By James Guild
By any measure, Thailand’s dependence on foreign markets and visitors has made it especially vulnerable to the effects of the coronavirus pandemic. Foreign tourists brought in about $62 billion in 2019, and total goods exported reached $245 billion. Obviously these sectors will take a huge hit this year, but the news is not all bad. Because of the way the country has structured its public finances and economy, it has quite a bit of fiscal space to combat the deleterious effects of the pandemic.
Thailand has very favorable terms of trade, running a current account surplus of $38 billion in 2019. The last time the country had a deficit in its balance of payments – that is, when it was a net debtor to the rest of the world – was in 2014. Over the years, the Bank of Thailand has stockpiled a large amount of foreign reserves, ending 2019 with $216.8 billion in non-gold holdings, equal to about 40 percent of GDP.
The government has also been running a tight fiscal ship for many years, with expenditures rarely exceeding revenue. There were fiscal deficits only twice from 2013 to 2019, each time less than 1 percent of GDP. As a result, total external debt in 2019 amounted to around 33 percent of GDP, moderate enough that it could be easily covered by the foreign exchange reserves held by the central bank.
In the event of a major global crisis, this is not a bad position to be in. With big surpluses, large foreign exchange reserves, manageable external debt, and public expenditures offset by tax revenues the government of Thailand can, if it wants to, raise lots of cash quickly and cheaply in a pinch.
You may notice this is somewhat of a Catch-22. The reason Thailand is afforded lower yields by capital markets is precisely because it doesn’t run deficits and has moderate debt. But if there is any time to dip into years of accrued fiscal good will, it is surely during a global pandemic that has choked off some of your economy’s main sources of revenue. The government of Thailand agreed, approving a 1.9 trillion baht rescue package in May (worth approximately $60 billion at the time, but due to the baht strengthening since then now closer to $63 billion). At around 10 percent of GDP, it is a sizable stimulus.
The rescue package is meant to be funded by 1 trillion baht in new government bond issuances, and go toward shoring up the healthcare system, providing cash handouts, and stabilizing the financial and corporate sector. In April, the government had 20 billion baht ($663.8 million) in outstanding Treasury bills, and pushed that to 400 billion baht ($13.3 billion) by the end of the October. These bills have yields close to the benchmark rate of 0.5 percent and terms of between 6-12 months, so the strategy is clearly to ensure the bulk of borrowing for fiscal stimulus will be short-term in nature.
Indeed, authorities have gone to great lengths to signal to capital markets that Thailand will not go crazy on debt, even in its efforts to combat the crisis. But why is the government so committed to fiscal sobriety even during these extraordinary times? The most likely answer is that for a country like Thailand, which prioritizes tourism and trade, having a stable baht is the most important consideration. Capital inflows (and outflows) can cause currency volatility, and this is clearly something Thai policy-makers want to avoid. They want to thread the needle of funding a stimulus package, without having the baht strengthen too much, which leaves them somewhat constrained.
In the process, they may be missing a golden opportunity. While Thailand’s external debt is very moderate, domestic credit is another story. In June household debt was reported to be 83.8 percent of GDP. That is very high, especially when the national savings rate in 2019 was only 30.9 percent of GDP. Whenever credit exceeds savings by that much, it’s cause for concern. Thailand could use the window created by COVID-19 to borrow cheaply and, as part of its stimulus efforts, restructure and provide relief on some of this household debt. This would provide a big boost to domestic consumption, the most obvious and immediate driver of recovery until the pandemic is well and truly behind us.
But it appears the Thai government is still placing its hopes on trade and tourism to lead it out of this crisis, and to do that requires a stable baht that is not too strong. And that means adhering as much as possible to moderate fiscal policies, and keeping capital flows and debt in check. In the process, this looming domestic credit bubble – the kind that can be popped by a sudden shock, such as a pandemic-induced spike in unemployment – may get pushed to the backburner. So while the government has gone a bit outside of its comfort zone to combat the pandemic, time will tell if it was enough.
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