Rectify financial imbalances before it's too late

On the surface, the Thai economy appears to be doing well. Economic growth this year is expected to range between 4.5 to 5.5 per cent. Unemployment, which is the envy of the world, is below 1 per cent. Exports in January rebounded to 16.1 per cent. And the government is set to unveil its mega-investment of Bt2.2 trillion, earmarked for the next five years.

Yet underlying this seemingly buoyant growth rate are growing financial imbalances. If left unchecked, these will destabilise the Thai economy and lead to a crisis similar to the 1997 debacle. The financial imbalances are apparently in the government's fiscal policy management, the Bank of Thailand's (BOT) monetary policy management, the financial and real estate sector and household debt.

Let's start with the fiscal imbalances. The government is committed to saddling Thailand with further debt through its populist policies and infrastructure spending. Government debt, inside and outside the budget, is burgeoning. The government continues to run a deficit of Bt300 billion this fiscal year, after a Bt400 billion deficit in the previous fiscal year. The government is to invest Bt2.2 trillion until 2020 to improve the country's infrastructure. Most of this money will come from borrowing.

"Unless we can see 6 per cent GDP growth in the next seven years, public debt to GDP ratio is like to exceed 50 per cent. We expect the debt ratio to peak at around 55 per cent in 2018," TISCO said in its report yesterday.

But this is a fairly optimistic view on Thailand's public debt because there are numerous other debts swept under the carpet. And in the event of a downturn, the public debt could swell out of control, similar to what Spain and Greece are now experiencing.

The state-controlled banks are in trouble. The SME Bank and IslamBank have combined bad debt of almost Bt80 billion. They would have gone bust if they were privately owned. Krung Thai Bank's lending portfolio has high exposure to government-related projects. The Government Housing Bank is lending to subprime homeowners, similar to the US subprime home market.

But the real story is the Bank for Agriculture and Agricultural (BAAC) Cooperatives. The debt incurred by the BAAC in its rice, and other crop, price intervention scheme alone now stands at Bt601,072 billion - equal to half a percentage point of the country's GDP. In the end, the government will have to fiscalise the debt of the state-owned banks. We are seeing fresh figures of almost Bt700,000 billion already.

In the monetary policy management, the BOT is focusing on boosting growth rather than safeguarding price stability. Incredibly, it sees little risk in asset price bubbles. According to DBS Group Research (" Keeping an Eeye on Excesses", February 27, 2012), asset prices in Thailand are growing to create financial imbalances. The BOT still keeps its interest rate below inflation, yielding a negative rate of 0.85 per cent. Between 2005 and the present, the BOT has maintained, on average, a negative interest rate of 0.35 per cent. This reflects its pro-growth policy and has forced money into speculative investment. The Thai rate is already one of the lowest in the region and asset price bubbles are forming, yet Finance Minister Kittiratt Na Ranong still favours further rate cuts.

The Stock Exchange of Thailand (SET) index has twice doubled since 2009, rising from 400 in 2009 at the height of the US financial crisis, to 800 in mid-2011. Now it has almost doubled itself again by passing the 1,500 mark. Many expect it to hit 1,600. SET president, Jarumporn Chotkiasathira, has come out to warn of 120 stocks whose prices and valuations show bubble signs. In spite of hot money from capital inflow, the banking authorities have yet to ponder any measures to stem the inflow that is creating bubbles.

The real estate market is also facing price bubbles. Since 2009, real estate prices have surged 36 per cent - ahead of a cumulative inflation rate of 15 per cent over the same period. The middle class and low-income families will have a more difficult time owning homes if land and real estate prices continue this trend.

Bank loans to individuals have been jumping sharply from 15 per cent in 2005 to almost 25 per cent now. As a result, Thai household debt is rising at an alarming rate. The National Economic and Social Development Board has come up with an outstanding household debt figure of Bt2.9 trillion, 21 per cent of which represents car loans, 33 per cent motorcycle loans and 29 per cent personal loans.

The asset price bubbles and financial imbalances in the private and public sectors are worrying signs that should be dealt with early. Global economic recovery is slim, as evidenced by negative growth rates in the US, Europe and Japan in the final quarter of 2012. The government should cut its populist and mega-project spending. The BOT must take the punch bowl away instead of waiting for the party to be over. The private sector should move on with a sense of caution. That's the way to go.