On July 3, the Bank of Thailand reported that Thailand's household debt had reached 16 trillion baht ($455 billion) in the first quarter of 2023, accounting for 90.6% of the country's gross domestic product. This represents a further deterioration compared to the 87% recorded in the fourth quarter of 2022. The central bank's redefinition of household debt also contributed to the increase in this figure.
This data comes at a time of political uncertainty in the country. As early as July 13, parliament is set to elect the next prime minister through a joint vote of 250 senators and the 500 newly elected members of the House of Representatives. However, with Move Forward's eight-party coalition controlling just over 310 seats in the House, there is no guarantee that their leader, Pita Limjaroenrat, will secure the 376 votes needed to become prime minister.
If the prime ministerial vote becomes contentious and doubts persist about the formation of a new government beyond the end of the fiscal year in late September, the caretaker government led by Prayuth Chan-ocha may continue with limited ability to take significant fiscal steps. Additionally, if someone other than Pita becomes the prime minister, protests may ensue, further complicating the government's management of the situation.
This uncertainty has left Thailand's financial industry and market watchers anticipating a policy paralysis.
Several factors contribute to the growing household debt. "The pandemic's impact on income reduction has played a role, but increased access to digital finance is also a contributing factor," said Somkiat Tangkitvanich, president of the Thailand Development Research Institute (TDRI).
High household debt is not unique to Thailand, as there are advanced countries like Switzerland where household debt exceeds GDP. However, in Thailand, the quality of debt, particularly nonhousing loans, is not adequately backed by assets.
"As long as there is sustained economic growth, it is not considered an immediate, bursting problem," explained Somkiat of TDRI. He pointed out that 35% of all household debt is related to housing, 12% to car loans, and 29% to consumption. "However, it is true that with the backdrop of economic maturity and an aging population, the phase of 5% to 6% growth has ended, and the country has entered a phase of gradual development, at around 3%."
Some experts have proposed the establishment of a "national debt relief agency" to allow financial institutions to address poorly collateralized household debt. However, Somkiat believes it is premature to implement such a measure. He noted that commercial banks' nonperforming loan ratios are declining, indicating their ability to withstand interest rate hikes. Nevertheless, there are concerns about the quality of loans provided by certain unsupervised savings cooperatives.
Meanwhile, the formation of a new government presents an opportunity to tackle the escalating debt problem in both the public and household sectors. Thailand's public debt has also been rising and reached 61% of GDP as of March.
However, there are concerns that the new government may overspend, as political parties from both the pro-democracy and conservative camps made generous campaign promises to attract voters.
"The Move Forward Party, which emerged as the leading party in the election, proposed a 28% increase in the minimum wage to 450 baht ($12.70) per day, which can be seen as a commendable initiative to support households while curbing fiscal deterioration," said Somkiat. He emphasized that the minimum wage has only risen 10% from 2013 to 2021. "Although raising the minimum wage to 450 baht is reasonable, it should be done gradually over a few years to avoid excessive pressure on businesses."
Addressing both household and public debt simultaneously would require either tax increases or securing new sources of revenue, as using public funds to reduce household debt would increase the government's own debt. Thailand's tax revenue stood at 16.5% of GDP in 2020, making it less capable of dealing with the rising debt.
"Given the significant income disparity in Thailand, it is rational to strengthen taxation on the wealthy, but the introduction of new property taxes or inheritance taxes has faced difficulties," he said, suggesting that options such as carbon taxes should be considered.
Somkiat also highlighted that the Move Forward Party proposed introducing a Taiwanese-style "uniform invoice" system, where retailers issue receipts with attached lottery tickets when selling goods. He believes this idea holds the potential to incorporate small and medium-sized enterprises into the tax system.