Threat of high household debt still down the road, says EIC

Meanwhile, the expected increase in the Bank of Thailand’s policy interest rate next year will mostly affect small and medium-sized enterprises and lower-income households, the EIC said. 

Speaking at the BOT’s annual symposium, EIC senior economist Athiphat Muthitacharoen said the long-term risk of high indebtedness was that it will restrain economic activity, since it will lower households’ disposable income and constrain their access to credit while reducing the role of domestic demand as a shock absorber against economic volatility.

The EIC’s latest study revealed that Thailand’s household debt has been rising fastest in the region during the past three years. It increased by 19.3 per cent from 2010 to 2013, and its current level of 83 per cent (around Bt10 trillion) of gross domestic product is more in line with developed countries (the United States is also at 83 per cent). The high level of indebtedness among low-income households is particularly worrying.

However, middle-income groups are the ones generating the most debt at the moment, which poses no risk to short-term financial stability of the country, because they have the ability to pay back their loans. This will hamper economic expansion in the long term, though, since these people will be reluctant to consume more. 

“The rising debts in this group have already begun to affect domestic consumption significantly,” Athiphat said.  The EIC study indicates that middle income groups – those earning around Bt20,000-Bt50,000 per month – had annualised debt-growth rates of a little over 6 per cent from 2009 to 2013, which was almost double that of the group with less than Bt20,000 per month, whose debt grew by about 3.2 per cent annually. 

The study also found that the middle and higher income groups together accounted for 83 per cent of total debt in 2013 and that people who were least likely to consume were those who had to use more than 40 per cent of their income to service their debts.

The average debt-to-service ratio in Thailand was 27 per cent in 2013, while the poorest households’ DSR was 49 per cent, around 29-25 per cent for middle-income households and 23 per cent for the richest households. 

As for the expected increase in the policy rate next year, Athiphat said SMEs and lower-income households would be more troubled by the hike, since they tend to take out loans that are more vulnerable to rate changes, while middle-income groups tend to take out more car loans and mortgages, which normally have fixed interest rates.

“Low-income households will be more burdened by the expected interest-rate hike next year, since their interest rates will change in accord with the market. But effect of the rate hike on consumption will be on a larger scope and not limited to lower-income households only, especially for people with a DSR level that is almost hitting the 40 per cent mark,” he said.