Rising household debt in Thailand remains a source of risk for the Southeast Asian country’s economy.

Thai household debt accelerated rapidly between 2010 and 2013 in particular, mostly due to tax breaks on vehicle and housing purchases. More recently, growth in household lending has slowed to 6.5% for Thailand in 2014 from 18% in 2012.

Yet despite slower household credit growth over the past two years, household debt in Thailand remains among the highest in ASEAN at 86% at the end of 2014.

Fitch noted on the matter ”While the slowdown in household debt growth is positive, household leverage is likely to stay high in the short to medium term as consumer loan demand is unlikely to be materially below GDP”.

High leverage leaves households sensitive to macroeconomic weakness. With challenging headwinds coming from China as the world’s second biggest economy takes a pause, this risk is unlikely to end at least for some time.

Further asset quality deterioration is likely and will depend on the outlook for economic growth and unemployment, with lower-income households being more vulnerable.

According to Fitch, large commercial banks seem well-placed to weather any asset quality stress due to their better-quality customer base, reasonable capital and asset quality buffers. However, escalating delinquencies, exposure of some institutions to vulnerable lower-income segments and weaker economic growth have the potential to seriously disrupt the banking sector.

 

Fed’s Rate Policy Prompts Fund Outflow from Thai Banks

It’s also important to note is that the faith of the Thai banking sector might no longer depend on the Thai economy alone. The US Federal Reserve decided to keep its zero interest rate policy unchanged on Wednesday, the 17th of June.

However, two rate rises of 25 basis points each before the end of this year, to bring the Fed rate to 0.75 per cent, are widely expected among market analysts.

Analysts have been warning for a long time that the Federal Reserve’s zero-interest policy, launched in 2008 and accompanied by massive money printing totaling $4 trillion, has seriously undermined the global economy.

Such policies have been unprecedented and it remains unknown how the markets will react once the Fed decides to normalize rates. The Fed too is vary of possible negative spill overs, hence the delay in the rate rise.

Thailand, as an emerging market economy, would not be exempt from possible financial shocks. Most certainly, higher US rates would induce capital outflows.

The Bank of Thailand has brought down its short-term rate to 1.5 per cent. For now, the goal is to hold a low rate and to keep the Thai Baht weak, in the hope that this will help stimulate the economy and boost exports.

However, with the Fed on the brink of raising rates for the first time since 2008, the Thai central bank will more likely than not have to follow along. This will only put more pressure on the Thai banking sector.

For now, brace for more tough times in the second half of this year when the effect of the recent drought on Thai farmers begins to spread. The third and fourth quarters of 2015 will most certainly be interesting as debt in Thailand continues to rise in both the public and private sectors.

About Reid Kirchenbauer

Reid Kirchenbauer is the Founder of InvestAsian. He's experienced with trading stocks and buying property in Thailand, Cambodia, and elsewhere. He's been featured in publications such as Forbes, Nomad Capitalist, Property Report, and Seeking Alpha. Download his free investment guide by clicking here.

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