Rising consumer loans endanger Thailand's economic stability
To be the bearer of bad news is not pleasant. But recent signs are alarming. And unless there is a strong effort to reverse current trends, the recent surge in consumer loans could see another home-grown financial crisis.
The recent concerns expressed by the Bank of Thailand on the surge in consumer loans caused a frenzy in the media, but to determine whether or not the concern is valid, I have tried to answer four main questions: 1) Has there been an unusual surge in loans compared to national revenue (a sign of a bubble) 2)? Is Thailand's recent loan growth alarming when compared with international standards? (3) What possible triggers threaten to burst the bubble (if it exists)? 4) If it exists, how many years do we have left before the bubble bursts?
To answer the first question, I have looked at the year-on-year growth of total domestic lending compared to the nation's nominal gross domestic product (GDP) and private consumption. And in the last two years, loan growth has evidently been higher than GDP and consumption, which signifies a credit boom above real fundamentals. This gap is similar to conditions that existed in periods prior to two previous domestic financial crises: in 1983-84, and in 1987-97 (although the current gap is smaller than it was in those two episodes).
Arguably, this could be the sign of a bubble forming.
To answer the second question, I have computed the ratio of Thailand's consumer loans per capita (the cause of the Bank of Thailand's concern) to GDP per capita (a proxy for citizens' income) and compared this ratio with those in our neighbouring and in industrialised countries. The rationale is that, if this ratio is high and rising by international standards, it is an alarming sign of the presence of a bubble.
Thailand's ratio (25.5 per cent) is far lower than my sample's average (46.7 per cent), but the acceleration of this ratio in the last two years is quite remarkable. Notably, our trend is similar to those of neighbouring countries, especially South Korea, Malaysia and Singapore.
In short, by international standards, the level of our consumer loans compared to our ability to find revenue is still acceptable, but the rising trend of loan growth might be a cause of concern.
To answer the third question - what might trigger the bubble's burst, should one form - a thought experiment is exercised. To trigger the bursting of a lending bubble, there are two mechanisms. The first is a reduction of borrowers' income to pay monthly instalments and/or the principal. The second is an increase in lending costs, ie, interest expense.
A fall in income could be caused by: 1) a global crisis that leads Thai exports to decline, and subsequently to the deterioration of the domestic economy; 2) a failure in government policy, such as the abolition of the government's rice-pledging scheme; and 3) on the expenditure side, a surge in inflation as a result of the unexpected revival in the global economy and/or a liquidity injection by global central banks. In that event, the US Federal Reserve would have to hike the Fed Fund Rate, which would eventually lead to a surge in the BOT's policy rate and Thailand's commercial bank lending rates.
On the final question - how much time we have left before the next bubble bursts - I have computed the loan-to-GDP ratio on a 30-year horizon and found that our current ratio (86.4 per cent) is similar to the one in 1993 (84.1 per cent), four years before the 1997 financial crisis. Although the economic environment now is different from that it 1993 (notably the exchange-rate regime), there is a possibility that the next crisis is looming on the horizon if loan growth (and especially consumer loans) steadily rise above the level of income generated in Thailand.
In sum, in trying to answer the question of whether there is a consumer loan bubble in Thailand, I have come up with three findings. First, the empirical evidence shows that there is a chance of a domestic consumer loan bubble forming that, if left unchecked, might provide the seeds of the next financial crisis. Second, there are three events - a global economic crisis, a Thai political crisis and a rise in global interest rates - that could serve as potential triggers for a bubble bursting. Finally, although the environment is different, there is also a possibility that the next crisis might emerge in 2017, giving the lessons we learned from the Asian financial crisis 15 years ago.
Borrowers, lenders, investors and policymakers of Thailand - be prepared.