Bank of Thailand holds firm against the PM’s relentless campaign and stinging criticism. Tension escalates as the government puts further pressure on for interest rate cuts. Thailand’s central bank shows leadership amid a growing crisis of confidence. Structural reforms are seen as crucial for future sustainable economic growth. Thailand must avoid the populist economics trap. This is the key to stability and future competitiveness.

The fractious debate between Prime Minister Srettha Thavisin and central bank boss Sethaput Suthiwartnarueput is growing fiercer. Despite a call from the National Economic and Social Development Council (NESDC) this week for lower interest rates, the Bank of Thailand is holding firm. It comes amid increasing evidence that Thailand’s economy is being kept alive by a combination of foreign tourism income and a splurge driven by the wild abandon of consumers using borrowed money. With growing signs of deterioration in loan quality and concerns over the country’s weakening manufacturing sector, the danger of the tension between the Bank of Thailand and the government overflowing into a full-blown crisis grows every day. In the midst of this, the Bank of Thailand is holding its own. Unquestionably, it is showing leadership against what can only be perceived as populist or short-term expansionist economics being pursued by the current government.

This week, Prime Minister Srettha Thavisin (right) increased the pressure on Bank of Thailand Governor Sethaput Suthiwartnarueput to lower borrowing rates in Thailand. The clash between the central bank boss and the PM comes amid evidence that debt in Thailand is spiralling out of control while GDP growth is weakening.

This week Prime Minister Srettha Thavisin doubled down on rhetoric calling on the Bank of Thailand to cut interest rates.

Indeed, the PM’s tone on Tuesday was somewhat stinging. It came hours after the National Economic and Social Development Council (NESDC) appeared to throw its support behind the government’s line. 

Mr Srettha is becoming increasingly strident in his calls for a turnaround in monetary policy.

Country’s top economics agency boss appears to throw his weight behind the Prime Minister’s call for a drop in base interest rates to boost GDP growth

The country’s top economic agency, on Monday, also called for lower interest rates. Significantly, it called for effective lower interest rates on loans provided by banks to small businesses.

On Tuesday, in reaction to that, Mr Srettha took a swipe at the economic agency for not making its voice known earlier.

In particular, before the February 7th meeting of the Bank of Thailand’s Monetary Policy Committee (MPC). Previously, the committee voted 5 to 2 to keep the country’s base interest rate unchanged. The current base lending rate is 2.5%, a 10-year high which rose from 0.5%. In contrast, rates in the United States are 5.5 -5.75%.

Questioned on Tuesday about the central bank’s independence, Mr Srettha’s reply was biting.

‘I want to say that being independent does not mean you can ignore people’s hardship,’ the PM said. ‘Regarding my earlier post on X, I wanted the MPC to call an urgent meeting to consider cutting interest rates because the NESDC has new information.’

Prime Minister piling immense pressure on Bank of Thailand boss to alter the central bank’s policy which in turn is set by the Monetary Policy Committee

The prime minister called for an urgent ad hoc meeting of the Monetary Policy Committee to lower interest rates at this time by 25 basis points. The next Monetary Policy Committee meeting is on April 10th.

Certainly, at this time, both senior economists and the Bank of Thailand Governor are clear that reducing rates would not be appropriate.

However, Mr Strettha is growing increasingly more adamant. So much so that the widening division and inevitable bitterness that is opening up between the central bank and Government House is now itself, a key cause of concern.

The pressure being heaped on Bank of Thailand Governor Sethaput Suthiwartnarueput must now be immense.

‘The next meeting will take place in April. So we’ll have to wait another two months. I want to ask the committee to consider,’ the prime minister said.

Economic advisory board confirms sluggish growth in 2023 and slowing economy coming into 2024. Since 2019, Thailand’s economy went backwards in real terms

The NESDC, on Monday, revised downwards its GDP growth target for 2023 and its outlook for 2024 to 1.9% and 2.7%, respectively. It suggested the BoT use financial measures to support the economy. This was in a review given by the agency’s secretary-general Danucha Pichayanan.

At length, the NESDC announced its latest projections for economic growth in 2023 and 2024. These were rather lower than its previous forecasts of 2.5% and 2.7-3.7%.

The government’s top economics body confirmed earlier reports of weaker GDP growth.

The fourth quarter of 2023 saw a very weak performance at 1.7% growth despite an expansion of foreign tourism. In effect, the growth rate towards the end of the year was slowing down.

This meant the final GDP growth rate for 2023 came in at 1.9%.

Worrying in view of the fact that it was below the GDP growth rate for 2022 of 2.6%. Last year’s growth was only marginally ahead of the 1.6% seen in 2021.

Thailand’s economy was valued at $512 billion in 2023, not far ahead of the $500 billion seen in 2020 and significantly less than the $543 billion seen in 2019.

GDP has contracted as household debt and chronic problems strangle the country’s future growth and economic opportunity. Fault of successive governments

In truth, Thailand’s economy is going backwards despite the government’s regular announcements. At the same time, internally, the country is beset by a range of chronic difficulties including persistently high household debt.

These are real problems that have been ignored by successive Thai governments for decades.

Mr Danucha said that to help propel the economy and reduce the burden on households and small and medium-sized enterprises (SMEs), the central bank should seriously consider measures to reduce rates, in particular, the net interest margin (NIM), which is currently high at around 5%.

‘In the recent past, the government undertook many stimulus measures to revive tourism, support investment, and expedite the disbursement of the state budget. As a next step, it should use financial measures to support the economy,’ the state agency boss explained.

The NESDC wants financial institutions to reduce the net interest margin (NIM) to help SMEs and households with their debt burden. The NIM has a less critical although quite substantial impact on large businesses.

Mr Danucha said in addition, the central bank should extend its debt assistance measures.

This would include maintaining the minimum repayment rate for credit card debt at 5% after the current concession expired in December.

The current rate of 8% will mean more non-performing loans (NPLs) among SMEs and householders, he warned.

Top executive of the National Economic and Social Development Council (NESDC) offers to have his agency meet with Bank of Thailand on the economy’s needs

Mr Danucha said again Tuesday that he urged the BoT to cut rates because the economic figures were lower than the NESDC’s previous forecasts.

He also warned that special mention (SM) loans, defined as loans overdue for 1-3 months, are fast becoming non-performing loans (NPLs).

‘I think the NESDC should hold talks with the BoT. Having said that, the NESDC has not been pressured by the prime minister,’ Mr Danucha said.

His comments come as there is a growing sense of urgency about the quality of outstanding loans in Thailand. Indeed one source this week estimates that between debt included in restructuring and those under review, the amount was ฿2.7 trillion.

This represents 19.7% of the ฿13.7 trillion owed to financial institutions. Separate sources now estimate informal debt in Thailand could be as high as ฿3.95 trillion.

Even as late as December 2023, the government estimated that this was only ฿50 billion.

Alarming figures from the National Credit Bureau (NCB)

To understand this discrepancy, we have to take note of figures just released by Mr Surapol Opasatien, the Chief Executive Officer of the National Credit Bureau (NCB).

In short, he disclosed that there are 2,674,081 debt-related cases in Thailand with a total value of ฿15.99 trillion.

Furthermore, there are 1.05 million cases where judgment in favour of the creditor has been awarded. These alone had a total value of ฿15 trillion.

Out of the latter figure, ฿1.75 trillion was informal debt.

691,000 cases with a value of ฿761 billion were currently within the legal execution process.

Comments from economics agency boss relate to firms struggling under effectively far higher bank interest rates charged by banks to manufacturing concerns

The comments by the Secretary-General of the National Economic and Social Development Council (NESDC) on Monday related to the country’s struggling private sector. In particular, the kingdom’s manufacturing base is suffering.

While Thailand’s interest rates are among the lowest in the world, the margin of profit for its commercial banks is high.

This is a calculated risk as the Bank of Thailand is tasked primarily with preserving the country’s financial stability. In short, this means a healthy and profitable banking system.

However, amid growing pressure from various sectors to lower interest rates, the Bank of Thailand (BoT) has stood firm. It insists on maintaining its current policy rate at 2.5%.

Despite growing and ever louder criticism from government officials and some economic analysts, the bank is on firm ground. In effect, there are compelling reasons behind the BoT’s stance to keep rates unchanged. 

They are rooted in the country’s economic fundamentals.

Consumer spending is buoyant. In addition, the money is being spent primarily on good times and alcohol not on reducing debt or on productive expenditure

The Thai economy is undoubtedly facing severe challenges. GDP growth for the fourth quarter of 2023 coming in at 1.7%, was far lower than expected.

However, the BoT’s stance is supported by a deeper analysis of the components driving this growth.

While overall GDP growth may be sluggish, private consumption has remained robust, with a growth rate of 7.1% in 2023.

The bank sees no further reason to bolster this with stimulus as proposed by Mr Srettha’s government or lower interest rates.

Prime Minister Srettha still doggedly pushing his less-than-popular and legally perilous Digital Wallet plan

Consumption growth already outpaces the previous year’s figures. This indicates that consumers are not experiencing significant hardships. It is directly contrary to the perception of an economic crisis.

Critics have pointed to the need for lower interest rates to stimulate growth.

However, the BoT sees rising consumption levels as a potential danger rather than a solution. The surge in consumption has been fueled by increased borrowing. It is actually perpetuating the ongoing crisis in household debt. 

Meanwhile, Bank of Thailand launched a credit squeeze

This comes despite a Bank of Thailand campaign to rein in credit.

Government closely monitoring Thailand’s corporate sector bond market. Fears of a pending crisis
Bank of Thailand to tackle household debt in new plan from 2024 which will see higher standards

A credit crunch began in January 2024 which is particularly limiting auto loans and other consumer loan products. In April 2024, the bank will be emphasising loan restructuring for persistent borrowers.

At the same time, in 2023 alone, household debt increased by approximately ฿1 trillion. A top economist has pointed out that this has caused consumers to resort to skipping debt repayments to sustain their spending habits.

This trend highlights the unsustainable nature of current consumption patterns in Thailand.

It is not an issue which can be addressed simply by lowering interest rates. As a matter of fact, such a move would appear as a nod towards borrowers continuing their post-pandemic spending splurge.

Moreover, the composition of this consumption raises further concerns.

Frivolous expenditure on hotels and restaurants

The significant growth in spending on ‘Restaurants and Hotels’ indicates a reliance on discretionary and non-essential purchases. This is in contrast to essential goods and services. 

The pattern is exemplified by the disproportionate increase in spending on alcohol, rather than food. It suggests a concerning trend among the public towards frivolous expenditure.

While some advocate for lower interest rates to support consumption, the BoT emphasises the need to address structural issues within the economy.

In particular, central bank executives are concerned about the vanishing manufacturing sector. The decline in manufacturing activity is evidenced by negative growth in the Manufacturing Production Index. 

In short, it underscores the need for policies aimed at boosting productivity and competitiveness, rather than simply stimulating consumption.

Lowering interest rates may fuel a disturbing and incorrect trend. Curbing excess borrowing and debt is the key mission of the Bank of Thailand at this time

Additionally, the BoT recognizes the limitations of monetary policy in addressing the kingdom’s economic challenges. Lowering interest rates may lead to further debt accumulation, exacerbating the already acute household debt crisis.

The central bank’s ability to influence interest rates is contingent on factors such as money supply growth.

Similarly, this may have unintended consequences on the economy, including sparking inflation and currency depreciation.

Baht expected to decline in the short term as the United States maintains elevated interest rates while Thailand’s fundamentals are seen as weakening

The baht is expected to decline in the coming months moving towards ฿37 to the greenback. This is because of Thailand’s weakening fundamentals and capital flight. 

At the same time, the US Federal Reserve is holding off on interest rate cuts. This is due to persistently high inflation indicators stateside and a strong economic performance.

Many consumers and foreigners in Thailand welcome the negative inflation numbers seen in recent months. A lowering of interest rates may see a consequently weaker baht and a rise in inflation.

Thailand is already suffering from capital flight out of the country in line with what is happening in China.

The current spat between the Prime Minister and Bank of Thailand governor does little to instil confidence in the country’s economic policy.

That is policies quite apart from populist economics which we have seen play out in other mid-income economies such as Turkey and Argentina.

Thailand must avoid this path.

No avoiding the hard decisions and a period of sacrifice that will be required to restructure Thailand’s ailing, sick and outdated economy for growth

Undoubtedly, there is a divergence of opinion between the Prime Minister and his central bank. The PM insists that the country can spend its way out of this crisis or its chronic situation. 

In reply, the central bank says no, the solution will require hard decisions and sacrifices.

Thailand must address its significant structural issues ranging from household debt to population ageing from corruption to a poor education system. At the same time, to do this it must preserve its crucial financial stability

Internationally, the BoT’s approach contrasts with countries like Japan and China. In turn, these have opted for aggressive monetary stimulus measures.

However, the effectiveness of such policies remains questionable, as evidenced by sluggish consumption growth in these economies despite lower interest rates.

In contrast, Thailand’s relatively strong consumption growth suggests that alternative strategies focused on structural reforms may be more appropriate. Ironically, this may require, at length, tighter monetary policy.

Thailand must resist the lure of getting drunk on populist economic stimulus policies leading to higher inflation and even further loss of competitiveness

In response to calls for rate cuts from Prime Minister Srettha Thavisin, the BoT has maintained its stance. It emphasises the need for a comprehensive approach to address economic challenges.

While acknowledging the concerns raised by government officials and economic analysts, the central bank remains committed to its mandate. At length, this is to maintain price and financial stability, even in the face of external pressure.

The Bank of Thailand’s decision to hold interest rates is grounded in a careful assessment of the country’s economic fundamentals. 

While there are legitimate concerns about sluggish GDP growth, the reliance on consumption-driven growth fueled by debt is not sustainable.

It necessitates a cautious approach if not a need to tighten monetary policy. By prioritising long-term sustainability over short-term stimulus, the BoT aims to show leadership.

The alternative is to countenance possible hyperinflation and an ever-further loss of competitiveness.

Thailand’s future economic development must be built on stability and sober, inclusive GDP growth.

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