expressed concern at the country’s lingering high level of household debt and how this impinges on the economy as well as hardship experienced by millions of Thai families.
Even at a middle-class level, the impact of rising interest rates which are expected to commence when the Bank of Thailand’s Monetary Policy Committee meets on August 10th, will feed into a dampening or curtailment in domestic consumption.
Even mild interest rate hikes in a ‘smooth’ transition will have a heavy impact on overborrowed families
Recent surveys have shown that over 66% of Thai households have significant debts to repay with that figure rising to 77.5% in Bangkok.
She highlighted that for a family borrowing ฿10 million over 20 years, the extra income it will take to pay an extra 1% in borrowing costs will amount to ฿5,887 per month from an existing rate of 6% with a financial institution in the kingdom.
Ms Narumon said that evidence suggests that in the last 3 months, the loan quality for non-bank borrowers or those availing of credit from financial institutions which are not operating as banks, has deteriorated with a spike in overdue debt seen in the last 3 months.
She called on the government to set up debt restructuring plans at all levels within the economy as the it continues to grow marginally but in the face of higher growth in inflation or stagflation.
Household debt fell back from a record level
This is despite Thailand’s chronically high level of household debt falling back marginally in the opening months of 2022 to 89.2% of GDP after reaching a historic high of 90.1% at the end of 2021 indicating that Thai borrowers were managing despite challenging economic conditions before inflation kicked in as a result of the war in Ukraine.
Thailand is currently expected to grow its GDP by anywhere from 2.5% to 3.5% this year with most analysts now suggesting a figure of 2.75% based on achieving 9 million foreign tourists by the end of 2022 and a 5% growth in exports.
Some plus points in the current economy such as higher farm prices but the foreign tourism recovery will take time with concern over second-half GDP
There are some plus points in the current situation such as higher prices for farmers particularly those producing sugar cane, corn and palm. However, at the same time, there are raised costs for living expenses and the price of fertiliser.
Also within the foreign tourism industry, the current rate of arrivals cannot offer Thai hotels anything more than marginal occupancy rates and prices that are below normal because of an oversupply while the Tourism Authority of Thailand (TAT) has confirmed that current flight connectivity to the kingdom at approximately 33% of pre-emergency levels, is causing higher airfares for incoming passengers and limiting the country’s recovery.
Significantly, concern is growing about the rate of domestic consumption in the latter half of 2022 despite more positive figures from May suggesting that it was picking up.
Complex array of factors impacting Thailand’s struggling economy with the Ukraine war critical
In recent days, Kriengkrai Thiennukul, the Chairman of the Federation of Thai Industries has said that the continuing impact of the Russian- Ukraine war and renewed nervousness about the pandemic are dampening expectations for a stronger second half to the economic year with an already disappointing first half.
‘Many factors are affecting the economic growth and confidence of the business sector,’ Mr Kriengkrai explained as he indicated his concern over accelerating interest rate rises in the United States but more particularly about the situation in China which he described as the factory of the world and which, since 2018, has shown itself to be linked to Thailand’s manufacturing and export economy because of embedded supply chain links and other factors.
However, the situation is not clear-cut.
Things may also move in the other direction with the average price for WTI West Texas Crude oil falling from the 8th of June at a price of $122 a barrel to $94.10 on fears of a worldwide economic contraction.
However, even this is not certain with a surprise in GDP for May being reported this week by the United Kingdom in the face of rising inflation.
On the other hand, there is extremely dark news coming from Beijing.
Dark and disturbing news from Beijing with credible reports that the Chinese economy has contracted amid ongoing scepticism at the country’s official data
This week, Mr Kriengkrai said he was concerned about lockdowns in China which appear to be unpredictable and threaten key areas of global supply chains that Thailand depends upon.
Aside from the Thai industry leader, many commentators worldwide are becoming increasingly perplexed about the news from China and its policy relating to the pandemic which appears both irrational and highly damaging to the communist country’s economic prospects.
Some experts have attributed this to the fact that China is an authoritarian state and also not a fully market-led economy such as exists in other parts of the world.
Analysts and economists, this week, suggested that the Chinese economy may have already contracted in terms of GDP in the second quarter of 2022.
This also raises disturbing questions about China’s economic data which is well known to be ‘man-made’ or massaged.
This week, a Beijing expert suggested a grim picture of the world’s second-largest economy.
Max Zenglein, the Chief Economist of the Mercator Institute for China Studies, put a health warning on any information or economic data emerging from China as he confirmed his view that China’s economy is contracting.
Banking and Property crisis not being reported
‘The government will not acknowledge a contraction,’ Mr Zenglein disclosed. ‘The further the growth is from zero, the less credible the official figure will be.’
There is also a growing fear that a deepening banking and property crisis in China which has seen thugs used by authorities to break up consumer-led protests in recent days outside troubled banks, could be something more serious and that authorities may be using the pandemic as a cover for what is an even greater threat to the Chinese economy.
Reporting from China on these issues has been overshadowed by reports of lockdowns and responses to the pandemic.
At the same time, Tianlei Huang, a research fellow at the Peterson Institute for International Economics in Washington also confirmed the current situation for the Washington Post newspaper on Thursday.
‘The Chinese economy is in a very bad shape now,’ said the expert on China. ‘Consumer demand is very weak.’
World Bank suggested in June that the projection for the world economy is a return to 1970s stagflation
The situation worldwide, in early June, led the World Bank to slash its predicted growth projection for the world economy to 2.9% for 2022 and at the same time, the bank suggested that the world was headed back to the 1970s era of stagflation unless there was some shift or positive development in current world affairs.
Shang-Jin Wei, a Columbia University professor, has warned that a recession in the western world in the United States or Europe will further add to China’s economic woes.
‘The Chinese economy in the second half of 2022 still faces the uncertainty of periodic lockdowns in response to new covid breakouts,’ the finance professor explained. ‘If a recession breaks out in the US or Europe, it will add further difficulty to Chinese growth.’
Power heave in China as Premier Li Keqiang tours the country saying the economy is at a ‘critical point’
In recent days, the Chinese Premier Li Keqiang, rumoured to be engaged in a tussle for power with the country’s President Xi Jinping has been touring the country saying that China’s economy was at a ‘critical point’ and urging local party officials to get it ‘back on track’.
Mr Li was once quoted at a private meeting in classified diplomatic channels released by Wikileaks, confirming that Chinese economic data was fabricated and was only to be used as a gauge or for ‘reference only’ by economic analysts.
The crisis over the pandemic followed by the war in Ukraine has led to a very real and growing geopolitical shift away from China not just by investors and also foreign firms already based there.
Mass exodus of US firms from China
The mass exodus of foreign firms from China was confirmed by a senior executive of the Centre for Strategic and International Studies (CCIS), John J Hamre, who told a summit in April that up to 70% of US firms in the Communist country were making plans to exit China including 45% who were actively engaged in the process at this time.
The rising impact of inflation and the prospect of rising interest rates in Thailand was confirmed this week by Mr Voralak Tulaporn, a senior Vice President with The Mall Group Co. even though he also confirmed a recent improvement in overall sentiment among shoppers.
Retail executive says shoppers are becoming more cautious again with a fall in the average ticket price
However, the adept and highly successful Thai retail chain has noticed a fall off in the purchase of more expensive high ticket items with the average ticket sale price falling by 10%.
Mr Voralak suggested that Thai consumers were highly intelligent and sensitive to changes in the economy.
‘An anticipated hike in domestic interest rates is also expected to aggravate household debt, weakening consumer purchasing power,’ Mr Voralak explained. ‘Shoppers are now more cautious about their spending. If the prices of overall products increase, we believe consumers will see greater hardships, particularly salaried workers.’
Senior Bank of Thailand executive moves to reassure the market saying capital flows are positive and the country has ample foreign exchange reserves
With the Thai baht, this week, reaching near a 16-year low, moving toward the ฿37 to the dollar mark, Dr Daranee Saeju, Senior Director of the Financial Institutions Strategy Department at the Bank of Thailand gave out some insightful and reassuring information.
Dr Daranee said that, in recent times, there has been an inflow of ฿104 billion into Thailand and a ฿7 billion outflow from the country’s bond market giving a ฿97 billion inflow.
She also revealed that reserves were running at up to $250 billion which was 52% of GDP and 3.35 times short-term foreign debt.
This is what gave the bank confidence to pursue what appears to be an outlying and risky strategy compared to its peers by not raising interest rates sharply.
Future US rate hikes priced into the market suggests Dr Daranee as the baht heads to ฿37 to the dollar
The Thai baht, while it has fallen nearly 14% against the US dollar since its value on the 19th of February last at ฿32.15 compared to this week’s ฿36.60, is only 2.7% down against regional currencies.
It is still up this year against the euro and the pound.
Lack of confidence in the UK and Eurozone economies and low rates has seen gains for the baht this year
Dr Daranee also played down future Federal Reserve rate hikes saying that these had been already priced into financial markets.
Thailand with a falling baht caught in a stagflation spiral with high inflation and low GDP growth this year
However, she did express concern about the country’s current account deficit which is running at 1% of GDP.
She indicated that the bank remained hopeful that rising foreign tourist numbers and income will help to offset this challenge.
Situation quite unlike 1940 or 1997 as Thailand’s economy is impervious to speculators says top banker
She said that the current situation was quite unlike that seen in 1997 or even 1940 as Thailand’s fundamentals do not leave it vulnerable to speculation.
It comes with reports suggesting market players are beginning to short the Thai currency and others in Southeast Asia.
‘Is there speculation on the baht or not? Thailand’s situation is different now than in 1940 because we did not set a fixed value of the baht, but in 1940 it was fixed. The current account deficit is at a low level, unlike in 1997, which had a deficit of 8% of GDP, and low external debt. Therefore, Thai fundamentals are not speculative and the Bank of Thailand does not need to intervene for the baht to maintain the price level but only to mitigate excessive volatility.’
This may explain somewhat the confidence and reluctance shown by the Bank of Thailand to raise interest rates precipitously as in the United States.
Again, this week, the Bank of Thailand insisted that it has no plans to hold an emergency meeting to raise interest rates quickly and that it is sticking to its stated policy as outlined by Governor Sethaput Suthiwartnarueput at the end of June.
He has confirmed that interest rates would rise but said the bank would tailor the rises to run smoothly to maintain inflation over the medium term while not scuppering the current economic takeoff which will see growth this year, although perhaps slower than neighbouring countries.