I wish I were this good when it comes to picking winning lottery ticket. Just a few days ago, the Ministry of Finance (MOF) lowered its 2024 GDP growth projection from 2.8% to 2.4%, citing blah, blah, blah.
The growth projection range is 1.9%-2.9%. But the MOF will not be lonely for long as other economic research houses will soon lower their growth projections as well. For Dr Chartchai, he stands firm on his projection of -1.5% to 1.5% growth for 2024 with a base case of 0.0% growth.
March economic data was released on April 30th which I have not had much time to digest it. However, I intend to do a full review of the quarterly performance in the next article. After a quick look, the March data appear to be much weaker than I expected. Key features are a further decline of 5.1% in manufacturing production, a private consumption index contraction of 0.6%, and a dangerously low level of private credit growth, which expanded merely 1.2%. The credit growth data is important as it indicates a non-functioning banking system.
Because of the weak March economic data, I am not surprised the MOF suddenly adjusted its 2024 growth projection downward. Q1/2024 GDP growth could be less than 1%. Official Q1 GDP data will be released by the National Economic and Social Development Council (NESDC) around mid-May. Prepare for a shock.
Q1/2024 economic performance is important for two reasons. First, it would set the tone for this year's GDP growth. If the 1st quarter GDP growth is low, say around 1%, no one would believe Thailand can achieve annual GDP growth of 2.6%-2.8%.
Even the MOF's 2.4% growth projection would be optimistic. Second, with low Q1 GDP growth and even lower Q2 GDP growth, the risk of an economic crisis in the second half of the year would be prominent due to the low ability to service debts by the Thai corporate sector. Q2's economy is likely to be weaker than Q1, as extreme heat retards economic activities.
Even my fanclub thinks that I am too pessimistic about the economy. They do recognise problems with the Thai economy but with strong tourism income and demand recovering from Covid-19, things will get better and Thailand will soon join other high growth Asean economies, or so the argument goes. Q1/2024 GDP data, once released, might persuade them to think otherwise.
At the onset on 2023, everybody, World Bank and IMF included, foresaw Thai GDP growth would be around 3.6% to 4% for the year, largely owing to returning foreign tourists. Actual outcome is 1.88% growth. What went wrong? Tourists did increase by 154% from 11 million to 28 million. So what are reasons for low growth?
There are four problems hindering Thailand's economic growth. They are (1) inadequate liquidity, (2) an ultra-high level of bad debt, (3) receding manufacturing production, and (4) increasing competition from China. If these problems are not eliminated or, at least, reduced, Thailand will never get growth beyond 2%.
Adequate liquidity is central to economic growth. Banks need money to expand their loan portfolios. With increased credit from banks, consumers consume more and producers produce more.
In 2020, the Thai monetary system had excess liquidity of 658 billion baht and, consequently, total credit growth, which includes government borrowing, was 4.4%. In March 2024, excess liquidity was 796 billion baht in the red and, consequently, total credit growth dropped to 2%. The only reason why Thai banks could afford to extend credit at a time of negative excess liquidity is they are getting extra liquidity from foreign sources. As of Q4/2023, Thai banks borrowed US$36.4 billion (about 1.3 trillion baht) to support their lending activities.
Unfortunately, domestic credit expansion was not enough to satisfy the liquidity needs of the Thai corporate sector. The corporate sector borrowed $121 billion from abroad on their own. Please note that corporate foreign borrowing is 3.3 higher than that of the banking sector. With severe liquidity constraints and heavy reliance on foreign funding, it would be difficult for me to remain optimistic about the Thai economy. To me, this is a Tom Yum Kung II crisis in the making.
Thailand is famous for bad debts. According to my estimation, based on National Credit Bureau (NCB) data, the level of bad debts in Thailand is 12.6% as of Q4/2023. This figure is in stark contract with the BOT's NPL figure of 2.66%.
I am not in a position to argue whose number is right. I only will say that if NPL is as low as the BOT's figure, Thai banks would not be extremely cautious about credit extension. And private credit growth would not sharply plummet to 1.2%. No one can hide a skeleton in the closet forever. Japan and US ran into a financial crisis when their NPL levels exceeded 5%. With 12.6% real NPL, the Thai financial system, for all intents and purposes, is in bankruptcy stage and will not function properly.
Am I being pessimistic or realistic? Thailand is an over-consumption nation. Over-consumption is the root of all problems. Demand for cash for consumption outpaced supply of cash from income. Therefore, domestic liquidity became inadequate, and the economy relied more and more on foreign financing. Uncontrolled consumption-demand created unsustainable debt levels, pushing the household debt to GDP ratio to 91.3%. Theoretically, policymakers can rein in excessive consumption by applying macroeconomic policies of high interest rates and conservative government spending. It is clear the current Thai government is pushing for the opposite policies.
Thailand is also facing an under-production problem. The Manufacturing Production Index was at 108.5 in January 2019 and was 99.9 in January of 2024, a disturbing 8.5% contraction. Inexperienced economists might attribute that to weak demand after Covid. The facts suggest that is not so. Consumption demand grew robustly at 6.2% in 2022 and 7.1% in 2023, compared to average consumption growth of 3.4% before the Covid outbreak. Thai consumers did consume; the problem is they did not consume Thai products.
This leads to the fourth problem: competition from China. There is no need to argue that Chinese products are both cheaper and better. Imports from China rose from 9.3 % of GDP in 2019 to 13.8% of GDP in 2023, causing the trade deficit gap to double from 676 billion baht to 1.295 trillion baht. The situation is likely to get worse in 2024 as China lowers product prices to boost exports. With these four problems of (1) inadequate liquidity, (2) a maddening level of bad debt, (3) shrinking manufacturing sector and (4) intense competition from China, the chances of Thailand escaping a crisis are slim. Call me a pessimist if you like, but at the end the truth shall be revealed as it was in 1997.