Household consumption in Thailand has been constrained by an ageing population and rising consumer debt, and a string of failed stimulus packages launched in the early 2010s led to a sharp increase in the number of distressed and non-performing loans (NPLs) in the consumer segment, exacerbating already challenging circumstances. However, the tide is beginning to turn. The Bank of Thailand (BOT) has worked to tighten lending, and household debt has eased since reaching a peak of 80.8% of GDP in 2015. Meanwhile, consumer lending recorded strong growth in 2017 alongside a significant increase in domestic automobile sales.
Although private consumption has improved, growth remains subdued. The BOT’s private consumption index shows the metric expanded by 1.4% in 2015 and 3.7% in 2016. However, household final consumption expenditure in current US dollars fell from a high of $220bn in 2013 to $214bn in 2014 and $205bn in 2015, before recovering to $206bn in 2016.
Other indicators have also not met expectations: passenger car sales eased from 411,000 units in 2014 to 383,000 in 2015 and remained subdued at 389,000 in 2016, while commercial vehicle sales decreased from 417,000 units in 2015 to 380,000 in 2016. The retail sales index was also relatively flat, shifting from 213.02 in 2014 to 212.92 in 2015 and 215.05 in 2016, while the consumer car sales index declined from 105.54 in 2014 to 98.16 in 2015 and 98.59 in 2016.
Subsiding consumption is not a recent trend: household consumption as a percentage of GDP has dropped off in recent decades, from 77.7% in 1960 to 60.95% in 1985, 51.23% in 1998 and 55.04% in 2008. General consumption has also continued a steady downward trend, worth 55.03% of GDP in 2011, 53.33% in 2013, 48.86% in 2015 and a 56-year low of 46.18% in 2016, the most recent year for which statistics from the World Bank were available at the time of publishing.
The problem is partly structural. Thailand is set to be the first emerging economy to become an “aged society”, with 14% of the population forecast to be over 65 years of age by 2022 (see analysis). The UN has also projected that 42% of locals will be over 60 years old by 2044. This demographic imbalance could cause difficulties for the younger generation financing the universal health care system in the coming decades. A shrinking workforce and low levels of skilled labour are also forecast to weigh on long-term consumption. Successive government regimes have taken steps to boost private consumption, seeing mixed results.
In 2011 the government of then-Prime Minister Yingluck Shinawatra introduced a rice-buying scheme offering up to 50% above market rates, which cost more than $21bn by late 2013. A $681m subsidy programme for rubber farmers was also unveiled in 2013, with global ratings agency Moody’s later reporting that these increasingly expensive subsidies were considered to be credit negative.
In 2011 the Yingluck administration also launched a $2.5bn lending scheme for first-time car buyers. Beneficiaries would receive tax refunds of up to $3200 on purchases of domestically manufactured vehicles. This resulted in surging passenger vehicle sales growth of 84.2% to 694,000 in 2012, which remained elevated at 663,762 in 2013, before easing to 411,414 in 2014. Commercial vehicle sales followed a similar trend, at 218,000 units in 2011, 742,000 in 2012, 667,000 in 2013 and 470,000 in 2014.
While these stimulus programmes boosted sales in the short term, many low-income borrowers could not afford to repay their loans. By September 2013 more than 100,000 new car buyers defaulted on loans and had their vehicles repossessed. Furthermore, farmers participating in the rice-pledging scheme were able to access loans for the first time, leading to a rise in defaults when the initiative ended.
The government also rolled out minimum wage increases in 2011, allowing many to qualify for personal loans and credit cards for the first time, causing more delinquencies and defaults: the consumer lending NPL ratio rose from 1.9% in 2012 to 2.8% in 2015.
Reining It In
While previous reforms did not yield desired results, high levels of household debt and stagnating incomes are the largest challenges to near- and medium-term growth. Households are highly leveraged, with the household debt-to-GDP ratio rising from 42.2% in 2003 to 71.8% in 2012, 76.6% in 2013, 79.7% in 2014 and a high of 80.8% in 2015. Although the rate moderated to 79.3% and 78% in 2016 and 2017, respectively, it is among the highest in the Asia Pacific.
Consumer NPLs also rose from 2.71% in the fourth quarter of 2016 to 2.74% in the third quarter of 2017, before moderating to 2.68% the following quarter. This is still below the broader NPL ratio, which increased from 2.71% in the fourth quarter of 2016 to 2.97% in the second quarter of 2017, before easing to 2.91% by end-2017. However, the ratio of special-mention loans – those overdue by between one and three months – remains elevated in the consumer segment, having grown from 3.19% in late 2016 to 3.26% in the third quarter of 2017, before falling to 3.21% the following quarter. This is higher than the average rate of special-mention loans across the banking sector, which was 2.63% at end-2016, 2.72% in the third quarter of 2017 and 2.55% in the final quarter of that year. The growth in NPLs is largely driven by housing, automotive and credit card loans taken out by millennials – those born in the 1980s and 1990s – who often use personal loans to solve their liquidity problems.
In September 2017 the BOT moved to tighten regulations to reduce risky lending, capping borrowing at 1.5 times the monthly salary of any applicant earning less than BT30,000 ($868) per month. This is much lower than the previous allowance of up to five times the monthly salary of any applicant earning BT15,000 ($434) per month. Credit card interest rate caps were also reduced from 20% to 18%. While the framework could affect bank profitability, financial institutions have also welcomed consumer deleveraging, as this should create opportunities for purchases and savings.
Several indicators rebounded in 2017. Consumer lending recorded strong growth of 6.1%, supported by 8.4% and 5.7% increases in auto lending and personal lending, respectively. However, housing loans, which account for 16.7% of bank lending, contracted by 5.5%, and credit card lending, which accounts for 1.9%, shrank by 3.4%, due in part to Standard Charter selling its retail lending unit to TISCO, a domestic lender, in December 2016 (see Banking chapter).
While there was an anticipated slowdown during the mourning period of the late King Bhumibol Adulayadej, other consumption indicators showed improvements. Automobile production for domestic distribution rose by 11% in 2017 to 862,000, with passenger vehicle sales increasing by 18.1% to 459,000. The BOT’s retail sales index jumped from 215.05 in 2016 to 228.34 in 2017, and its car sales index grew from 98.59 to 111.24 over the period. The World Bank reported that private consumption growth hit 3.2% in 2017, contributing nearly half of aggregate economic growth for the year.
Improved indicators offer good reason to be optimistic about economic recovery but might not tell the full story. In February 2018 global ratings agency Standard & Poor’s (S&P) reported that problems in small and medium-sized enterprise (SME) lending could spill over into consumer lending: rising credit card and mortgage defaults could be tied to defaulting SME owners who have also taken on personal debt. Especially because SMEs account for 33% of commercial bank lending, they could pose the biggest risk to the asset quality of banks (see Banking chapter).
The government has taken action since 2015 to support SMEs through the use of soft loans, credit guarantees and income tax deductions. According to S&P, these factors, along with improving business sentiment and investor confidence, could indicate a more positive outlook for the near to medium term.
“Thailand’s focus on facilitating access to finance for SMEs is common among emerging economies in the region, who also understand SMEs’ potential for creating jobs, reducing poverty, boosting economic growth and improving income distribution,” Shamsad Akhtar, executive secretary of the UN Economic and Social Commission for Asia and the Pacific, told OBG. “However, there is little clarity about which programmes and institutions are most effective to achieve this.”
The performance of SMEs and the economy in general are typically tied to consumption figures. The National Economic and Social Development Board forecast private consumption growth of 3.1% in 2018, down slightly from 3.2% in 2017.
Meanwhile, the World Bank projects that this will remain flat, at 3.1% in 2018 and 2019, leaving the external sector to remain the primary near-term growth driver. However, the first quarter of 2018 was surprisingly robust, with year-on-year consumption growth hitting 3.6% and GDP expansion reaching a five-year high of 4.8%, suggesting that macroeconomic recovery could lead to a long-awaited uptick in consumption.
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