Household debt crisis looms as rates rise

A sign announces interest rates at a currency exhibition. Household debt now exceeds 90% of Thai GDP as households struggle to make ends meet. (Bangkok Post file photo)

With interest rates set to rise in the second half of the year, rising household debt could hit Thailand’s economy hard, weakening consumer purchasing power and slowing economic growth, according to KKP Research.

Thai household debt now exceeds 90% of Thailand’s GDP, ranked 11th in the world, as households struggle to make ends meet.

Most households in the bottom 20% have an average monthly income of only 10,000 baht, while the minimum monthly expenditure is 12,000 baht. These households resorted to borrowing to pay for basic daily needs, driving up the proportion of short-term consumer debt to total household debt, the research house said.

Thailand’s per capita income is also very low compared to countries with similar debt levels, suggesting the Thai economy is more vulnerable to the impacts of debt than other countries, KKP said. Research.

According to Credit Suisse, Thailand has one of the highest levels of wealth inequality in the world, and debt tends to be concentrated in lower-income households that have a lower asset-to-debt ratio. Therefore, when interest rates rise, these households have to reduce their consumption to pay off their debts, which will slow down economic growth.

Low-income households are also more affected by inflation, as food and energy expenditures represent a relatively larger proportion of total household expenditures, reducing their ability to repay debts.

Rising household debt will cause Thailand to face a long downturn in the economic cycle, the research house said.

The debt burden will intensify as interest rates rise and rising household indebtedness slows consumption growth. Any attempt to boost consumption through debt will hit a dead end because debt levels are already high, KKP Research said, which means boosting consumption through debt cannot create growth.

KKP Research estimates that if the economy enters a period of debt repayment or deleveraging, consumption momentum will fall by around 1.3 percentage points, while economic growth will slow by around 0.7 percentage points. percentage, causing a long economic crisis.

However, the company believes Thai financial institutions will remain strong with high foreign exchange reserves. Risks to watch include Thailand’s loss of competitiveness, which could lead to a negative current account balance, a weaker baht, excessive debt that could lead to an economic crisis and a weaker-than-expected recovery in tourism. External risk factors include the global central banks’ long-term plan for their monetary policy in the event of stagflation, as well as the Chinese government’s promotion of domestic tourism which could lead to a decline in Thailand’s current account.

KKP Research said the Thai government should not try to stimulate the economy with debt, preferring a gradual rise in interest rates.

Julio V. Miller