Majority of Households Straddled With a Mountain of Debt
Even before COVID-19 struck in early 2020, most Thai households were saddled with high debt. Thai workers have struggled to make ends meet for many years, resulting in a dependence on borrowing.
Global crises, such as the ongoing pandemic and its variants and the Russian invasion of Ukraine, have only deepened their debt crisis.
Political focal point
According to the National Economic and Social Development Council (NESDC), household debt rose 4.2 percent to Bt14.35 trillion ($434.8 billion) in the third quarter of last year, equal to 89.3 percent of GDP.
As a result of this dire situation, opposition politicians have attacked the coalition government led by the Palang Pracharath Party.
A recent idea floated by the leader of the Kla Party, Korn Chatikavanij, to get rid of debt has sparked a huge debate among netizens.
Former Finance Minister Korn promised to work with banks to provide clean loans to entrepreneurs, such as street food vendors or farmers.
Korn’s plan calls for an interest rate as low as 2.75 percent per year for a three-year loan, and each borrower could get Bt30,000 to Bt100,000.
The suggestion comes as Korn’s party prepares to participate in the Bangkok city council elections due in May and a possible snap general election to the House of Representatives in case of a political mishap leading to the dissolution of the lower house of Parliament.
The former finance minister said it was not a far-fetched idea and that he had helped many people get out of debt when he served as finance minister between 2008 and 2011.
A number of opposition politicians have long raised the issue of high household and public debts, accusing the government of mismanaging the economy. In the event of an election, the opposition is likely to focus on the issue of house debt.
In response, the government blames COVID-19 for weighing down the economy and increasing household debt.
Factors contributing to debt
Several economists attribute the problem of indebtedness to the widening economic inequality. According to them, the vast majority of people are trapped in poverty and high debt because a small minority enjoys substantial economic gains. Another reason is slower economic growth.
Since leading the military coup in 2014 and continuing in power for a second term after the 2019 general election, Prime Minister Prayut Chan-o-cha has been blamed for mismanaging the economy resulting in slower growth.
Those working as tour agents, tourist guides, hotel staff, restaurant workers, as well as taxi and bus drivers, have been adversely affected by the collapse of the tourism industry in the wake of the pandemic. For the fourth quarter last year, the NESDC reported a 3.1% decrease in employment in related tourist services.
The erosion of Thailand’s competitiveness has also hurt the country, as it faces strong competition from emerging countries such as Vietnam, which has been very successful at boosting its exports.
Experts say an aging society has also weakened consumption and also reduced the availability of productive labor.
Mortgage loans top the list
During the third quarter of last year, mortgages accounted for the largest share of household debt, at Bt4.9 trillion, followed by Bt4 trillion in consumer debt – personal loans and credit cards – and Bt2.7 trillion in small business loans. Borrowings for car and motorcycle purchases totaled Bt1.8 trillion.
The NESDC reports that small-business loans rose the most at 7.3 percent, followed by mortgages at 5.5 percent and consumer loans at 4.6 percent.
Burdened by debt
Farmers and street food vendors, as well as students from low-income families, have largely borrowed money from government subsidy schemes. The Student Loan Fund has about 5 million debtors, including their guarantors. Using a fund set up by the government, the government recently reduced the default penalty to not more than 2 percent annually for new graduates.
Due to the overall unfavorable economic conditions, helping students and their parents pay off their debts is challenging.
According to the NESDC, the unemployment rate for new graduates (those with bachelor’s degrees or higher) was 3.22 percent, much higher than the nationwide unemployment rate of 1.64 percent in the fourth quarter last year.
Manufacturers and service businesses are cautious about hiring inexperienced workers.
Teachers and police have a chronic problem with debt. Rice farmers have been suffering from low prices.
Do we need more loans to deal with debt?
Indebted families may find temporary relief by taking out more loans at a low-interest rate, but that is just debt refinancing, said Teerana Bhongmakapat, former dean of Chulalongkorn University’s economic faculty.
The most suitable solution in the medium and long term will depend on how the money will be spent, or the ability of the borrowers to repay the debt, as well as how the economy performs,” said Teerana.
The poor prospects for rice prices mean farmers will remain in debt if they continue to grow rice. Investing in tourism-related services may not be a wise decision, he said. Compared with the rosy years before the public health crisis, tourism faces an uncertain future, he said.
In light of the uncertain economic outlook for both the local and global economies, Teerana predicts that manufacturers and businesses will be cautious about new capital investments.
Uncertainty in geopolitics
Since the third quarter of last year, Thai consumers have faced rising living costs. The recent Ukrainian invasion has only exacerbated the already high energy bills.
Amidst signs that the pandemic is less severe on the health system despite the recent spike in new cases, tensions between superpower rivals are also putting a strain on the Thai economy and global economy. In response to the war in Ukraine, the US leads an alliance to impose severe economic sanctions against Russia.
Having tensions between the US, Western and Asian allies in one camp, and Russia and China in the other camp, may cause the Russian invasion of Ukraine to spread through Eastern Europe and a part of Western Europe, or even to East Asia and Southeast Asia,” Teerana said.
Due to high oil prices translating into high logistics costs and the effects of economic sanctions, the global trade sector will likely see slow growth in the next few years. Materials and grains shortages would also affect manufacturing and service sectors as well as consumers.
It is unlikely that Thai households will be able to escape debt because of uncertainty facing the Thai and global economies, he warned.
Teerana forecasts economic growth this year of around 3.5 percent, but he warns that the pace may slow in the coming years.
Source: Thai PBS