Less populist policies would cut household debt: ADB

The Asian Development Bank (ADB) has suggested that once Thailand has a permanent government in place, it should drop its populist policies as a way to rein in rising household debt.

Luxmon Attapich, ADB senior country economist, said the high level of household debt last year had lowered people’s purchasing ability, and this situation had continued into this year at the same time as reduced income as the slump in the economy had affected consumers’ ability to repay their debts.

She said a short-term solution to increase people’s ability to repay their loans was for the economy to pick up, but there were also long-term solutions such as the promotion of a money-saving culture and discouraging people from taking out superfluous loans. 

She also suggested that the new government adopt fewer populist policies that have the effect of eventually raising personal debt and for financial institutions to moderate the use of campaigns that lure customers into borrowing for impractical reasons.

The Bank of Thailand reported that at the end of last year, household debt stood at Bt9.79 trillion, or 82 per cent of gross domestic product. This compared with just 55.8 per cent of GDP at the end of 2008.

And the debt-to-GDP ratio has continued growing according to Kasikorn Research Centre, which estimates it will rise to 84 per cent by the end of 2014.

The World Bank’s “Thailand Economic Monitor” reported last month that the high level of household debt was one of the factors constraining Thai consumers’ purchasing power last year.

However, BOT spokeswoman Dr Roong Mallikamas said it was hard to quantify how much high household debt had contributed to the current slowdown of domestic consumption because there were other factors in play such as reduced income.

She noted that most households were still able to make their loan payments normally. The number of special-mention and non-performing loans (NPLs) at commercial banks had risen by only a small margin, from 5.4 per cent in the third quarter to 5.7 per cent in the fourth quarter of 2013.

Roong said the problem was the reduced cashflow within the household. When this is coupled with the already high level of debt, people have started to try to stabilise their financial situation, and this contributed to the slowdown in domestic consumption.

“The high level of household debt is a factor that has contributed to the current slowdown of domestic consumption, but the size of its effect cannot be identified,” she said. 

Still, the BOT has been warning about high household debt since last year, and the problem appears to be continuing.

Somchai Amornthum, executive vice president of the research department at Krung Thai Asset Management, said the current rise in household debt was a short-term phenomenon that would slow down once the economy recovers from the political turmoil.

He said commercial banks were well aware of the situation and rises in NPL rates in recent years were still manageable and not an immediate concern. 

“The number of NPLs is on the rise this year but it should not be a problem for commercial banks since it was expected, and the banks’ financial strength has remained high. There is no NPL crisis at this time,” he said. 

Somchai said commercial banks had been warned by the BOT since last year to be wary of rising household debt and they had taken some measures such as tightening loan requirements. Other measures such as active loan-collection strategies and a reduction of promotional campaigns to encourage borrowing have also been taken by commercial banks to lessen the chances of NPLs.

He said the BOT had done a good job in getting out the message to loan providers and consumers, which has reduced the risks considerably. He also believes that when the economy improves and the political squabble has died down, the consequent increase in both domestic consumption and government spending should be enough to counter the effects of rising household debt.