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Rising household debt puts junta in a bind

Central Embassy, a sprawling luxury shopping center in Bangkok, remains quiet shortly before noon on a weekday.

BANGKOK -- Thailand's post-coup junta faces a paradox: To correct the economic policy missteps of the previous government, it may be forced to implement very similar measures itself.

     Private consumption in Thailand is anemic, due largely to the explosion in household debt brought on by policies introduced under former Prime Minister Yingluck Shinawatra. Aggressive government spending could offset this and help kick-start growth, but doing so would likely be seen as delivering handouts -- the same criticism that eventually brought down the previous government.

     With increased household debt crimping private spending, concerns are growing that a delay in government investment will cause the economy sputter, said Supant Mongkolsuthree, chairman of the Federation of Thai Industries, at a regular meeting with the interim government on March 3.

     The warning runs counter to the government's stance that the economy is recovering and could be taken as criticism of the junta.

     Thailand's economic stagnation has its roots in the political turmoil that boiled over in late 2013, a result of growing antagonism between supporters and opponents of Yingluck Shinawatra, younger sister of fugitive former Prime Minister Thaksin Shinawatra. 

     With the general election in February 2014 invalidated by the constitutional court, the Yingluck administration effectively fell apart. The implementation of budget appropriations and authorization of investment projects came to a halt, throwing the nation's economy into a tailspin.

     Thailand's gross domestic product grew 0.7% in 2014 from the previous year, the lowest growth since 2011, when it showed zero growth in the wake of severe flooding, according to the National Economic and Social Development Board. The slowed growth was attributed to a 2.8% plunge in investment and a meager 0.3% rise in private consumption.

Legacy of borrowing

Household debt is near a "crisis point," the Bangkok Post said in its March 4 edition, having reached 82.4% of nominal GDP at the end of September 2014, up about 29 percentage points from the end of 2008. It is likely to hit 90% of GDP in 2015, and may lead to a recurrence of the 1997 Asian currency crisis, the paper said, quoting an expert.

     This surge in household debt is a legacy of the Yingluck administration, which introduced a series of sweeping stimulus measures upon its formation, such as tax breaks for first-time car buyers.

     Auto sales in Thailand soared 80% in 2012 from the previous year to 1.44 million vehicles under the tax incentive program, which offered rebates of up to 100,000 baht ($3,111). But the program prompted a large number of buyers to take out loans despite not being on solid financial footing. As a result, the outstanding balance of liabilities in the country increased sharply in 2012.

     Global falls in prices of agricultural produce only made matters worse. Prices of rice, the country's main farm product, and natural rubber, plunged some 10% and 40%, respectively, at the end of 2014 from a year earlier. This dealt a serious blows to farmers, who account for 40% of Thailand's population.

     Starting at the end of 2014, the interim government provided subsidies worth a total of about 100 billion baht to growers of rice and natural rubber. But these subsidies amounted to just a drop in the bucket, and private consumption has shown no signs of picking up.

     In fact, the private consumption index compiled by the Bank of Thailand dropped 1.5% year-on-year in January.

No-win situation

Prime Minister Prayuth Chan-ocha announced an additional package of stimulus measures at the end of February. This included an expenditure of 116 billion baht to arrange debt waivers and restructurings for some 800,000 borrowers who have taken out loans from the state-owned Bank for Agriculture and Agricultural Cooperatives.

     Prayuth stressed that the additional support for low-income people will stimulate the economy. Nevertheless, the nation's economic outlook remains unclear.

     The subsidy program introduced by the Yingluck administration to buy rice from growers for up to 50% above market prices triggered its downfall and her impeachment. The program has become synonymous with budgetary handouts, as total payments far exceeded the administration's projection of 500 billion baht.

     Although the program helped the Thai economy pick up temporarily, it reportedly resulted in a loss of 700 billion baht, due in part to flaws in related systems.

     This legacy makes it difficult for the interim government to introduce bold stimulus measures, but its only other choice seems to be introducing unpopular austerity measures.

     The NESDB remains bullish, forecasting that Thailand's GDP will expand between 3.5% and 4.5% in 2015. But given the dilemma facing the government, the economy is unlikely to regain its cruising speed of 5% growth anytime soon.

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