Rapid growth in household debt may not be a systemic risk to the whole Asia-Pacific region, but it is dampening economic growth prospects for Thailand in 2015.
Thai Government Downgrades 2015 Growth for Third Time
Thailand’s finance ministry cut its economic growth forecast for Thailand in 2015 to 3.0% y-o-y growth from 3.7% y-o-y growth previously expected, and represented the third downward forecast adjustment so far this year.
Weaker-than-expected export growth partly explains the downgrade, but slow consumer demand, resulting from high levels of household debt also explain the sluggishness in Thailand’s economy.
Slower Growth, High Debt Weighs on Consumer Demand
Since 2005, household debt has been rising rapidly as Thai consumers have taken on credit cards, car loans and other types of financing. With weaker growth in the export and tourism sectors – key sources of employment – consumers have come under increasing pressure from high debt levels.
Thailand: Household Debt/GDP Ratio, 2005-2014
Low Interest Rates Likely for Near-Term
What this likely means in the short-term is that Thai authorities will likely keep interest rates low to ease consumer’s debt burden. This is all the more likely given that inflation is currently at historical lows.
Heightened Risks for State Banks
However, the slowing economy and high debt levels may increase pressure on the banking sector. Fitch Rating sounded the alarm in a recent research note, where it said that high debt levels will threaten banks asset quality in a weak economic growth environment, and cited state policy banks as being particularly at risk, since they lend to lower-income households, who would most likely suffer most from the weakening economy.
Stricter controls on credit issuance will be necessary, as well as increased levels of capitalization, according to KKR Research. But, as much as high household debt is a problem for the banking sector, more must be done to get the economy moving again.
Policy Changes Needed for Faster Growth
For many, a shift away from overreliance on the agricultural sector and promotion of higher-value added manufacturing may help solve the current economic malaise. Alternatively, increased investment – until recently held up by political inertia – may help increase economic growth.
Political Gridlock Stymies Policy Stimulus
However, these views overlook the political situation that currently exists in Thailand which, for many, is the real drag on growth. A lack of policy expertise in the new administration and an unwillingness to take hard decisions for fear of inflaming a sensitive populace will likely mean that government policy efforts will be muted, rather than active, in the coming months.
As such, problems with high household debts will likely remain, meaning stress for government-backed lenders and subdued demand in the consumer sector through 2015 and, most likely, into 2016.