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It's time everybody became serious about their household debts

HOUSEHOLD debt in Thailand is on the rise. Although the latest figure of 78 per cent of gross domestic product is for the second quarter, the new third-quarter figure, scheduled to be released this month, is sure to break 80 per cent, a new high. So households are becoming more indebted, and very quickly.

Worst still, Thailand's household debt is listed by the World Bank as among the fastest-growing in East Asia, with a pace that matches China and Malaysia. While the advanced economies have entered the phase of deleveraging household debts, East Asia appears to have done the opposite.

But is household debt at 78 per cent of GDP a threat? We can't be sure. Many countries, particularly developed ones such as Switzerland and New Zealand, have household debts way beyond 100 per cent and still survive without a crisis. And yet again, many countries with household debts at barely 100 per cent, developed ones included, have faced serious economic crises. The latest global financial crisis is one example that was undeniably fuelled by the growth in mortgages among sub-prime borrowers in the United States. Some countries have even gone into a crisis with much lower household debt-to-GDP ratios.

So unlike current-account deficits, in which most economists have a better sense of what level may actually trigger a crisis, the crisis level of household debts remains open for debate. And unlike public debts, there is no sustainability framework to caution us against rising household debts.

But even if the current level of household debts in Thailand is not crisis-prone, it puts the household sector in a more vulnerable state.

Where do household debts in Thailand come from? Partly to blame is the first-car programme and partly to blame is the flood of 2011. After the flood, inundated households needed to replace many of their durable goods, including electrical appliances and furniture, which are all big-ticket purchases. Hence financing these large outlays was often the only option, which explains the jump from 65 per cent of GDP to 70 per cent in the final quarter of 2011. Then the first-car programme came in 2012, and the rest is of course history.

The vulnerability is inherent to the financial sector as well, and that got the rating agency Standard & Poor's worried. The rating outlooks for four Malaysian banks have been lowered for precisely this reason, as Malaysian household debt stood at 83 per cent of GDP.

For Thailand, the most rapid credit expansions were in instalment loans after the government's first-car programme and in unsecured lending. It is not only that both of these borrowings are consumption-related, not income-generating, they are collateralised with depreciating assets or none at all. This means they are backed purely by the income streams of the borrowers, which may be exposed to common risk factors such as an abrupt economic downturn.

Though most vocal about this issue earlier in the year, the Bank of Thailand possesses limited power to supervise and control the growth of household debts. Only about half of the lending to the household sector is by commercial banks and their subsidiaries. About 30 per cent is by specialised financial institutions (SFIs) owned by the government, and another 15 per cent by savings cooperatives. The BOT may be able to offer recommendations to the latter two groups, but they are not required to follow them.

And to make things worse, the level of household debt here does not include the semi-formal sector, such as the Village Funds, and definitely not informal lending. In other words, nobody really knows how deep the roots go.

Like it or not, we must deal with growing household debt in Thailand. The strong growth in this segment has been concentrated rate-insensitive credit, such as instalment loans and unsecured lending. Hence, contrary to most commentaries, raising the central bank's policy rate is not the solution to the household-debt problem.

We need to redevelop a saving culture over the current borrowing one. Households must learn that savings are rewarding, while reckless borrowing is not. Lenders will need to slow credit stimulation, while maintaining high prudential standards. It also will require the authorities to work together to cover all of the sources of household debts.

There is still time for us to handle the issue delicately. As experiences have shown, if we do not deal with Thailand's credit culture now, the worst is yet to come. And when it does, a slowdown in consumption will be the least of our worries.

Dr Benjarong Suwankiri, head of TMB Analytics, the economic analysis unit at TMB Bank, can be reached at Views expressed in this article are those of the author and not of TMB Bank or its executives.

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