High levels of debt among households and businesses, as well as increasing non-performing loans, pose a challenge for Thailand’s economic recovery from the COVID-19 pandemic.
Household debt is a major drag on consumer spending, which accounts for more than 90% of Thailand’s GDP. The COVID-19 pandemic has worsened the situation, as many households have lost income and jobs, while having to repay their loans and mortgages. The government’s stimulus measures, such as cash handouts and debt moratoriums, have provided some relief, but they are not enough to boost consumer confidence and demand.
High Household and Corporate Debt in Thailand
Thailand’s household debt remains worryingly high at almost 91 per cent of gross domestic product (GDP) as of the third quarter of last year, due largely to a debt overhang since COVID-19 hit the country in 2020. Corporate debt was almost as high at 87.4 per cent of GDP in the same period, given the rising number of firms making low profit.
High debt levels pose significant risks to the financial stability and economic recovery of Thailand. High household debt reduces the consumption and saving capacity of households, especially those with low income and informal employment. High corporate debt reduces the investment and profitability of businesses, especially those in the tourism and export sectors that have been hit hard by the pandemic.
Policy Rate Cut Ineffectiveness
Piti Disyatat, secretary of the central bank’s Monetary Policy Committee (MPC), argues that a policy rate cut will not help much as around 40 per cent of household debt, such as mortgage loans, have a fixed interest rate, while half of business loans also have a fixed rate.
A lower rate of interest could encourage people to take on more debt, adding to a cumulative debt burden later, he said.
Debt Restructuring and Support Measures
High debt levels also increase the vulnerability of the financial system to shocks and defaults, as well as the fiscal burden of the government to support debt relief measures.
To address this challenge, Thailand needs to implement a comprehensive and coordinated strategy that balances the short-term relief and long-term reform objectives. The strategy should include:
- Enhancing the debt restructuring and resolution mechanisms for both households and businesses, with clear eligibility criteria, transparent processes, and adequate incentives for creditors and debtors.
- Strengthening the financial regulation and supervision to ensure the soundness and resilience of financial institutions, as well as to prevent excessive risk-taking and moral hazard.
- Promoting financial literacy and inclusion to improve the financial management and access of households and businesses, especially those in the informal sector and rural areas.
- Implementing structural reforms to enhance the productivity and competitiveness of the Thai economy, such as improving the business environment, fostering innovation, diversifying the export base, and upgrading the human capital.
The central bank has issued a slew of measures to help debtors clear or reduce their debt burden since the pandemic in 2020. The latest measure, starting January 1 this year, is a responsible lending program under which the central bank has asked financial institutions to offer debt restructuring at least one time for debtors before their borrowings becoming non-performing loans (NPLs), and restructure their loans at least once after it becomes an NPL.
Thailand’s economy in 2023 fell short of initial forecasts, with a growth rate of only 1.9%, significantly lower than earlier predictions of 2.5% to 3.2%. While the tourism sector showed some recovery, weaker performance in exports, manufacturing, and private investment hindered overall growth.
- Thailand’s economic growth in 2023 slowed to 1.9% due to weak exports, despite robust tourism and rising consumption.
- The National Economic and Social Development Council (NESDC) downgraded Thailand’s 2024 economic growth forecast to 2.2% to 3.2% from the previous projection of 2.7% to 3.7%.
- The economic growth outlook for Thailand in 2024 is expected to be strengthened by improved export prospects, resilient private consumption, and increased government spending. However, there are potential risks from geopolitical conflicts and a global economic slowdown.
- The lower-than-expected growth suggests the possibility of an interest rate cut at the Bank of Thailand’s next policy review in April.
The weak global demand affected Southeast Asia’s export-oriented economies. For 2024, the National Economic and Social Development Council forecasts the economy to grow by 2.2% to 3.2%, down from the previous projection. The lower-than-expected growth indicates the potential for an interest rate cut at the Bank of Thailand’s next policy review in April.
