Rising non-performing loans (NPLs) and decelerating investments could drag down the country's economic growth this year and next, warns the Fiscal Policy Office chief.
Somchai: SMEs most vulnerable in a sagging economy
Even though bad loans are rising at a slow pace, special mention loans are higher, defined as overdue from 30 to 90 days, said director-general Somchai Sujjapongse.
Small and medium-sized enterprises are the most vulnerable in a sagging economy, while swelling household debt has deteriorated consumer purchasing power, he said, adding public investment will decline further if the political impasse continues.
Despite a high level of public investment applications, this does not mean investors will immediately embark on that investment, he said, perhaps delaying until the political situation shakes out.
Decelerating investment growth could prompt the country's credit ratings agencies to downgrade Thailand, raising both private and government financial costs.
A credit rating threat looms after the Japan Credit Rating Agency recently lowered that country's outlook to negative from stable. Big credit rating firms such as Moody's Investors Service and Standard and Poor's could follow the same path for Thailand this year or next if political tension remains.
Political unrest has gripped the country since late October. Former caretaker prime minister Yingluck Shinawatra dissolved the house on Dec 9 and called a snap election after hundreds of thousands of people took to the streets, demanding her cabinet step down to pave the way for reform. Although Ms Yingluck and nine ministers were removed from office by the charter court for the transfer of National Security Office head Thawil Pliensri, a political deadlock remains as some caretaker ministers remain in place.
Mr Somchai said previous public investment could help offset the decline in private investment, but it cannot prime the economy's engine with a caretaker government.
"We may prop up the economy and deliver growth this year, but it would only be a maximum of 2%. The country's economy is on the verge of contraction next year if the political situation continues to unravel," he said.
Should the political stalemate remain, spillover effects such as higher NPLs, banks' reluctance to extend loans, business failures and rising unemployment could take place, said Mr Somchai.
The Finance Ministry is scheduled to summon the executives of eight specialised financial institutions (SFIs) today to outline measures to prevent bad loans from rising, he said. The ministry wants these SFIs to solve overdue payment problems before the loans turn sour.
As of February, SFIs regulated by the Finance Ministry had a combined NPL ratio of 5.34% of their loans outstanding, well above commercial banks' 2.3%.
Concerns over higher NPLs have compelled banks to tighten their loan approvals.
The Bank of Thailand said last week the retail loan approval rate fell to 50% in the first quarter from 70% in the final quarter last year, as the business loan approval rate remained steady at 70%. It added bank loans grew 9.8% year-on-year and 11% on a quarterly basis in the first quarter due to the economic slowdown.
State-owned financial institutions with the exception of Islamic Bank of Thailand and the Bank for Agriculture and Agricultural Cooperatives extended 69 billion baht in loans so far this year, well below their target of 129 billion.
The Finance Ministry plans to raise state-run financial institutions' loan growth target to 300 billion baht and encourage the Thai Credit Guarantee Corporation (TCG) to increase its overall guarantee target to revitalise the economy if the country slips into recession, defined by contractions for two consecutive quarters, he said. TCG has the capacity to provide an additional 287 billion baht in credit guarantees after it guaranteed 177 billion worth of loans.