Is it all the Bank of Thailand's fault?

Consumers inquire about loans and other financial services at a money expo in November last year. The high level of household debt has forced the central bank to curb consumer lending. (Photo by Somchai Poomlard)

Currently, the two most pressing economic issues in Thailand are the appreciation of the baht and the high level of household debt.

While most people understand the negative effects of the rising baht on exports and tourism, few can visualise the adverse consequences of high household debt on the economy. No, high household debt will not cause an impact like the Tom Yum Kung financial crisis of 1997. That crisis arose from too much foreign debt which triggered a massive outflow of capital. Domestic debt does not behave that way. Household debt is in the local currency, the baht, and will never ever leave the country. However, I will discuss this subject later.

The high household debt level has forced the Thai central bank to curb consumer lending. So why is Thailand experiencing household debt, currently at 78.7% of GDP, which ranks as the second-highest in Asia and 11th-highest in the world?

The first logical explanation for such an alarming level of household debt could be the large income disparity between the upper and the middle class. To attain a higher standard of living, middle-class people have no choice but to acquire credit card, automobile and housing loans.

The second explanation puts the blame on the lack of financial discipline of consumers. Thais just love to live beyond their means. If we cannot make payments on existing loans, we just get new loans. If no banks will lend us money, we will go to the street and pay exuberant interest rates.

The third explanation for the high household debt is the easy-credit system. We all remember the days when banks begged us to take loans or shoved credit card applications in front of our faces as we strolled through shopping malls.

Before we make a character judgement on Thai borrowers and the danger of debt, let's take a look at the three countries with the world's highest level of household debt to GDP.

Top honours go to Switzerland where household debt is 128.7% of GDP, followed by Australia (120.3%) and Denmark (115.4%). We might conclude the Swiss, the Aussies, and the Danes are the world's worst borrowers. And that their economies are in big trouble because of their extremely high level of household debt. However, neither conclusion is true. Their economies are doing fine and so are their people. So why all the fuss about household debt?

Unlike the case of Thailand, data from other developing and established economies clearly indicate that a high level of household debt has nothing to do with the income gap or a lack of financial discipline. More importantly, high household debt does not interfere with their growth potential.

Let's look at the case of Switzerland. Even though its household debt level has been above 100% of GDP since 2000 and reached 127.7% in 2017, the Swiss economy has not gone bankrupt and commercial banks in Switzerland have not been plagued with non-performing loans. The Swiss economy has grown healthily at an average 1.6% for the last five years. Meanwhile the household debt level has jumped to almost 130% of GDP, yet there is no sign of concern in Switzerland. I was there last year and can confirm the Swiss yodel has lost none of its vigour.

In Thailand, levels of household debt are much lower, having grown from 45.1% in 2005 to the current level of less than 80%. But they have forced the Bank of Thailand (BoT) to put the brakes on consumer lending since last year. The first regulation is a loan-to-value (LTV) control on housing loans. I am convinced that regulations on automobile loans will be next.

So what are the differences between the Swiss economy and the Thai economy? The key difference is the ability of borrowers to pay back loans thanks to the different levels of per-capita income.

Citizens of developed economies like Switzerland, Australia and Denmark have high per-capita income. Swiss per-capita income is US$82,950 while Thai per-capita income is US$7,187. In other words, Thai people's annual income is only 8.7% that of the Swiss. Therefore, Switzerland can have a household debt-GDP level of 130% and still be okay, while Thailand struggles with a level of around 80%.

The most interesting thing is that in Switzerland debt is growing far slower than GDP, at an average of 1.2%, while in Thailand it is growing at 6.1%. In short, we could say that the Swiss use income to finance debt, but the Thais use debt to finance income.

While the BoT is absolutely right to control consumer lending, the brakes should have been applied when Thai household debt to GDP passed the 60% mark in 2010, rather than waiting until 2018.

The big question is: Why has Thai household debt accelerated in the last decade? From my perspective the answer is obvious: the flood of liquidity into the country after the Lehman Brothers collapse sparked a global crisis in 2008. Capital inflows caused a sudden rise in local liquidity. The liquidity flood prompted banks to give easy credit. Unfortunately, after the Tom Yum Kung crisis, businesses are reluctant to take excessive loans. Only hungry consumers are ready to blindly borrow.

A primary function of a central bank is to control credit. Therefore, the Bank of Thailand cannot escape responsibility for the unsustainable consumer debt level. Thai borrowers are not the culprits, they are human beings in a consumerist world of temptations. With the benefit of hindsight we can say that in 2010, the Bank of Thailand should have curbed the excessive capital flowing in from the quantitative easing programmes of developed economies. But instead, the BoT permitted foreign liquidity to gush into the country by absorbing it into foreign reserves.

While the central bank is proud of its ballooning exchange reserves -- which, in its eyes, reflect stability -- I see this as an indicator of something wrong. Under the flexible exchange rate system, foreign reserves should be stable, not ballooning nor deflating.

The Bank of Thailand's actions have triggered two negative legacies for the Thai economy – a high level of sustainable household debt and a 22.3% appreciation of the Thai currency. The question now is whether these negative consequences be reversed or at the very least lessened.