Debt-ridden Thailand being sucked into whirlpool of deflation

[webfact]

OVERDRIVE
Debt-ridden Thailand being sucked into whirlpool of deflation
Thanong Khanthong

BANGKOK: -- Disinflation - or negative inflation - has hit Thailand for the past five months in a row. In the first quarter of this year, inflation was minus-0.5 per cent. The situation worsened in April, with inflation at negative-1.04 per cent. In May the disinflation surged to -1.27 per cent, prompting growing concern as to whether deflation is waiting on the horizon.

While disinflation is a temporary phenomenon of price decline, deflation represents a general collapse in prices and demand, aggravated by a lack of fresh investment and a marked slowdown in the velocity of money (its speed of circulation).

Once an economy plunges into a deflationary spiral, it is extremely difficult to perk it up again. A dose of fiscal expansion and sharp rate cuts will have to be met with renewed confidence and fresh investment to create employment. The advanced economies - the United States, the UK, Japan and most recently Europe - have embarked on this policy of Keynesian spending and zero interest rates to pull themselves out of the severe slump, yet despite seven years of unorthodox methods a recovery is nowhere in sight.

Indeed, a recovery can never come under the current insurmountable level of indebtedness. Global debt has reached $200 trillion, or three times the size of the global GDP of $70 trillion.

The global economy can't grow with more debt. Without debt restructuring, any recovery is out of the question.

Most Thai economists agree that deflation is not on the table yet, as the marginal fall in prices, caused by weak oil and food prices, will hit rock bottom soon after the economic pickup.

"We expect headline inflation to bottom out and then pick up gradually from June onwards," Phatra Securities reported on Tuesday. "However, we expect that headline inflation will not turn positive until the fourth quarter of 2015."

Disinflation and deflation aside, Thailand is entering a dangerous period of economic slump and geopolitical risks. The downturn is caused by weak demand, both internally and externally. Household debt has reached Bt10.4 trillion, in a Thai economy whose total size is Bt13 trillion. Thai consumers no longer have much room to buy. To consume more they will have to further leverage their household balance sheet. They can't create more debt.

This has resulted in an overcapacity or oversupply situation in the

economy. Businesses do not want to invest further because they can't sell their goods or products. Banks are more reluctant to lend for fear of bad debts. Small and medium-scale enterprises are being hit hard by the lack of fresh credit and weak consumer demand.

Externally, the Thai export sector, which has been the engine of the Thai growth, is sputtering. The export sector has also registered shrinkage five months in a row, with figures for the first quarter of 2015 showing minus-4.3 per cent growth.

The explanation is either weak overseas demand or a lack of competitiveness in Thai industries. If overseas demand is the problem, there is nothing much we can do. If we cut the prices - by lowering the baht exchange rate - other countries can do the same, triggering a currency war. If the problem lies in exports' loss of competitiveness, then Thai industries have to take responsibility.

So what should be the appropriate policy response from Thai authorities? Government spending grew almost 30 per cent in the first quarter of this year, offering a degree of economic stimulus. But we all know that fiscal stimulus has its limitations. One can't expect the government to create a heavy debt burden year in and year out in order to perk up the economy. Japan and other welfare states have tried this medicine before and all ended up with unsustainable public debt. In the case of Japan, the government debt to GDP has reached a staggering 240 per cent. Creating more debt risks destroying the value of the yen, now hanging by a thread and on life support provided by the Bank of Japan's government bond-buying programme.

Then it comes to the efficacy of monetary policy. The Bank of Thailand acted as if it had blood in its eyes when it cut its benchmark rate twice in a row to 1.50 per cent. The banking authorities must have seen disturbing signs in the economy, prompting them to cut the rates in a hurry. First, they want to send out a signal that they are providing an accommodative environment to stimulate domestic demand and growth. Second, they want to encourage the banks to extend further credit, particularly to the SMEs. Third, they want to rely on exchange rate targeting to boost exports.

In macroeconomic management, we can't overdo both the fiscal expansion and the monetary stimulus. Government overspending will create debt burden for future generations. Besides, disbursements are not timely enough.

At the same time, monetary stimulus, if it is overcooked, discourages businesses, industry, households and the private sector in general from making appropriate adjustments to the actual prices.

For the Bank of Thailand's low interest rate policy carries a double-barrel effect: lowering the cost of borrowing and weakening the baht.

But we can see that the banks have not cut their borrowing rates to match the central bank's rate reduction. Thai banks' profit margins remain at a historic high compared to banks in other countries, with profits of Bt50 billion in the first quarter of this year. A quick calculation projects bank profits at Bt200 billion this year. Banks are fattening their pocketbooks at the expense of the general economy and Thai borrowers. That's why Bank of Thailand governor Prasarn Trairatvorakul was rather emotional when he found out that the banks had maintained their borrowing rates intact. That means Thai consumers are not benefiting from this round of rate cuts.

Now we come to the exchange rate targeting. The baht is losing value in a hurry under the Bank of Thailand's deliberate policy to weaken the currency. Last month alone, the baht weakened by 4 per cent, almost touching Bt34 to the dollar. Siam Commercial Bank recently predicted exchange rate targeting could drive the baht down to Bt35 before the end of the year.

Destroying currency value is a bad money policy, but, strangely enough, most central bankers have adopted it in earnest.

Weakening a country's currency might benefit the domestic export sector in the short term, but overall it harms the nation's purchasing power.

Inflation will strike back with a vengeance. Under good money policy, the value of the currency remains stable over time. This benefits not only grass-roots citizens but also the overall economy, because all the participants do not have to play catch-up with runaway inflation.

A low interest rate environment, coupled with a weakening currency, discourages the economy from making the necessary adjustments. Bad companies, which should have folded, remain on the scene to create future burden. They use resources that they don't deserve access to. A low interest rate policy also drives away savings. Capital accumulation gives way to speculative investment in the stock market or real estate. Retirees or pensioners earn nothing from their bank savings. They do not deserve this kind of punishment from bad money policy, in which they almost earn nothing from interest returns while at the same time the baht's value diminishes steadily and harms their purchasing power.

In the end, the way out for Thailand is a combination of appropriate doses of fiscal and monetary medicine that allow the economy to adjust at its own pace. Thailand has already fallen into a debt trap, with combined private and government debt to GDP reaching 130 per cent. This high debt level will have to be brought down via restructuring, because raising incomes to pay down the debt looks almost impossible now given the global outlook. The government can tax the rich more to help out the poor. The banks must make less profit. The Bank of Thailand must not be tempted into a monetary trap, which would risk plunging the country into a zero interest rate environment. By that time it would be too late to save the baht.

Source: http://www.nationmultimedia.com/opinion/Debt-ridden-Thailand-being-sucked-into-whirlpool-o-30261656.html


-- The Nation 2015-06-05

[cloudhopper]

A deflationary burst is the inevitable result of irresponsible credit expansion.

Inevitable means there is no way to avoid it - there is nothing that can possibly be done to stop it.

This is global. Have a nice day.

[BSJ]

I for one would be happy to see the Au$ to baht rate change in favour of the Aussie.

[Bluespunk]

Whirlpool?

Black hole would seem more apt.

[ezzra]

It seems that all those mega malls and hugely expensive condominium builders living on another

plant or simply don't agree with the forecasts, as they keep building like there is no tomorrow

and banks are landing billions to these builders hands over fists......

A good indication of the situation will be to see how many new cars will be sold come December

in the car's show...

Edited June 4, 2015 by ezzra

[konying]

So another words, get ready for a crash?

[IMA_FARANG]

Only in the upside down world of todays economic theory is inflation..... increasing prices for the same goods....regarded as a "good" thing and deflation .... lower prices for goods for the consumer called a "bad" thing.

In such logic when the rich get wealthier and the poor get poorer that is called a "healthy economy".

Isn't that a lot like a sick patient getting sicker being a "good thing" for the doctors?

[CaptHaddock]

The writer is an economic illiterate. Japan has unsustainable debt? The 10 year Japanese Treasury bond currenty pays 0.53% interest, which means that bond buyers are quite happy to buy Japanese govt bonds. What does unsustainable debt look like? Looks like Greek debt, for example. The current interest rate on the 10 year Greek Treasury is 10.91%.

The current global slowdown is an effect of the financial crisis of 2008 which was a crisis of private debt, not government debt, with the exception of small countries like Greece. Competitive devaluations are the order of the day, lately including the Thai baht. Governments, including the Thai govt, should increase, rather than decrease, borrowing to invest in infrastructure and the development of human capital and to replace lost economic activity.

It is true that disbursements from the Thai govt are not timely enough, but that is because the military "government" is incompetent.

Thai economists are in agreement that deflation is not deflation because the military says it isn't.

[JDGRUEN]

It seems that all those mega malls and hugely expensive condominium builders living on another

plant or simply don't agree with the forecasts, as they keep building like there is no tomorrow

and banks are landing billions to these builders hands over fists......

A good indication of the situation will be to see how many new cars will be sold come December

in the car's show...

And another sign will be the number of automobile repossessions... voluntary surrenders or confiscation... it was bad before -- coming will be worse.

- Also another sign will be the unfinished large scale projects... that just stop... I am already seeing signs of that where I live.

[trogers]

It seems that all those mega malls and hugely expensive condominium builders living on another

plant or simply don't agree with the forecasts, as they keep building like there is no tomorrow

and banks are landing billions to these builders hands over fists......

A good indication of the situation will be to see how many new cars will be sold come December

in the car's show...

The vicious asset inflation, while the real economy suffers deflation.

Most of these developers are public-listed. The QEs from the West and Japan are inflating prices of stocks worldwide.

Banks holding lots of cash from the QEs are very willing to extend lending based on rising asset prices.

Until another financial bubble bursts...

[cloudhopper]

The writer is an economic illiterate. Japan has unsustainable debt? The 10 year Japanese Treasury bond currenty pays 0.53% interest, which means that bond buyers are quite happy to buy Japanese govt bonds.

lol there is only one buyer left - the BOJ. There are 2 possible outcomes 1) The BOJ keeps printing and buying everything up until the yen becomes worthless or 2) Interests rates are forced up by the market and the state defaults on its bond obligations.

[JDGRUEN]

One small way to increase internal spending of money from foreign sources would be to cut out some of the bureaucracy in creating small businesses. Thailand should allow the direct equivalent of a LLC Limited Liability Company with a minimum of paperwork - an abbreviated form of creating a company - not the standard method. The four employee requirement should simply be done away with... along with the millions of baht required.. as few self-funded startups need employees during a startup phase. And the policy only hinders business creation that will eventually hire Thai workers- but just not at first. And the competition with Thais provisions should be trimmed. With large Thai companies employing foreign workers from Myanmar, Cambodia, Laos and Burma by the tens of thousands, the policy of forcing new businesses to hire four Thai workers seems to be an oxymoron.

I have several small business concepts in mind that would not compete with Thais but I am very hesitant to venture into them because of the foreboding of the Thailand Incorporation hurdles - even as an American who gets only abbreviated hurdles when it comes to business formation.

The current Thai law only causes foreigners to skirt Thai law by hiding behind a Thai citizen front - complicating matters.

The corruption factor... I know of Foreigners who have done it the right way - B visa - Work Permit - millions of baht and 4 Thai workers, etc. who after a couple of years dissolved the business and hid it behind a Thai front - sold the business to a Thai on paper. Reason - Corruption. The business because it had been foreign ownership immediately became a target for every bureaucrat and police officer is town to demand some 'Fees' to keep the business going without some 'problems'. Foreigners are all ultra rich 'ya know.

I am not an on line worker, programmer, customer service / help desk, etc. guy working in Thailand and would not become one - but the idea of hindering this class of 'worker' is just pain dumb. Thailand should foster this type of worker - done with appropriate checks - such as prove the income and transactions are generated and paid outside Thailand. The Thai Government should create a special Work Permit -- External Worker... Centers for External Workers should be fostered - not hindered or forbidden. Thailand should promote this concept as a lure for people to come live - make money from foreign transactions - show proof as cited above... and allow the country to profit from the circulation of money spent for rent, food, entertainment, transportation, etc.

But... TiT.

[Tatsujin]

It seems that all those mega malls and hugely expensive condominium builders living on another

plant or simply don't agree with the forecasts, as they keep building like there is no tomorrow

and banks are landing billions to these builders hands over fists......

A good indication of the situation will be to see how many new cars will be sold come December

in the car's show...

Given the increase in excise tax coming in 2016, there might be quite a lot of new car buyers, especially if they continue with the low/zero interest payments.

[Manbing]

A deflationary burst is the inevitable result of irresponsible credit expansion.

Inevitable means there is no way to avoid it - there is nothing that can possibly be done to stop it.

This is global. Have a nice day.

In principle I agree,

In practice...

Stimulate the property market by allowing foreigners to buy land in Thailand.

Vietnam did it, they are booming- as is their educated manufacturing sector (smartphones).

Short term solutions are all tweaks, long term, invest in vocational education for the 1/3 population of functioning illiterates.

Oh yeah, invest in education for a workforce able to keep up with manufacturing global technological advances

[kingalfred]

A deflationary burst is the inevitable result of irresponsible credit expansion.

Inevitable means there is no way to avoid it - there is nothing that can possibly be done to stop it.

This is global. Have a nice day.

In principle I agree,

In practice...

Stimulate the property market by allowing foreigners to buy land in Thailand.

Vietnam did it, they are booming- as is their educated manufacturing sector (smartphones).

Short term solutions are all tweaks, long term, invest in vocational education for the 1/3 population of functioning illiterates.

Oh yeah, invest in education for a workforce able to keep up with manufacturing global technological advances

All great ideas. But chance of it happening in Thailand? ....O% Edited June 5, 2015 by kingalfred

[GlobalCtzn]

Global deflationary collapse coming. Thailand is merely a spectator. Real tangible assets, no debt, and good community is where I am putting my eggs……………….

[Andreas2]

It could be that people (and of course big investors; "smart money") start pulling their money out of the Thai banking system and start hoarding cash (or transfer it from public debt into private foreign assets: private debt and stocks; "smart money") as the trust in the government (they can never ever repay their debt: raising taxes, winding down of public services, "hair cut" and "restructuring" of public debt come to mind) and Thai banks (wait for reduced limits on cash withdrawals, bank runs) is in decline.

For people interested in what is going on in the financial markets, globally, the "Economic Confidence Model" (ECM) could be a starting point. Martin Armstrong is always an intersting read, as is "Austrian Economics".
Buckle up for the many bumpy rides to come, already intensifying everywhere. Let's see, what October 1st (2015.75) has in store for all of us.

http://armstrongeconomics.com/
https://mises.org/

[chainarong]

I for one would be happy to see the Au$ to baht rate change in favour of the Aussie.

Wont happen, not while the bloody RBA continues to promote the OZ at 72c against the USD

[manarak]

A little bit of deflation has no effect whatsoever... Western economies came to diabolise deflation because it leads to things many don't like, such as falling tax revenue for the government, less consumer spending and possibly falling wages.

The proper paradigm is IMO to keep money at a stable nominal value, meaning that productivity gains in the production of products or services with a high labor cost should lead to decreasing prices for those products.

This has been true during the industrial revolution (cars) and for products that were IMPORTED into Western economies, but constant inflation in the West caused prices of everything to go up.

For the sake of currency stability, I have imagines a currency whose value would be based on a basket of basic commodities, of agricultural, industrial, energetical and mineral nature.

For example, take a basket of 20 commodities including gasoline, gold, wheat, soja, sugar, copper, steel, etc.

[CaptHaddock]

It could be that people (and of course big investors; "smart money") start pulling their money out of the Thai banking system and start hoarding cash (or transfer it from public debt into private foreign assets: private debt and stocks; "smart money") as the trust in the government (they can never ever repay their debt: raising taxes, winding down of public services, "hair cut" and "restructuring" of public debt come to mind) and Thai banks (wait for reduced limits on cash withdrawals, bank runs) is in decline.

For people interested in what is going on in the financial markets, globally, the "Economic Confidence Model" (ECM) could be a starting point. Martin Armstrong is always an intersting read, as is "Austrian Economics".

Buckle up for the many bumpy rides to come, already intensifying everywhere. Let's see, what October 1st (2015.75) has in store for all of us.

http://armstrongeconomics.com/

https://mises.org/

Oh, sure. Austrian economics. For the truly and permanently clueless. They have been predicting US inflation and the decline of the dollar ever since 2008. The fact that what happened was just the opposite never put a dent in their wooly-mindedness.

[greenchair]

A deflationary burst is the inevitable result of irresponsible credit expansion.

Inevitable means there is no way to avoid it - there is nothing that can possibly be done to stop it.

This is global. Have a nice day.

In principle I agree,

In practice...

Stimulate the property market by allowing foreigners to buy land in Thailand.

Vietnam did it, they are booming- as is their educated manufacturing sector (smartphones).

Short term solutions are all tweaks, long term, invest in vocational education for the 1/3 population of functioning illiterates.

Oh yeah, invest in education for a workforce able to keep up with manufacturing global technological advances

I agree. They should allow foreign ownership of small second hand housing. The Thai have no interest in purchasing 2nd hand housing. There are now thousands of older homes on the market that do not sell.

The seller's will in turn use that money to purchase new properties. Therefore boosting the new housing projects.

It is a win win.

I would love to sell my property to purchase (2nd hand) in another area at a higher price.

But there is no market for 2nd hand housing in Thailand.

You buy. You stay. No way out.

[chainarong]

Short term fix for gain, results in long term pain , the short cuts Thailand seems to take on a daily basis from education upwards, nothing would surprise , however a report , poll or some bank will tell us tomorrow that the Thai economy is bouncing along greatly , whatever the out comes you are now looking down the barrel of a gun, there is a great deal to said for a steady government , unfortunately Thailand lost all this from 1997 onwards and hasn't quite recovered.

[FireMedic]

All of you guys are making too much sense. In other words, none of it will happen.

[natway09]

A bit of scare mongering by the writer here. Thailands debt restucturing is actually at present under control & a lot better than

say Japan or even Australia..

The USA only survives because of it's size of economy. They are technically bankrupt.

Biggest concern right now is the level of household debt in Thailand, but have no idea how you reign it in.

Anybody know any comparisons to other countries?

[empireboy]

For all the 'Contrarians' out there a 'Buyer's Market' is looming on the horizon. Great wealth can be made at these times in the economic cycle for the savvy investor with courage.

[Praematura]

Foreigners buying real estate here? Pass me some of that your smoking. You can get a better ROI from saving cans of tuna to resell once the fish stocks are depleted.

[FangFerang]

When the Thai banks refused to fund the loans to pay off the rice farmers, then changed their mind when the junta pushed themselves into power, the world said "If they do this to their own people, how can we trust them not to screw us?"

[12DrinkMore]

The writer is an economic illiterate. Japan has unsustainable debt? The 10 year Japanese Treasury bond currenty pays 0.53% interest, which means that bond buyers are quite happy to buy Japanese govt bonds.

lol there is only one buyer left - the BOJ. There are 2 possible outcomes 1) The BOJ keeps printing and buying everything up until the yen becomes worthless or 2) Interests rates are forced up by the market and the state defaults on its bond obligations.

The crunch for Japan will come when their current account deficits become too great.

They will then have to go to the world and beg for loans to pay for imports. And these loans will not be at no interest.

[trogers]

When the Thai banks refused to fund the loans to pay off the rice farmers, then changed their mind when the junta pushed themselves into power, the world said "If they do this to their own people, how can we trust them not to screw us?"

That's the fiduciary duty of a bank on funds entrusted to them. Seek lenders who can pay them back with interest. Not to throw money into bottomless holes.

But in this period of high indebtedness, seeking prudent and solvent lenders is hard.

[Andreas2]

Oh, sure. Austrian economics. For the truly and permanently clueless. They have been predicting US inflation and the decline of the dollar ever since 2008. The fact that what happened was just the opposite never put a dent in their wooly-mindedness.

You are surely fully aware that Mr. Armstrong is everything but an "Austrian" or a "Gold bug", yes? So don't worry about me being truly and permanently clueless or my wooly-mindedness .

As I said, both "disciplines" (approaches by Mr. Armstrong and by the "Austrians") can provide people, to whom the experts' comments of the mainstream media - or the state-approved textbooks with their "Chicago Economics" for that matter - don't make a lot of sense or are somehow incomplete, with very interesting information.

As for my part I am very thankful to the Mises Institute ("Austrians") for providing the public with its massive library and giving me the opportunity to read up things which are missing or left out in the official textbooks or the news.

With my initial post I only tried to give the readers my personal oppinion and expectation about the current economic and financial developments and gave the links for the ones more interestet in the background of my reasoning.

That's all, I'm not on a mission to tell people what's right or wrong or "how it is". That's something they have to find out for themselves.