Thailand's Household Debt Problem
THB 10,000 handouts are not the solution
The digital wallet scheme is a major campaign promise by the Pheu Thai Party and PM Srettha. They promise THB10,000 (USD270) to eligible citizens to purchase consumer goods from participating merchants.
This one-off policy, however, will be largely ineffective at solving Thailand’s largest structural challenge; the heavy debt burden that most Thai households face.
Heavily Leveraged Households
Source BIS, TAM
Thailand’s household debt is one of the highest in the world. When stacked against its regional peers, the difference is stark. At more than 90% of GDP, household debt far supersedes other Asian economies.
Overly leveraged households are a problem for the Bank of Thailand, further easing of the Thai policy rate is feared to further incentivize borrowing by households.
Source: BIS, TAM
Household debt accumulation within Thailand is not due to unhinged spending by Thai households, but rational debt-taking in response to external events and public policy mistakes.
The first run-up in debt happened in the lead-up to the 1997 Asian Financial Crisis, which led to some de-leveraging afterwards with households opting to repair their balance sheet. The Thais could do so as they were free from any external shocks that required any large spending.
However, since 1997, Thai households have been faced with several large macro events that forced households to raise their borrowing levels. The 2008 Financial Crisis broke most things in the world, Telok Ayer Macro previously covered its impact on global trade, but for Thailand, it meant huge loan originations for households to tide through the crisis.
Not long later, Thailand was hit by a once-in-a-lifetime flood that cost USD46.5bn in damages, the government exacerbated the debt problem by initiating a “first-time car buyer tax rebate”. What was meant to boost growth and repair consumption patterns turned into a major catalyst for debt-taking by households. Consumers were incentivized to borrow to fund the purchase of automobiles that they had struggled to afford. When the scheme ended, policymakers found that Thai consumers were less willing to buy cars and those that were willing to, were heavily indebted (Muthitacharoen, 2017). The flood added another pressure point, with nearly 1/6 of the population displaced, households borrowed to repair their way of life and bounce back.
Since then, ultra-low global interest rates disincentivised Thai households to draw down their debt levels which led to a rather stagnant level of household debt through the mid-2010s.
While this situation has already become untenable for Thai households, the Pandemic pushed the debt problem into a crisis. While it has largely moderated since the worst of the pandemic, household debt remains exceptionally high.
One must consider that amidst all these pressures on households, Thailand has been suffering from an ageing population, an unstable political atmosphere and mild economic growth. These background factors increase financial pressure on Thai households which requires additional borrowing, especially among the young and the poor.
Poor Households Unable to Deleverage
Source: Krungsri Resarch, NSO
Krungsri Research’s findings are particularly concerning. Outside of the richest 1% of Thai households with debt, almost every segment of society has low rates of saving. Furthermore, the bottom 85% spend more than they earn, implying that these people rely on welfare or credit to sustain their day-to-day living. This difficult situation implies that most Thai households are hand-to-mouth consumers that face considerable cost of living.
Source Krungsri Resaerch, BIS, TAM
Further investigations by Kungsri Research also suggest that Thai households are using a significant portion of their income to service debt. Households are likely pressured on both ends. They are suffering from both low wage growth and mounting debt servicing and living costs.
To further add pain, 56% of their economy relies on private consumption. Putting two and two together, we see that consumers are likely hand-to-mouth, and a cash injection will create strong multiplier effects. However, growth derived will likely be short-lived as debt servicing will likely be amongst the Thais’ top priorities, thereby weakening the consumption-boosting nature of a stimulus.
Thai Households are in a Debt Trap
Source: Bank of Thailand, TAM
Credit cards and personal loans are likely being used to subsidize the expenses of Thai households. We see the most indebted group of households also owe the most amount to credit card debt. This presents 2 potential problems.
Thai households are in a perpetual cycle of debt and repayment. Each passing cycle deepens the problem as debt servicing becomes more costly and harder for the government to rectify.
The prominence of “Unproductive Debt” implies that credit growth in Thailand is less stimulative than competing economies. Unlike home loans or business loans, credit card debt is distinctively unproductive. Loans used to finance asset purchases could be expected to pay off in the long run and provide a net gain. Credit card debt is unlikely to generate future wealth and it comes with high interest rates.
Source: Bank of Thailand, TAM
Recent data suggest that household credit quality has taken a turn for the worse. Across all debt types, Non-Performing Loans (NPL) have risen in the past 2 years, indicating that the consumer’s position has softened since the pandemic. Most worryingly, we see credit card debt, which has the highest usage amongst low-income households and the highest interest rates, violently increase in NPLs.
NPL levels are slowly approaching unacceptable levels. NPLs in the US hit a high of 5% during the 2008 Financial Crisis, considering that credit card NPLs are touching that territory, the situation is primed to deteriorate quickly.
Youth bear the brunt
Taken together, these two graphs hint at a concerning trend, Thai workers rack up debt in their early years and struggle to deleverage as they age. Debt levels remain high, although there is some gentle decline through their prime working ages. This suggests that while Thai workers’ wages do grow over time and can slightly deleverage, but its slow pace hints at a lacklustre wage growth pathway with significant servicing and living costs.
Alarmingly, the delinquency rate is extremely high in Thailand, hitting over 20% for those in their late 20s, and early 30s. While it is expected that young workers are the least credit-worthy due to small asset holdings, this level of delinquency far surpasses levels seen in most economies.
Consumers are overly burdened with debt which will be a continuing consumption headwind. This is exacerbated by the composition of delinquency rates. Delinquency rates are concentrated in prime working-aged workers which is the age group that is expected to lead the economy in consumption figures.
“Non-productive loans” (Auto, Personal and Credit Card loans) make up the vast majority of debt in their working life. While business or home loans may be a source of wealth generation and allow for future asset appreciation, non-productive loans will weigh on the lifetime spending potential for Thai households. It seems that the vast majority of debt underwritten is used to subsidize the Thai lifestyle instead of building for the future.
Government Response
Of course, as we have established earlier, this increase in debt is not due to irrational behaviour or reckless spending by households but rather the accumulated result of reacting to external pressures. This means that good public policy is imperative to fixing these debt levels.
Policymakers rolled out a THB10bn debt re-structuring program to alleviate the pressure on households, the specifics are outlined below.
Credit card NPLs are forced into a refinancing agreement for up to 10 years, with interest being cut to 3-5% from the current 16-25%
Student loans are seeing reduced interest rates, reduced monthly payments and guarantor relief.
Retailers and SMEs are offered a debt moratorium with some undergoing debt restructuring.
Farmers’ debt payment is suspended for 3 years.
PM Srettha has also managed to push through his THB10,000 digital wallet scheme with recipients having to adhere to the following criteria.
Above 16 years old as of 30 Sep 24
Not more than THB500,000 in savings
Earning not more than THB840,000 annually or THB70,000 a month
Filed taxes for 2023
Approximately 50mn citizens are expected to qualify for this program.
Is it enough?
Firstly, the THB10bn debt restructuring program is a welcomed source of support for the most indebted of households and businesses. The most vulnerable of Thai citizens will benefit greatly from this scheme. However, it is likely too little too late, the size of household debt is now ~USD445bn (~THB16,000bn), and the new policy is unlikely to fix structural damages.
Secondly, Telok Ayer Macro is sceptical about the effectiveness of the digital wallet scheme. On the growth front, with most households being heavily in debt, we are not sure if the cash transfer will massively increase consumption. Households may use cash transfers for their daily spending and transfer money they otherwise would have spent to service their debt. Overall, this might mean that total consumption may rise less than anticipated.
On the debt-servicing front, while indebted households would greatly appreciate THB10,000, this measure is unlikely to result in significant deleveraging. According to CEIC data, the Average Household Debt is a whopping THB197,255, the THB10,000 will not be able to make a dent in their total liabilities. In short, the digital wallet scheme will likely be ineffective in stimulating consumption while also struggling to rectify the household debt problem.
Instead of subsidising demand, greater efforts should be undertaken to restructure loans and extend debt moratoriums while ensuring that monetary policy is kept tight. This would provide some short-term relief for households and prevent further debt-taking. Meanwhile, the government should expand their industrial policies to encourage manufacturing expansions to take advantage of trade dislocation due to the US-China tensions. Regardless, the household debt situation has evolved past short-term fixes and will require a massive structure reform to tame.