Thai opinion: The unfortunate link between purchasing power and indebtedness

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The unfortunate link between purchasing power and indebtedness
Achara Deboonme

BANGKOK: -- Newly appointed economics tsar Somkid Jatusripitak began his tenure by insisting that Thailand is not experiencing an economic crisis. The problem, external factors aside, is that a slump in crop prices has left Thais with little money to spend, especially in the rural heartlands, Somkid said.

He is thus convinced that the economy would tilt upward if the poor had more to spend.

The Cabinet is today due to consider proposals from its new economic team for short-term measures to lift the economy. One of them will be a massive cash injection to the Village Fund scheme, which would give the rural poor access to a reported Bt59 billion in low-interest loans.

The brains behind previous loan schemes have highlighted the benefits of better access to finance, and the so-called multiplier effect - when an initial injection into the economy causes a bigger final increase in national income. Expect to hear more of the same from today.

According to reports, new loans will only go to income-boosting enterprises. Let's hope that the village committees overseeing the lending are able to screen the projects properly. Let's also hope that the borrowers don't use the money to buy unessential items, as has happened in the past.

Experience has shown that the poor are enthusiastic about loans that carry zero interest in the first two years. Yet, financial institutions are often reluctant to lend to the poor, given the uncertainty over repayment.

Household debt in Bangkok, Nonthaburi, Chon Buri and Samut Sakhon averaged more than Bt400,000 in 2011, National Statistical Office data shows, and more than 40 per cent of that debt went to finance house and/or land purchases.

In contrast, household debt in the Northeast and the South averaged below Bt200,000, with more than 40 per cent spent on household consumption. In the North it was also below Bt200,000, but most of it went to finance agricultural and other income-boosting projects.

Meanwhile only 42 per cent of the poor are indebted, in contrast to 58 per cent of the non-poor.

The situation will not have changed much four years on.

The data strongly suggests that the spending patterns of rural populations create a greater multiplier effect. Unfortunately, they don't have much to spend. And with loan offers few and far between, they have to be discreet with their spending.

As such, they should welcome the rebooted Village Fund scheme. As in the past, many are likely to come up with business plans for income-boosting enterprises, only to use the loan to buy a new motorcycle for their private use. (Of course, this purchase may well benefit the economy, but only months from now, when the motorcycle makers pay tax.)

Farmers typically need to show a cultivation plan before the Bank for Agriculture and Agricultural Cooperatives will grant them a loan. Yet, a recent survey by a farmers' network showed that most farmers in two central provinces used the loans to finance their children's education or health expenses.

This time, as in the past, if the loans cannot boost their income, they will only boost their indebtedness.

Prime Minister Prayut Chan-o-cha has shown deep concern over debt levels among farmers. In July, he instructed his then deputy, Pridiyathorn Devakula, to lead three related ministries in tackling the problem of farmers burdened with high-interest loans, especially those who stand to lose their fields to loan sharks. That followed a report that 149,000 farmers owed loan sharks roughly Bt21 billion in total.

Early last month, Prayut was reportedly alarmed by an Interior Ministry report that 1.64 million farmers owed as much as Bt388 billion, or an average of Bt237,000 each. He instructed the Interior, Justice and Finance ministries, along with the Government Savings Bank and the Bank for Agriculture and Agricultural Cooperatives, to provide speedy aid to farmers facing the loss of their properties.

Indeed, the general level of debt among Thais is alarming.

Average household income doubled over the decade up to 2011, and with it went average spending - up from Bt68,405 in 2001, to Bt134,900, according to official figures. Yet much of that spending was fuelled by loans: In 2011, household debt averaged Bt241,760.

In 2014, almost three-quarters (74.8 per cent) of Thai households were in debt, according to a survey by the University of the Thai Chamber of Commerce.

The respondents attributed their borrowing to the economic slowdown against the higher cost of living and education expenses. Some explained having to borrow to repair damage caused by natural disasters. Some had overspent with credit cards. Many farmers needed to take loans after their payments under the rice-pledging scheme were delayed.

Over the past two years, a drop in Thai exports has gone hand in hand with a slide in economic growth. Most policymakers have insisted that Thais' purchasing power has remained strong, but that consumers have been afraid to spend because of the economic uncertainty.

Somkid has arrived with a new theory. It seems he is convinced that the poor hold the key to the health of the domestic economy. Prayut is also a believer, having publicly stressed the important role that low-income Thais have to play in lifting the economy.

It's good to hear they agree that the poor need an injection of purchasing power. Yet it will be unfortunate if this treatment is administered in such a way that it boosts their indebtedness.

Source: http://www.nationmultimedia.com/opinion/The-unfortunate-link-between-purchasing-power-and--30267824.html


-- The Nation 2015-09-01

[MaiChai]

Oh dear getting the poor farmers into more debt. This only benefits the rich in the long term as farmers loose land because they can't service their debts. There must be others ways to boost peoples spending other than getting them into more debt?

[HiSoLowSoNoSo]

Lending more to people who can't pay back their old loans sounds like a really stupid idea.

[lovelomsak]

Lending more to people who can't pay back their old loans sounds like a really stupid idea.

Is that not the way big business works. Managed poorly giving CEo's big salaries for being none productive then asking for bailouts because they are broke. Big business is always getting bailedout because they cannot pay their bills.

[Puwa]

I don't believe that an economist has been born who could figure out how money circulates in the general population here.

[Praematura]

Thailand has become a middle income country and because they didn't innovate they are going down the drain. Thailand exports hard drives? So 1990s. You can see how other countries changed and copy their success. This country isn't unique, just look around.

More loans rather than innovating existing industries sounds more like buying off the masses in the short term for political expediency.

[worgeordie]

Instead of pushing people to spend more,what about advising

people to live within their means,and to be happy with what they

have,the public debt must rise every time Apple puts out a new

iPhone.

regards Worgeordie

[timewilltell]

The very first act should be to increase the criminal penalty for loan sharks with net rest above the legal maximimum to at least 3 years.

The second thing would be to include a clause in that law to consider any payment made on the principal as interest regardless of how it is named in the contract. And thirdly to include any fees or other charges to be treated as interest. In other words whatever has to be paid on top of the principal is deemed interest in the eyes of the law. These clauses needed to stop these scum lenders from cheating which they are expert at.

If enacted with a dictator to the police to vigorously enforce and apply the law retroactively, then the amount of loan sharing where the poor can lose their property should shrivel. It is damaging to the economy and to society.

The low interest loan ideas is only as good as the people who oversee the distribution which, considering that a huge percentage of Thai people are corrupt or deceiving, does not make that task very easy. Add to the fact that social responsibility is non existent and pretty much everyone lives for today with no thought for tomorrow, there is almost no chance that the scheme can run without vast corruption.

The answer is education and training both of the young and those who are past leaving age to give them the skills needed to be employed and to start a program me of spurring a will to work and make it socially unacceptable to lounge around all day doing nothing.

Thailand's best option to galvanize the economy is to cut away all the xenophobic laws making foreign investment unattractive, providing foreigners with a way to secure a home to live. It requires a huge sea change in attitude and laws to require a majority of profits to be reinvested in Thailand to stop profits being sucked back outside Thailand.

Thailand is going down the plug hole with no effort to stop it as the countries around it are rising and Thailand sits back on its lazy xenophobic laurels. It deserves al, it gets.

[Tatsujin]

wow, more debt to come then I guess ... after all, to clear a debt, it's only common sense to borrow more cos we all need the latest iPhone, LED TV, new car etc.

Edited September 1, 2015 by Tatsujin

[cloudhopper]

This piece should have been titled the link between indebtedness and ruin. More debt is not the solution. But that is what is going to happen until it all collapses.

[somo]

IThey need to focus on the longer term rather than short term fixes. Improving education standards for the poor should be the number one priority or Thailand will be stuck in the middle income trap for another generation. At the moment the Thai education system is a scandal. Sadly I don't see it happening as politicians, even ones with military backgrounds, only focus on the here and now.

[Srikcir]

"Let's hope that the village committees overseeing the lending are able to screen the projects properly."

The government is going to distribute Bt59 billion to the village committees and hope the money is used wisely? There should be clear accounting and transparency procedures that must be met by independent auditors to assure no conflict of interest or corruption. But nothing in details about this.

Who will be monitoring the committees to assure they do not steal the funds or improperly screen projects to the advantage of cohorts?

This looks like another bailout that only enriches the wealthy at the expense of the taxpayers.

[connda]

What a great answer: Make the poorest segment of society into debt slaves, well, until you can foreclose on their meager land holdings, and then force them into a feudalistic existence bound to a land owner.

...And the rich get richer and the poor get poorer;

the the mean time, in between time, ain't we got fun!!!

-by Richard A. Whiting, lyrics by Raymond B. Egan and Gus Kahn.

[Thai at Heart]

The unfortunate link between lax lending and indebtedness.

[jerojero]

There are two ways to lift the economy. Government direct spending and consumer spending. Typical Macroeconomics says government spending is most effective and efficient, while consumer spending takes longer to affect the economy. However government spending means creating new jobs, directly or indirectly. And since Thailand has officially zero unemployment, all bets are off. Give money to the poor, at least they will spend it which might bolster the economy.

[elgordo38]

Lending more to people who can't pay back their old loans sounds like a really stupid idea.

It is a stupid idea but its happening world wide thanks to cheap money. Loans on cars are the worst as financed cars usually are traded back in for a new one before they are paid off. Its the opposite of compound interest at higher rates. My daughter has a line of credit that keeps growing and she is retired. I tried for 40 years to get her to watch her money but then the government came along with almost 0 percent loans and she was hooked like everyone else(except me) My grand daughter and grandson are also hooked. She just bought a house and a new car and he bought a new car.

[elgordo38]

Lending more to people who can't pay back their old loans sounds like a really stupid idea.

Credit card debt is the worst.

[elgordo38]

Instead of pushing people to spend more,what about advising

people to live within their means,and to be happy with what they

have,the public debt must rise every time Apple puts out a new

iPhone.

regards Worgeordie

That would never work. They have to keep people going in the hole to keep the economy afloat. Its all one big debt Ponzi scheme.

[ramrod711]

The problem, external factors aside, is that a slump in crop prices has left Thais with little money to spend, especially in the rural heartlands, Somkid said.

Wonder how that could have happened? I think the obvious answer is elections, 500 baht per voter might boost the economy. It seems to be the only source of income that some of my in-laws have.

[jaywalker]

"He is thus convinced that the economy would tilt upward if the poor had more to spend."

Once again, rocket science, much like saying that if a frog had wings he wouldn't bump his ass.

[billd766]

Oh dear getting the poor farmers into more debt. This only benefits the rich in the long term as farmers loose land because they can't service their debts. There must be others ways to boost peoples spending other than getting them into more debt?

How is this getting the poor into more debt? Granted if they apply for and then abuse the loan you are correct. However if they don't apply or borrow nobody is forcing them to take out a loan.

Here is a slightly off topic piece from the BBC News website this morning.

http://www.bbc.com/news/business-34144333

quote from one part

Millions of buyers were sold interest-only mortgages before rules were tightened up three years ago.

Without the need to pay back some of the loan each month on top of the interest, they could borrow more to buy their dream homes.

Sarah, who lives near Brighton and has an interest-only mortgage, said she and her husband could hardly afford the interest when they bought their house and frequently fell into arrears.

"We were silly. We'd just had our first baby," she said.

"But they shouldn't have given the loan. We didn't understand what we were taking on and didn't think about having to pay it back."

They have 16 years until they have to return nearly £200,000, but admit the debt has become a constant worry.

These people are supposedly educated to a higher western standard than poor Thais.

[onelasttime]

This is quite scary ... that Somchai, already in debt can get deeper and deeper into that black hole. I heard of a young Bankokian girl whose credit card was maxed out. The bank gave her another one and when that was maxed out too, a different bank gave her a line of credit to pay off the others. <deleted> ! This is the mechanism by which those in powwer consolidate their wealth. Can someone explain why the Baht is still relatively strong?