Thailand’s off-the-books debt problem

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A nasty consumer debt hangover awaits Thailand, as recently highlighted by EM Squared. Over the past decade, Thais have binged on auto financing and unsecured loans, to the extent that nominal household debt doubled between 2008 and 2014, and debt has reached 80 per cent of GDP*. Consumption growth has stalled, and neither consumers nor the country's banks can stomach much more.

Yet for many in Thailand, the situation is even more precarious than official figures suggest. Millions of the poorest Thais routinely turn to various forms of off-system money lenders when they cannot access legitimate forms of credit. These range from gold shops engaging in unlicensed lending, to illegal pawn shops, to loan sharks with links to organised crime.

Tracking the slowdown in Thai credit spending
Tracking the slowdown in Thai credit spending   

Off-system interest rates range from the surprisingly reasonable to the viciously usurious. Field research by Asean Confidential, a research service at the FT, has found rates as "low" as 3 per cent a month on illegally pawned gold and as high as 1 or 2 per cent a day on borrowing from loan sharks. More typically, loans secured by collateral tend to cost about 5 per cent a month and unsecured loans about 10 to 20 per cent a month.

In a country where the legal limit for effective interest on unsecured loans is 28 per cent a year, such rates are extremely high. Highlighting the lack of financial understanding among borrowers, rates are often referred to in Thai as baht per month rather than as a percentage per year. For instance, a "10 baht" rate means 10 per cent a month.

In 2009, the Abhisit Vejajjiva government estimated that 1 million Thais owed money outside the official financial system. Asean Confidential's research suggests that today there could easily be 2 million or more, due in part to the troubles of rice and rubber farmers. Thailand is the leading global producer of rubber and the top exporter of both commodities.

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In 2013-14, about 1 million Thai rice farmers went unpaid for rice sold into a hare-brained government scheme, forcing most to borrow wherever they could to survive. Rubber farmers, who also number around 1 million, are in a similar position due to extremely depressed prices. Rubber demand has improved somewhat since early 2015, but prices remain much lower than farmers had grown used to in recent years.

Similarly, officials and business owners in secondary cities such as Khon Kaen and Surat Thani report serious concerns over both legal and off-system debt among factory workers. Research indicates that workers commonly owe amounts equal to six to 12 months of their salaries for formal loans, plus another month's pay in off-the-books debt.

While middle-class consumers in developed countries frequently owe more — a newly financed vehicle plus some credit card debt can quickly exceed an annual salary — for workers earning about $10-20 a day, any debt burden severely reduces their minimal disposable income. This is compounded by deflation: Thailand now exhibits the highest official deflation of any emerging market, meaning the true cost of borrowing rises over the period of the loan.

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In fact, deflation arguably reverses the recent deceleration in the growth of household debt. Official household borrowing has slowed significantly since its peak, but still greatly outpaces GDP (see chart). However, after correction for the headline consumer price index, debt-to-GDP actually accelerated in the first quarter.

*A Q1 2015 change in the way Thailand calculates GDP resulted in an on-paper fall in household debt to 80 per cent of GDP from 86 per cent.