2 weeks Ago
This is the second of three articles, following the earlier article "Problems with Dr Thaksin's Visions". The series will end with an article titled "Call for a paradigm shift". The most popular question nowadays seems to be, "Where has all the money gone?" Some even accuse the Bank of Thailand (BoT) of running a tight monetary policy by syphoning money out.
The facts are to the contrary. Broad money growth in July 2024 was 3.1%, compared to 1.
6% in July last year. Unfortunately, the money supply never fully reaches producers and consumers as financial institutions do not utilise the money to expand loans. This article aims to demonstrate the economy is already at the "end of the rope" as its banking system is no longer functioning -- it's in a silent crisis.
A non-functioning banking system is the key cause of most economic crises, such as the Great Depression of 1930, Thailand's Tom Yum Kung crisis of 1997, and the crisis of 2008. Why? Theoretically, it would be explained with Milton Friedman's equation of MV=PQ. In plain English, less money means less economic growth.
The central bank regulates the money supply in any economy. However, by law and by practice, a central bank is not capable of putting money directly into people's pockets or taking money out of people's pockets. Monetary policy would have to work either through the banking system or through the financing of government debt, or both.
The latter should be done cautiously as it is anti-productive and invites adversities like currency depreciation and runaway inflation. Certain Latin American countries -- Argentina is one of them -- painfully experienced this situation. This option should only be done under extreme conditions, like the disruption from the Covid-19 outbreak of 2020-2021.
During those years, BoT printed banknotes in the amount of 460 billion baht, resulting in an increase of 3.1 trillion baht in M (Money Supply). BoT had a valid reason for making such a dangerous move.
It was because "V" (Velocity of Money) plummeted deeply as people avoided going out to consume. To compensate for plummeting V, BoT increased M in order to minimise the loss of Q (GDP). Because BoT was unable to transfer money directly to our bank accounts, the increased 3.
1 trillion baht of M was channelled through government borrowing (1.5 trillion baht under emergency borrowing decrees) and an expansion of bank loans (1.6 trillion baht).
However, money printing operations are not done without a cost. The cost was inflation, which rose to 7.86% in August of 2022.
To mop up extra liquidity from the money printing operation, BoT increased the policy interest rate by 2.0% to 2.5%.
It is clear that without a properly functioning banking system, the BoT's monetary policy would become ineffective as there is no vehicle to channel the money supply. The BoT could print as much money as it wanted, but the money would get stuck at banks and would not reach Thai producers and consumers, which is happening right now. Let's start with the last row of the table.
Money supply has been contracting since Q2. (The answer to the question, "Where has all the money gone?") According to Friedman's equation, the Thai economy should have started declining during Q2. BoT tried its best to pump M into the economy to retard the economic slowdown, but banks have not been cooperative.
In Q1/2024, BoT increased M by 381.6 billion baht hoping to see 3% economic growth, but banks expanded new loans by only half of that amount. Money was half-wasted and GDP growth was 1.
6% for that quarter. In Q2/2024, loans outstanding contracted for the first time in 20 years (or more). BoT was unprepared and money supply contracted sharply by 142.
3 billion baht. The situation got worse in July as loan contraction deepened to 62.2 billion in one single month.
However, BoT was better prepared this time and M only shrank half of that amount. By the way, one can ignore that official GDP growth figure of 2.3% for Q2.
The figure is against Friedman's theory. Anybody following the news would know that Q2 was brutal for both producers and consumers. If loan contraction continues for the rest of the year, my original projection for this year's GDP growth of 0.
0% for Q3 and -1.5% for Q4 will become a reality. In my view, the possibility of a continuation of loan contraction is high as Thai banks are in a silent crisis, ie, dead.
Correction: Thai banks are healthy on the surface, as BoT makes sure of that, but banks turn into zombies. They are not dead, but they are not alive either. They are alive as legal organisations but dead as functioning business entities.
A banking business makes money when it issues loans. Therefore, there must be good reasons why Thai banks have been recalling loans. But there is no need to guess.
The answer is a risk of losses from bad loans. Real NPLs, not BoT's reported NPLs, are dangerously high, which prohibits banks from giving out new loans and begins to recall good loans. The rumour that banks reject 70% of certain types of loan applications is not further from the truth.
Would the 10,000-baht cash handout, distributing at the end of this month, spur GDP growth? Not really. Because the money, given in a one-time cash transfer, is likely to be used for paying informal debt (about 1/3), gambling and alcohol (about 1/3), and consumption (about 1/3). The handout-induced consumption spending would be too small to make visible change in overall consumption.
The observation is in line with a BoT research paper on fiscal multipliers. The paper concluded that the fiscal multiplier for transfer payments to support low-income groups was 0.4.
The second and third round of cash handouts? Forget them. The government is broke, and the liquidity market is not conducive to mass borrowing. Do not forget the government has to borrow 713 billion baht to cover the base deficit of the 2025 fiscal budget without handouts.
The government knows this problem well. It avoids borrowing 145 billion baht for next-week's cash distribution from the market but digs into its Treasury balance deposited at BoT. After the withdrawal, the Treasury balance will drop to 302 billion baht, compared to an opening balance of 543 billion baht for the 2024 fiscal year.
If one wants to fix the Thai economy, one must start by fixing the zombie banking system. As explained, requesting BoT to release more money would not be effective. The only way to cure zombie fever is to restructure household debt.
The government has the right idea that household debt must be restructured, but it has no idea how to do so, as the cost would be prohibitive. How prohibitive? Over 5 trillion baht. Chartchai Parasuk, PhD, is a freelance economist.
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