The emerging markets bubble started in 2009, when China launched a bold stimulus-driven economic growth strategy to counter the deleterious effects of the global financial crisis on its economy. China immediately scrambled to construct scores of new cities (many of which are still empty) and ambitious infrastructure projects for the sake of generating economic growth, which sparked a global raw materials boom that benefited commodities exporters such as emerging market nations and Australia. Global investors soon began to pile into emerging market investments to diversify away from ailing Western nations in wake of the financial crisis.
Near-zero interest rates in the U.S., Europe and Japan, along with the U.S. Federal Reserve’s multi-trillion dollar quantitative easing stimulus programs encouraged $4 trillion worth of speculative capital to flow into emerging market investments since 2009. Global investors entered carry trades in which they borrowed very cheaply from the U.S. and Japan, and invested the funds in high-yielding emerging market assets, while profiting from the interest rate differential or “spread.” The sudden influx of “hot money” into emerging market investments helped to inflate a bond bubble, which pushed EM borrowing costs to all-time lows and enabled government-driven infrastructure booms, red-hot credit growth, and property bubbles across the entire emerging world.
As international capital clamored into Thai assets, the country’s 10 year government bond yields fell from their prior 4 to 6.5 percent range to just over 3 percent, while total external debt more than doubled:
Even more worrisome is the fact that Thailand’s short-term debt to total external debt ratio has roughly doubled in the past decade, which means that the country is more vulnerable to short-term interest rate increases.
Foreign direct investment (net inflows, current dollars) has surged in the past decade:
The Thai stock market, as measured by the SET index, quadrupled since 2008:
Capital inflows into Thailand contributed to a nearly 30 percent increase in the baht currency’s exchange rate against the U.S. dollar since 2008:
Thailand’s Boom Is Driven By An Underlying Credit Bubble
As with most other emerging market nations, Thailand is currently experiencing a dangerous credit bubble that is helping to boost its economic growth and consumer spending. Though traditionally an export-driven economy, debt-funded domestic demand has replaced the country’s export sector as the primary economic growth engine since 2008.
Loans to Thailand’s private sector have soared by over 50 percent since the start of 2010:
Surging automobile sales in 2012, courtesy of a first-car tax rebate, has been a significant contributor to the recent increase in Thai households’ debt. The World Bank estimates that the tax breaks cost Thailand’s government $2.5 billion, but simply pulled automobile demand forward only to subsequently plunge when the tax break expired and over 100,000 indebted consumers defaulted on their auto loan payments. The chart of Thai automobile registrations shows a spike in recent years:
Thailand’s household debt grew at an alarming 13.6 percent per year since 2008, bringing the country’s household debt-to-GDP ratio to 77 percent from 55 percent, which is up radically from just 45 percent a decade ago. Total lending to Thai households increased at a 17 percent annual rate from 2010 to 2012, while household credit provided by credit card, leasing and personal loan companies rose at a blistering 27 percent annual rate.
Thailand now has one of the highest household debt-to-GDP ratios in Asia:
Source: Denise Law, FT
Bank of Thailand recently published a report that showed that the debt-service ratio (DSR) of indebted Thai households has increased from 30 percent in 2011 to 34 percent in 2013. To make matters worse, indebted Thai households that earn less than 10,000 baht per month are burdened by a debt-service ratio that is nearly twice as high at 62 percent. Bank of Canada estimates that debt-service ratios above 40 percent place households in financial jeopardy. Thai households’ high debt loads will limit future consumer spending and economic growth.
In July 2013, three Thai tycoons – all of whom lost fortunes during Thailand’s tom yum kung crisis in 1997 – sounded an alarm that the country was experiencing another economic bubble that is driven by debt-funded consumer and government spending. Boonchai Bencharongkul, a founder of the Thai mobile telecom corporation Total Access Communication (DTAC), said “Don’t over-invest, and if possible, do not borrow to expand the business.”
In October 2013, Standard & Poor’s Ratings Services issued a warning that Thailand’s record household debt could threaten the country’s banks, along with banks in Malaysia (as I’ve been warning about) and other Asian countries. “Rising household debt fueled by rapid loan growth and easy monetary conditions could weaken the credit quality of banks in Asia,” said S&P’s credit analyst Ivan Tan. He added that “Potential asset bubbles and imbalances are building up in some countries, and could put the banks at risk” and that “Overall, credit growth has been high and we believe this is leading to a build-up of economic imbalances in Thailand.”
Thailand’s Government Borrowing To Create Growth
Thai consumers aren’t alone in their debt binge: their government is taking advantage of artificially low borrowing costs to boost economic growth.
Thailand’s government spending is up by nearly 40 percent since 2008:
The country’s government is running a budget deficit to support its spending:
Spending increased significantly in 2012 as the government ran its problematic $2.5 billion first car tax rebate program as well as a failed rice subsidy scheme that caused the government to lose 136 billion baht or $4.4 billion despite being promoted as cost-neutral. The original goal of the rice subsidy scheme was to buy local rice harvests for nearly 50 percent above market rates and withhold rice supplies from the global market in hopes of driving prices higher, which is when Thailand’s government would have sold its supply. Unsurprisingly, the scheme failed when other rice exporting nations – primarily India and Vietnam – rushed to fill the shortfall, which caused Thai rice exports to plunge by 37 percent and allowed India to become the world’s leading rice exporter. Though Thailand’s government is now sitting on 17 million tons of excess rice that is starting to go bad, it will continue its rice subsidy in 2014 to buy 11 million more tons of rice, which will cost approximately 270 billion baht or $8.6 billion.
Other costly Thai government spending or tax break schemes abound such as:
- A subsidy scheme for first-time home buyers that will cost the government 12 billion baht in lost revenues
- A three-year debt moratorium program that will cost 1.5 billion baht per year
- A 2012 corporate income tax cut from 30 percent to 23 percent, which resulted in a 52 billion baht revenue loss. Corporate income taxes were further cut to 20 percent in 2013, which is expected to cause a 74 billion baht revenue loss
- Personal income tax has been cut to promote consumption, which will result in a 32 billion baht revenue loss in 2013
- A fuel subsidy that cost 90 billion baht
- Free computer tablets for students that cost the government 16 billion baht in 2012 and is expected to cost 12 billion baht this year
- A salary increase for government officials that cost 18 billion baht in 2012 and is expected to cost 23 billion baht in 2013
- A rubber subsidy that will cost 21.2 billion baht
One of the Thai tycoons mentioned earlier in this report, Boonchai Bencharongkul, cautioned against excessive government spending, saying “This time, the nature of the crisis might be different. Last time it was the private sector that went bankrupt, but this time we might see the government collapse.” Sawasdi Horrungruang, founder of NTS Steel Group, warned that Thailand’s government should not borrow beyond its ability to service its debt, which will eventually become the burden of taxpayers.
Thailand’s government isn’t heeding any warnings against its debt binge as it plans to spend 2 trillion baht ($64 billion) – nearly one-fifth of the country’s GDP – by 2020 on growth-driving infrastructure projects, including a network of high-speed railway lines to connect the country’s four main regions with Bangkok. The interest alone on this new debt will cost another 3 trillion baht over the next 50 years. Thailand’s ambitious government spending plans assume and demand an “Asian Century”-style regional growth boom many years into the future, which is highly unlikely considering the fact that China and most other emerging markets have devolved into massive bubble economies that will experience a severe crisis, or even a depression, when their bubbles collectively pop. Emerging market borrowing costs will soar when the overall bubble pops (the EM bond bubble will burst), which will make Thailand’s increasingly large public debt extremely difficult, if not impossible, to finance.
Like Most EM Countries, Thailand Has A Property Bubble
Credit and property bubbles go hand-in-hand, and Thailand’s current bubble economy is no exception in this regard. Thailand’s property bubble is most acute in the condo market, the predominant type of dwelling that most of Bangkok’s residents live in, and is the primary asset of choice for foreign speculators, many of whom hail from Singapore and Hong Kong (which are experiencing bubbles of their own, as I will soon report). According to Bank of Thailand statistics, condo prices soared by 9.39 percent, while townhouses prices rose by 6.86 percent in Q1 2013, after rising by similar amounts for the past several years. Total transactions by value, including both land and buildings, surged 35.3 percent in Q1 2013 as total outstanding property credits rose by 13.3 percent. Particularly worrisome is the fact that the majority of new mortgages originated are concentrated at the lower end of the Thai housing market. Bank of Thailand cautioned that cheap home loans could cause a bubble in the country’s property market. Thai condos are reportedly being advertised aggressively across all mediums, including pamphlets and text messages.
In April 2013, Thailand’s former Deputy Minister of Finance, Supachai Panitchpakdi, warned that there were “signs of a bubble in the Thai economy, with massive fund inflows heading mostly to the property sector.” He further warned against excessive bank lending, and said that some sectors’ asset prices exceed reasonable levels.
Boonchai Bencharongkul, one of the three aforementioned tycoons, said “I think the current situation is worrisome. As one of those who had such an experience, I can smell it now. People are rushing and competing to buy condos while more and more people are driving Ferraris. These are the same things we saw before the 1997 crisis occurred.”
Thai property apologists defend the country’s rapid property price increases by claiming that the boom is justified by red-hot economic growth, but there is a very significant flaw in their logic because Thailand’s economic growth is currently experiencing a bubble itself.
Thailand’s Export Boom Is Also China-Driven Bubble
While most commentators view Thailand’s export boom of the past decade as a reason for optimism, I view it as reason for concern because over half of Thai exports are accounted for by shipments to ASEAN nations and China, which are experiencing growth-boosting economic bubbles of their own. Exports have traditionally accounted for approximate three-quarters of the Thailand’s GDP, making the country extremely sensitive to the economic health of its export partners.
Despite strong export growth in the past decade, Thailand has experienced record trade deficits since 2011 due in large part to the rising cost of imported fuel. After Singapore, Thailand is the second largest net oil importer in Southeast Asia.
Thailand’s bubble will most likely pop when China’s economic bubble pops and/or as global and local interest rates continue to rise, which are what caused the country’s credit and asset bubble in the first place. The resumption of the U.S. Federal Reserve’s QE taper plans may put pressure on Thailand’s financial markets in the near future.
As I’ve been saying even before this summer’s EM panic, I expect the ultimate popping of the emerging markets bubble to cause another crisis that is similar to the 1997 Asian Financial Crisis, and there is a strong chance that it will be even worse this time due to the fact that more countries are involved (Latin America, China, and Africa), and because the global economy is in a far weaker state now than it was during the booming late-1990s.
In the coming months, I will be publishing more reports on other countries that I consider to be part of the emerging markets bubble. Please follow me on Twitter and like my Facebook page to keep up with the latest bubble news and my related commentary.
Jesse Colombo, Contributor
I’m an economic analyst who is warning of dangerous post-2009 bubbles