Thailand’s economy is caught in a trap where it cannot generate the level of income and profit margins to increase labour pay levels to make ends meet, something which, in the last decade or so, has driven a large number of workers into chronic, persistent and ultimately more expensive debt.

Prime Minister Srettha Thavisin’s government has turned its attention to the emerging ‘3D debt crisis’ that the kingdom is facing in 2024 as debt levels rise in the public and private sectors as well as households with more and more working people being forced out of the regular banking system to borrow from informal lenders. This crisis is not only a key factor in the country’s retarded GDP growth but is now threatening the country’s soundly financed banking system as revolving debt clogs up its arteries.

Tuesday’s cabinet meeting addresses the household debt crisis and efforts needed to tackle informal debt, which now stands at ฿3.48 trillion with more borrowers forced outside the system as banks impose stringent credit controls with a lack of liquidity strangling the economy’s ability to grow.

A casual perusal of the latest news headlines in Thailand in recent days gives some indication of what is happening under the bonnet of the Thai economy.

After all, the country is drawing nearer to confronting what one economist has called a 3D debt problem or ‘crisis’, a conflation of credit limits being reached related to household debt, private debt and significantly, public sector debt in the coming year. 

Murder of a small businessman, a fruit seller, over ฿400 in daily repayments sends a searing message to those in charge of a cash-strangled economy 

A news report from Sattahip last week saw a shocking report of a small businessman, a fruit vendor, being murdered by a young female loan shark. At length, the man lost his life over a dispute relating to two days of payments amounting to ฿400.

If money is the oxygen of business then small businesses in Thailand are being strangled especially those in the informal grassroots economy.

Police arrest callous loan sharks who murdered 45-year-old trader over ฿400 in missed payments

The female loan shark had been handed the gun at the scene of the execution by her boyfriend who had purchased it on Facebook

Zombie Thai firms according to Siam Commercial Bank’s intelligence unit, make up 18.7% of registered firms, established for over 10 years and struggling

At the same time, a report by the Economic Intelligence Centre (EIC) of Siam Commercial Bank some days later analysed what it termed ‘zombie’ private firms now making up 18.7% of Thailand’s registered companies, which have been in operation for over 10 years and are barely able to pay their debt obligations to the banks.

The Thai cabinet is to meet on Tuesday to discuss an initiative by Prime Minister Srettha Thavisin to address the critical issue of household debt which has risen to the top of the agenda of the Bank of Thailand this year with an action plan for 2024 which will see tighter restrictions on lending in addition to higher-quality standards.

Bank of Thailand to tackle household debt in new plan from 2024 which will see higher standards
Zombie Thai firms holding back economic growth as they struggle just to pay interest on bank debt

Thailand is heading for a disappointing year’s economic growth, predicted now to be 2.5% with exports, despite a slight recovery from August up to the end of October, showing a decline of 2.7% for the first ten months.

Thailand not alone in suffering a significant downturn in exports in 2023 as the world enters a new darker era of higher borrowing costs and tensions

In this respect, Thailand is not alone with all Asian countries this year showing a sharp downturn in exports as the world economy has seen a significant fall in demand related to elevated borrowing costs or the cost of money.

At the same time, rising geopolitical tensions do not seem to be abating with a divided world emerging with Western countries and the United States and an axis of countries around China and Russia moving towards an alternative world economy, something US policy appears to be pushing as it strengthens links between trade and human rights as well as social standards while robustly warning China off any premature act over Taiwan.

Economists are warning that the world has entered a new era of tightened money supply which is confronting political and economic leaders in Thailand with a very bleak outlook. 

This week, figures emerged showing efforts by Thailand’s central bank to keep interest rates in check at 2.5% after the last monetary policy committee meeting have inadvertently driven up the level of informal borrowing outside the financial system.

This is easy to understand as banks make their profits on increased margins related to interest charges on loans. 

Economists are unclear about the outcome of the next Monetary Policy Committee meeting at the Bank of Thailand on November 29th with the consensus being that rates will not rise again given the existing fragility of the economy.

Tighter financial regulation means more borrowers being exposed to informal lenders to make ends meet

Government limits or caps only lead to tighter lending criteria, which is increasingly forcing millions of Thais to borrow outside the regulated financial institutions. 

Meanwhile, the debt rate which in the first quarter of the year amounted to 90.7% of GDP, has reduced marginally to 86.3%, according to one informal central bank briefing.

Thailand is not the leading country in Asia when it comes to this metric, with South Korea leading the way and ranked 12th in the world. However, the average level of income in South Korea comes in at $2,947 per month compared to $700 for Thailand.

This is referred to by Associate Professor Dr Anusorn Thamjai, who is a former director of the Bank of Thailand, as a ‘3D debt crisis’ with the academic not blaming the level of household debt in Thailand on any perceived lack of financial education or awareness or some other factor which prompts Thai people to borrow but instead he insists it is caused by the simple fact that incomes in the country are too low to sustain a modern, basic livelihood. 

Even with ultra-low unemployment and record-high employment levels, debt levels continue to rise meaning Thai workers are getting a bad deal

This is happening in a country where the unemployment rate is extremely low and even where companies are suffering labour shortages, but at the same time, incomes in Thailand fail to rise.

Efforts by the government to keep borrowing costs in line by limiting interest rates, the interest rate being charged by banks, has led to more and more workers, even those with secure jobs, seeking to borrow outside the established financial system as banks have had to tighten lending criteria to protect their margins.

The figures are quite stark, with the University of the Thai Chamber of Commerce revealing, in a survey completed this year, that the average debt per household in Thailand now stands at ฿559,400 with 80.2% of this being formal debt within the established financial system while 19.8% is informal debt and this figure is rising.

Informal debt in Thailand, although for larger sums governed by agreements with interest rates far higher than the banks but subject to legal provisions, also extends to those charged daily with sky-high interest rates, even at the upper end of the lending spectrum.

Borrowers sign agreements that keep the relationship de jure legal while paying interest rates that are de facto illegal, many loans are clearly outside the law

Many borrowers are forced to accept de facto breaches of the law, while written legal agreements suggest otherwise to allow for de jure compliance in case the matter is examined later by authorities.

The problem for Thailand is that the country is now facing heightened borrowing levels across this ‘3D’ scenario, with public sector debt as of September 2023 standing at 62.14% of GDP, or ฿11.13 trillion, owed by the government.

At the same time, household debt stands at ฿15.3 trillion while informal loans have risen to ฿3.48 trillion.

The combined vista of Thailand’s 3D debt crisis is hurtling towards it as it begins the new year in 2024 where exports are likely to continue to be impeded while the country is also facing resistance in renewing its critical foreign tourism industry, suffering from reduced demand from all markets and a lack of flight connectivity which has failed to return to normal after the COVID-19 pandemic shutdown.

Prime Minister to tackle the issue starting from Tuesday after the cabinet has discussed the problem

Over the weekend, a spokesperson for the Prime Minister, Ms Radklao Suwankiri, said that Mr Srettha would be making a statement on Tuesday linked to the crisis of informal debt.

At the same time, a coordinated campaign by government agencies including economic ministries, social security, the Bank of Thailand as well as the Royal Thai Police and the Anti-Money Laundering Office (AMLO) would be launched to control or rein in loan sharks or those lending money at exorbitant interest rates thus creating dangerous situations which are increasingly leading to violence and trauma within society. 

Ms Radklao also announced that those who are currently under pressure concerning informal debt or their debt situation will be able to register with a website from the 1st of December 2023.

Register for help with informal debt here – Thai government initiative

The government is also preparing a plan to address household and private debt within the financial system itself.

A full announcement on this is due on December 12th. 

‘The Prime Minister always emphasises that this government is working hard to solve problems. He understands the difficulties of fellow citizens in reducing expenses. He is therefore confident that this problem will be resolved quickly. Moreover, from going from area to area to ask the people, he has decided to offer support in solving problems across the higher debt spectrum. In the future, people will not have to pay exorbitant interest rates and will be able to live well,’ the government deputy spokesperson told reporters on Sunday.

Large businesses in Thailand make bumper profits with the banking system protected by reserve ratios and regular stress testing with a wealthy elite

In the meantime, the former Bank of Thailand director, Professor Anusorn, notes that large businesses in Thailand continue to be relatively stable, making bumper profits while the banking sector, with strong reserves and loan provisions, is seen to be sound. 

This is confirmed by regular stress testing by the Bank of Thailand, something appreciated by the world’s large rating agencies.

However, the problems that exist within the economy are among the small and medium-sized firms which are increasingly having difficulty making debt repayments and meeting day-to-day commitments while a growing number of households are being pushed to borrow outside the financial system.

Nonetheless, within the formal bank sector, a  rising percentage of loans are repeat funding as both firms and individuals increasingly fail to pay off the principal on loans outstanding with this sort of debt clogging up the country’s financial system such as with zombie private firms while some middle-class borrowers can just about keep ruinous debt levels at bay.

Normal households sinking under impossible debt levels while the ultra-wealthy control well over 90% of the bank’s funds in a society riven by inequality

At the same time, as households are sinking under the financial despair of impossible-to-pay debt loads, an affluent elite in Thailand who control the vast majority of the country’s deposits continue to thrive and increasingly invest abroad as is the case with large Thai firms.

The World Bank noted that poverty has been on the rise in Thailand since 2015 with the country’s Gini coefficient being 43.3% in 2019 before the pandemic, a metric which has remained constant representing the highest income inequality in East Asia and the overall Pacific region.

A 2021 report by the Bank of Thailand showed that 1.6% of deposit holders controlled ฿11.411 trillion while 91.22% of deposit account holders only controlled 1.562% of the funds held.

Former central bank official’s remedy to the crisis will not go down well with the current Bank of Thailand’s leadership tasked with preserving stability

However, the remedy that the former director proposes may not go down too well with the current Bank of Thailand leadership whose overarching mission or remit is to preserve the country’s financial stability and keep inflation in check.

Economic malaise in Thailand has been growing with underlying problems now making their presence felt

‘The government must speed up financial restructuring. There must be further relaxation of financial reserves and a reduction in the cash reserve rate, as well as a relaxation of bad debt reserve criteria. And we must stop raising the policy interest rate,’ declares Dr Anusorn.

However, the financial expert accepted that ultimately the problem was a failure of income levels being able to rise in Thailand. A somewhat intractable problem, especially given the dark economic outlook facing the country in the year ahead.

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Further reading:

Zombie Thai firms holding back economic growth as they struggle just to pay interest on bank debt

Incoherent government economic policy clashes with Bank of Thailand’s efforts to rein in debt

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