Thailand’s Credit Bubble: Rising Baht is a Symptom Not the Disease

Thai’s former prime minister adores Abenomics. He claims that a rising currency the Thai baht may spark a crisis.

From Nationalmultimedia.com

Former prime minister Thaksin Shinawatra warned yesterday that a lack of cooperation between the central bank and the Finance Ministry in reining in the strengthening baht could lead to a new financial crisis for Thailand.

Thaksin said the current economic indexes were worrying. "I like looking at different indexes and often get alarmed," he said.

"During the crisis, only the paranoid survived," he added, quoting Andrew Grove, former chief executive of computer-chip maker Intel.

The latest message on his Facebook account (www.facebook.com/thaksinofficial) posted yesterday afternoon said that Japan was able to achieve a GDP growth of 3.5 per cent in the first quarter because the Bank of Japan works directly with the Japanese government. He said Thailand's problem was that the Bank of Thailand was independent, and he accused the central bank of refusing to listen to the government.

"They [the Japanese] have a holistic approach to dealing with their economic problems. Their monetary policy and their fiscal policy are united," Thaksin said.

I have previously pointed out that Thailand has been nursing and blowing a bubble. Here is an update

Thailand’s loans to the private sector has spiked by nearly 40% since 2010 chart from tradingeconomics.com. That’s about 17%+ annual growth in the last 2 years + in a economy that has recently grown by an annual rate of 5.3%

Thailand’s debt to gdp in 2011 was at 132%. Current the explosive growth of loans imply that Thailand’s debt to gdp ratio nears or is at the 1997 highs of 166%.

And since banks has accounted for the gist of lending, domestic credit sourced from the banking sector in 2011 was at 150.78. This should be much larger today, perhaps near or at the 1997 levels of 177%

The credit boom in Thailand has led to swelling trade deficits. This implies that the Thais have been spending more than they have been producing, such that the consumption boom has been financed through credit expansion. This also implies reduced productivity as resources are being squandered on yield chasing and rampant speculative activities.

The former Thai PM sees the Japan’s model as a worthy paradigm to emulate. But the Thai government has already been doing an Abenomics but at a modest rate.

The Thai’s government budget has swung from surpluses to deficits over the last few years, which means government spending has increasingly been outpacing revenues.

And given the rate of increase in spending, the Thai government-debt to gdp has marginally risen the recent years. The subdued effect from rising government expenditures has been due to the bloated denominator from credit driven boom

And where does the Thai government get its funding to finance government’s accelerated spending? Well like the private sector, through debt expansion. 

Thailand’s external debt has DOUBLED at the close of 2012 relative to 2006.

The following chart hasn’t been updated. But it shows that the short term debt segment of the external debt, in 2010 constituted 54% share, which may be higher today.

This ratio has already topped the 1997 levels. And this also means Thailand’s debt profile makes it highly vulnerable to short term interest spikes. 

Slower statistical economic growth have already been whetting the steroid addicted financial markets of another rate cute. This should further aggravate the ongoing credit bubble seen in Thai’s private sector and government.

Like Philippines, policy induced bubbles have led Thailand's stock markets to boom. The SET now fast approaches the 1997 highs.

Bottom line: Former PM Shinawatra has his reasoning backward. The rising baht has not been the disease. Rather the rising baht, like the strong Philippine peso accounts for as symptoms. The disease is that of the manipulated boom financed by a credit bubble, fired up by zero bound rates (as shown by explosive growth in private sector loans) and of the intensifying government outlays (which is being funded by ballooning) external debt.

So if Thailand’s government does an Abenomics, a surge in short term interest rates could trigger a debt crisis

Thailand’s credit bubble seems as in a very much advanced state than the Philippines. And this could become the catalyst for a regional contagion.

Déjà vu 1997?

Tourism Unlikely to Save Abenomics

This article attempts to cheerlead on the supposed benefits of the weak Japanese currency the yen.

From Bloomberg:

The Thai baht’s biggest quarterly gain against the yen since 1998 was enough reason for Kornkarun Cheewatrakoolpong, a 32-year-old economics lecturer in Bangkok, to change her honeymoon destination to Japan from Italy.

“It’s more affordable,” Kornkarun said in an interview from her home in the capital on April 17, after returning from a business trip to Japan. “I don’t feel it’s that expensive like in the past. I still expect that when I go for my honeymoon in November, the yen will remain weak.”

Kornkarun followed 36,000 Thai tourists who headed to Japan in the first two months of the year, 31 percent more than the same period of 2012 and the largest increase among five major Southeast Asian countries, according to data from the Japan National Tourist Organization. The baht, Asia’s best-performing currency in 2013, strengthened 14 percent versus the yen in the three months through March before rising a further 7.1 percent in April, making costs for accommodation, shopping and food cheaper for visitors from Thailand.

The rise in tourists caused a shortage of yen banknotes in Thailand, central bank Governor Prasarn Trairatvorakul told reporters in Bangkok on April 9, before the nation’s markets closed for the four-day New Year holiday, known as Songkran. The Bank of Japan’s monetary easing, coupled with increasing investment, helped drive the baht to its strongest against the yen in five years on April 22. Japan’s currency may weaken to 100 per dollar for the first time since 2009 by year-end, according to 54 analysts surveyed by Bloomberg.

For now the weak yen may boost tourism. This represents one of the short term effects of inflationist policies. Yet such a boom will be temporary.  When the inflation genie pops out of the proverbial lamp, which has been the expressed goal of 'Abenomics', and runs berserk, the risks of a crisis and social unrest will be magnified. 

Political and economic instability reduces the incentives of foreigners to travel. Thus, if price inflation turns for the worst or if a crisis emerges, tourism will take a hit.

Japan’s tourism (direct and indirect) constitutes only 6.7% of the GDP, according to World Travel and Tourism Council. 

This means that whatever benefits the tourism sector will reap are relatively puny, and will be more than offset or neutralized by economic losses in the broader economy due to the distortions of economic calculation, which reduces incentives for people to invest but nonetheless encourages speculation and capital flight. Also inflationism will constrict on the purchasing power of the consumers.

As the Austrian economist great Ludwig von Mises wrote,

The much-talked-about advantages which devaluation secures in foreign trade and tourism are entirely due to the fact that the adjustment of domestic prices and wage rates to the state of affairs created by devaluation requires some time. As long as this adjustment process is not yet completed, exporting is encouraged and importing is discouraged. However, this merely means that in this interval the citizens of the devaluating country are getting less for what they are selling abroad and paying more for what they are buying abroad; concomitantly they must restrict their consumption.

So enjoy the boom while it last.

As for the strong baht, that’s the result of Thailand’s credit bubble.

Thailand’s Credit Bubble

This passage from a report on Thailand’s monetary policy caught my eye; from Bloomberg

Daily minimum wages have risen as much as 89 percent after two increases in the past year. Most factories are located in an area where wages rose to 300 baht per day last April, an average increase of 38 percent, according to the industry ministry.

89 percent in one year wow!

Using the National Capital Region (NCR) as benchmark for the Philippines, minimum wage grew by 7% in 2012, according to the National Wages and Productivity Commission. Here is the history of minimum wages of the Philippines

The implication is that Thailand’s economy must either be experiencing a productivity miracle or in an advance stage of an inflationary boom, which in mainstream terminology will read as risk of “economic overheating”

Thailand’s economy according to the tradingeconomics.com has averaged 3.6% from 1994 until 2012

Yet Thailand’s credit markets represented by loans to the private sector (data provided by the Bank of Thailand again through tradingeconomics.com) shows that since December 2001 until November of 2012, the average growth rate has been 7.94%.

And it would appear 2010 served as the springboard for the rapid ascent of Thailand’s loan growth to the private sector.

Loan growth spiked as the Bank of Thailand floored interest rates in 2010. But the low point of 2010 in interest rates was second only to the record set in 2003 at 1.25%, according to tradingeconomics.com

Again one would notice that loan growth picked up in 2003 but the acceleration of the growth rates commenced in 2010, even as the Bank of Thailand negligibly raised interest rates in 2011. The Bank of Thailand eventually cut rates anew in 2012.

The above evidence suggest that Thailand’s economic growth seems mainly fueled by unsustainable credit expansion or a credit boom that has resulted to increases in input prices such as minimum wage.

And this has not just been a private sector concern.

Thailand’s government appears to have also used low interest rates and a lower US dollar to expand foreign denominated external debt tradingeconomics.com.

From 2005 until 2012 external debt by the government has grown at an average of 15.8%. Yet the average does not tell the accurate picture. The Thai government’s external debt resonates with the rate of growth in the private sector both of which has been intensifying since 2010. 

While the external debt picture, as per cent to the GDP, seems far from the danger zone it reached in 1997 (tradingeconomics.com), no crisis are exactly similar.

A unique but troubling feature of today’s Thai debt build up is that short term debt as % of the total external debt has reached record levels (tradingeconomics.com), topping that of 1997. Ghost of 1997?

This makes the Thai economy highly vulnerable to sudden interest rate spikes where Thai’s interest rate fragility may originate or be triggered from internal or external sources.

I earlier mentioned that the strengthening Thai baht and low domestic interest rates have incited these intensifying debt build up from both the private and public sectors.

The chart above shows the USDTHB has been in going down since the advent of the new millennium- from tradingeconomics.com

External easing by the majors economies, as well as globalization, have also contributed to portfolio flows in bonds (topmost pane) and in equities (middle pane) and in foreign direct investments (FDIs—lower pane). These capital flows have provided finance to Thailand’s trade deficit (not shown) and strong financial markets. Thai’s SET beat the Philippine Phisix by a head’s length at the finish line in 2012, up 35.76% against 32.95% in nominal domestic currency terms.

The bottom line is that when debt rises far more than income, then trouble lies ahead. 

Thailand’s Finance Minister Kittiratt Na-Ranong gripes about the lack of investment which the Thai government proposes to bridge, from the same Bloomberg article,

Another legacy of the 1997 crisis is a lack of investment due to concerns over the country’s debt levels, which has led to persistent current-account surpluses, Kittiratt said. Thailand has had a current-account deficit only once since 1997, according to data compiled by Bloomberg…

Over the long term, the government plans to invest in infrastructure to increase imports and reduce pressure on the currency, Kittiratt said. He has proposed spending 2 trillion baht ($67 billion) over seven and a half years on projects such as a railroad network to accelerate investments and put the current account into a deficit.

Given the steepening rate of debt build up, the question is where has all these money been flowing?

A property bubble perhaps?

From the Bangkok Post in October of 2012

The Bank of Thailand is keeping a close watch for any indication of a pending collapse in the housing bubble after prices of housing estate units recently sharply increased, Mathee Supapong, a senior director at BoT, said on Friday.

Housing loans provided by financial institutions were also substantially up and this was a case to concern, said Mr Mathee.

Officials say there has been no bubble. But no one can establish a bubble until after the fact (ex-post). The above only serves as clues to where the economic and social risks lies.

Politics And Markets: Bangkok Burns Edition

How are financial markets and political turmoil correlated?

Not much if you ask me.

This would largely depend on the underlying issues involved. Financial markets appear to be more sensitive to financial issues such as capital controls or debt anxieties than simply compared to domestic political turmoil.

News headlines such as this, "Bangkok Burns Amid Army Crackdown", highlight the unfolding mayhem in Bangkok, Thailand.

Photo from Star-Telegram

The common impression built upon or associated with such chaos would translate to a collapse in the markets, going by media's logic.

But how true is this?

Thailand's SETI is still up year to date as shown in the above chart from stockcharts.com and seems insouciant to the ongoing violence.

And it would seem that Thai markets are even more correlated to the gyrations in the US (as shown by the SPX below). The right vertical line reflects on the latest correlation while the left vertical line marks the start of the year performance.

And it's not just in stocks, but likewise reflected on the Thai Baht (chart from yahoo). True enough there has been a little downswing in the Baht, but this occurred before the violence, and seems likely to reflect more on external factors than the present political predicament.

Nonetheless, the Baht appears to be advancing of late in spite of the Bangkok Burning edition.

Bottom line: Financial markets and political developments don't have strong correlations or the causal link is tenuous. In most cases, they are merely subject to the available bias fallacy by media, which is why the public should learn how to distinguish between real forces and mere rationalization.

The same holds true for the Philippines, which is why the local markets surged in spite of nonsensical chatters of election "failure" risk during the campaign period of the recently completed national elections.