How Sustainable is Thailand’s Welfare and Debt Economic Model?

The bullish mainstream says that the current meltdown in the emerging markets has merely been a shakeout and that economic growth will eventually prevail.

But the $64 trillion question is, what drives economic growth?

In the case of Thailand, how dependable has her welfare-debt based growth model been?

The Wall Street Journal Real Time Economic Blog provides precious clues on these: (bold mine)

Thailand is discovering that putting the populist genie back in the bottle is harder than letting it out.

Since introducing a multi-billion dollar subsidy for the country’s rice farmers in 2011, the country has seen a plethora of other special interest groups demand handouts of their own. Among them, rubber planters this month staged running battles with riot police in southern Thailand in their bid to secure higher minimum prices for their harvests.

Now the country’s corn farmers are getting in on the act, last week blocking roads in northern Thailand, and raising questions among economists over whether Prime Minister Yingluck Shinawatra’s government will be able to roll back the scale of its handouts – and what the consequences might be if it doesn’t.

Central bank governor Prasarn Trairatvorakul warned an investor conference last week that populist subsidies “add to micro-level risks by making households undisciplined and addicted to ‘easy’ money, while also adding to macro-level risks by stretching fiscal resources without enhancing competitiveness in any meaningful way.”

Give them your hand, they want your arm. See how 'free lunch' policies fosters dependency or addiction?

And indeed populist welfarism via subsidies has been adding pressure to Thai’s government deteriorating fiscal conditions…(bold mine)

The subsidies are adding to the government’s budget, which already is bloated by a rubber subsidy and spending of 700 billion baht, or $22 billion, to support rice farmers since Ms. Yingluck was elected – an amount equal to 6% of Thailand’s gross domestic product last year.

…as well as compounding on the economy’s addiction to debt (bold mine)

Ms. Yingluck’s government has defended the subsidies as a way of supporting the growth of a strong consumer economy in rural Thailand, the heartland of the ruling Puea Thai, or For Thais, Party.

But the subsidies also are threatening to disrupt Thailand’s economy at a time when global investors are concerned about rising public and private debt levels in many emerging markets. Huge subsidies in countries like Thailand, Indonesia and India have added to government debt burdens – an important reason why investors have turned cold on these nations stocks and currencies this year.

Again Thai’s system depends on the Risk ON environment (low interest rates, strong baht, and debt financed activities) provided by zero bound rates, which the bond vigilantes has been exposing as untenable.

The doleouts have also contributed to the near doubling of Thai government’s external debt as well as to the surge in private sector debt (bold mine)

At the same time, the government’s goal of raising living standards and consumer spending in rural areas appears to be having unintended consequences.

Some farmers are using the promise of guaranteed future incomes as a basis for borrowing more money. Thailand’s total household debt is now pushing close to 80% of GDP, with a third of the lending provided by government-run institutions such as the Bank for Agriculture and Agricultural Cooperatives and the Government Housing Bank, which aren’t subject to regulatory control by the central bank.

So aside from zero bound rates, government sponsored lending and guarantees has compounded on the debt financed consumer spending binge.

And notice, when mainstream emphasize on consumer economy, what they really mean is a debt financed consumer spending, which is unproductive. 

Thailand's loans to the private sector has soared by about 30% in 2 years.

And part of this spending more than producing can be seen in Thai’s largely negative balance of trade.

Yet more unintended consequences from state subsidies…

A tax rebate scheme for first-time car buyers that was designed to stimulate production in Thailand’s auto sector, which was badly hit by severe flooding in 2011, also has raised debt to levels that have worried some analysts.

Consultancy IHS Global estimates that 10% of Thais who took out loans under the program have either defaulted on payments or unwound the borrowings, creating a glut of second-hand cars.

Thailand’s “free lunch” redistributive and debt financed economic model, again, has been highly dependent on the maintenance of a low interest rate environment which seems likely about to change.

Yet with the recent bout of spending splurge that has racked up systemic debt, the Thai economy has become increasingly vulnerable to the actions of the bond vigilantes. 

As for shakeout on emerging Asia, I believe we may see more bouts of volatility ahead.