Some say debt is a good thing…

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Some financiers believe that debt is a good thing and is the way to go. However, there is debt and there is debt. In America, total credit increased from USD1 trillion in 1964 to USD50 trillion in 2007. This is a 50-fold increase in 43 years!

Whilst it cannot be said that Thailand is in the same boat, it should look over its shoulder and learn from the impending US disaster. Thailand needs to sort out its ever increasing household and public debt to sustain the economic growth of the country and its people.

As my business partner, Paul Gambles, said recently, “Thailand acted after the 1997 Asian financial crisis, but there is a real danger that the country is falling into bad old habits as government debt is approaching 60% while consumer debt has reached 80%, and that is scary for future growth when these two things are happening side by side.”  The problem is, there is less room for the government to manoeuvre when public debt reaches such an awful rate, while domestic consumption is hampered as consumers tend to spend less because of their debt burden.

As a way of comparison, most of the euro-zone economies which have a massive debt burden recorded public debt below the 60% threshold, but the rise in private debt greatly contributed to how the public debt continued to carry on going up through the roof.

As of the first quarter, Thailand’s household debt increased to 8.97 trillion baht which is equivalent to 77.5% of Gross Domestic Product (GDP), compared with 1.36 trillion baht or 28.8% during the 1997 crisis. Things get worse, the rate then increased to 9.27 trillion baht or 79.2% of GDP in the second quarter.

According to Public Debt Management Office data, the outstanding public debt as of the end of August totalled 5.30 trillion baht or 44.63% of GDP.

With regards to the international markets, the Thai economy will be largely influenced next year by the growth outlook of the US and Chinese economies. The one difference between Thailand and other developing economies is how to manage the current account deficit effectively and stimulate economic growth through the passage of infrastructure projects – although some say the money raised for these is only there to pay of some of the existing debt, but that is another story…

It is possible that Thai economic growth could come in at 5% next year on the back of the 2 trillion baht infrastructure investment plan despite obstacles to growth such as the rice-pledging scheme and swelling household debt.

However, high growth at an unsustainable level would not contribute to future economic well-being of the country because the best way to sustain growth is to mitigate the debt problem.

Steve Keen, a professor of economics and finance at the University of Western Sydney, said the Thai government might want to consider writing off consumer debt and shouldering a budget deficit for a while to soothe the impact of financial meddling, “Given the scale of state policy on non-land-owning Thai farmers, there simply has to be a debt write-off or some form of debt-to-equity solution to reduce consumers’ debt burden,” he said. If not then Thailand may well be on the road to rack and ruin.

Rising household debt generates concerns because the lowest end of the economic spectrum is shouldering a heavy debt burden, while there is no commercial monitoring as the records of government loans go into specialised financial institutions and the Finance Ministry which means there is no public control over what happens thus giving grounds for potential outcries re transparency and good governance – which is another reason for having no debt as then no-one can lie about it.

The above data and research was compiled from sources believed to be reliable. However, neither MBMG International Ltd nor its officers can accept any liability for any errors or omissions in the above article nor bear any responsibility for any losses achieved as a result of any actions taken or not taken as a consequence of reading the above article. For more information please contact Graham Macdonald on [email protected]