Thailand’s region-topping household debt ‘a financial illness’, cure will be painful: Analysts

BANGKOK: Thailand was in the very final stretches of the wet season in late 2011 when the levees broke. Bangkok was exposed to a rush of floodwaters from the north, a deluge that would engulf the capital and impact an estimated 13.6 million people.

Countless homes, vehicles, businesses and fields were left in ruin. For some victims, it would take years to recover.

While the water would eventually drain away, what was left in its wake was a wave of debt, as people borrowed to survive and rebuild. And that debt has still largely failed to subside to this day.

Analysts point to this devastating and destructive moment in Thailand’s modern history, in combination with multiple other economic and political strategies converging at the same time, as a major reason why the country’s economy is caught in a sluggish loop.

Thailand has the highest household debt to gross domestic product (GDP) ratio in Southeast Asia, according to a report by the Institute of International Finance in late 2023. At about 90 per cent - and valued at US$482 billion - it ranks only behind South Korea across Asia as a whole, and well above regional neighbours like Singapore (45 per cent), Malaysia (84 per cent) and Indonesia (16 per cent).

Household debt refers to things like mortgages, car loans, credit card debt and student loans. With a ratio of 90 per cent, it means for every US$100 the entire Thai economy produces in a year, households owe US$90.

For Jack, a teacher in Sa Kaeo, a rural province on the Thai border with Cambodia, loaning money for “something necessary” like a car, motorcycle or washing machine is normal.

“There is no other option but to buy it on a payment plan and be in debt,” said Jack, who declined to give her full name, explaining she had borrowed 300,000 baht (US$8848) from a teacher co-op, an informal lending group. 

When including informal lending outside the remit of registered financial institutions - which is common in rural areas - Thailand’s debt ratio ballooned to 104 per cent in the fourth quarter of 2024, based on a study by Chulalongkorn University.

“Household debt is now one of the main structural economic issues in Thailand,” said Sommarat Chantarat, the executive director of Puey Ungphakorn Institute for Economic Research.

“And right now, we are kind of stuck.”

MONEY IN THE HANDS OF THE PEOPLE

It was not always like this for Thailand. While household debt had been elevated in the past, it hovered around a much more manageable 60 per cent before the “flood of a century”.

But it was a “coincidence” that the major shock of the flood occurred during a period of political populism and spending policies that resulted in runaway debt levels, Sommarat said.

The prime minister at the time was Yingluck Shinawatra, the sister of political doyen and former leader Thaksin Shinawatra who was in power from 2001 to 2006 before his removal from office by a military coup.

Yingluck initiated the First Car Buyer policy just months before the flood. It was an initiative that offered tax rebates of up to 100,000 baht (US$3,300) for first-time buyers of new passenger vehicles. 

The intention was to encourage car ownership and borrowing while stimulating the economy, especially Thailand’s critical automotive industry. By the time it ended in 2016, about 1.1 million cars had been sold under the scheme and household debt had reached record levels.

“Giving money into the hands of the people” had become a political tool under both Thaksin and Yingluck, explained Pavida Pananond, a professor of international business at Thammasat University.

Since then, she said, governments of all persuasions have largely maintained a similar approach to spending, consumption and stimulus.

“That's one of the key structural issues in the political sense, that we haven't had political parties really looking at the structural problems of Thailand,” she said.

Political instability has continued to plague Thailand ever since Yingluck too was removed from office in 2014. While other countries may have designed economic plans to manage debt, Thailand has largely failed to do that, she said.

“We have been too bogged down by political conflicts to the point where the idea of having to sit and think through what kind of economic visions we need has been missing over the past two decades.”

A VICIOUS CYCLE

High household debt is a signal of economic stress. It means households can be at high risk of not being able to repay their debts and are also less likely to inject new spending into the economy or make major purchases.

Kasikorn Research Centre had projected 23-year-low growth in commercial bank mortgages in 2024, expected at just 1.2 per cent due to the diminished purchasing power of Thais.

The average debt per household was 606,378 baht, an increase of 8.4 per cent compared to the previous year, according to research by the University of the Thai Chamber of Commerce in September last year. Loans had a delinquency rate of 71.6 per cent, the survey found.

It can create a “vicious cycle” where individual financial burdens feed into slower economic growth, Pavida said.

“This is like the negative feedback loop. When one thing slows down, the whole economy will be slowed down in every area,” said Nonarit Bisonyabut, an economist at the Thailand Development Research Institute.

“Businesses cannot invest more because people have no money to spend. So we will all share this whole burden together,” he said.

The situation is weighing on Thailand’s ability to lure foreign investments, a factor that is frustrating the country’s ability to get out of the so-called middle-income trap.

“Right now it’s at the level where it's becoming unhealthy for the overall financial health of the country. It is becoming more of a concern and I think it also undermines the attractiveness of Thailand,” said Pavida.

“This is a country with an ageing population. Household debt is very high and political stability is not there. So it adds to a not-so-attractive dynamism that could otherwise be economic momentum to carry Thailand forward. It's a difficult state,” she said.

The middle-income trap refers to the phenomenon of a developing country growing quickly and becoming wealthier but then struggling to maintain growth to advance its economy further.

Doing that requires advanced industries, improved education, spending on important infrastructure and technology and skilled workers. Stagnation can occur when these elements are inadequate.

Thailand’s inability to promote sustained growth has been a direct result of economic handbrakes caused by household debt, Pavida said.

As a result, she sees the current government opting for the “lowest hanging fruit”, such as stimulating the tourism industry and trying to introduce casinos as ways to push the economy forward.

GOVERNMENT MOVES TO REEL IN DEBT

The administration under prime minister Paetongtarn Shinawatra, Thaksin’s daughter, recently rolled out measures to reel in household debt in a relief package approved by Cabinet last month.

It will target millions of small businesses and retail borrowers with measures to help those with overdue debts, reduce instalment payments and interest suspensions for three years. 

Concerns over non-performing loans mean financial institutions in the country are expected to tighten lending further in 2025, especially for housing and vehicles. 

Deleveraging efforts - paying off existing debts - already bore positive outcomes nationally with the debt ratio dropping slightly to around 89.6 per cent in the second quarter of 2024, according to the Bank of Thailand.

Even these measures will cause “short-term pain” as access to money dries up around the country, Sommarat said.

She added that targeting debt restructuring will help going forward but regulating banks should also be a key strategy to go beyond simply solving the problem of existing debt.

“The second part is new debt,” she said. “How do we ensure that going forward, financial institutions lend out with better risk assessments?”

She said that the lack of a formalised registry or credit bureau covering all financial institutions in the country has “created overborrowing” through the years.

“We have so many financial institutions that people can actually borrow from, even in the formal system, But the banks don't know if you also have loans from informal institutions and how many and so on,” she said.

This is a symptom of a fast-growing financial sector lacking maturity and oversight, Nonarit said. At the same time, financial literacy has not kept up with financial access, and the products being offered, like loans and credit cards, he said.

“The financial sector keeps lending money to the people who are not well equipped with knowing what exactly they’re borrowing,” he said.

Pavida agrees that credit cards in particular have become an “easy trap” for young people exposed to aggressive marketing campaigns from banks.

Non-productive loans - those considered to increase spending power but not output - outweigh productive loans now in Thailand. They include debts for vehicles, personal loans and credit cards.

COVID-19 contributed to another spike in these types of debt levels as household incomes ran dry over the prolonged pandemic period.

Mali, a now 42-year-old Bangkok-based entrepreneur who also declined to give her full name, started a car loan during the period the government was offering its vehicle buying scheme. She now has two of them, on top of a mortgage for an apartment, a situation she considers “normal” nowadays in Thai society.

“A lot of Thais are in debt because their income is low when compared with the cost of living,” she said.

Average wages in Thailand were about 15,700 baht in the third quarter of 2024, according to the National Statistical Office of Thailand.  

Mali admitted that debt had become a “big burden”, although she felt confident to manage it going forward. For this generation though, the debt story has evolved to become tougher to contend with compared to the past, she thinks.

Part of that can be explained by lifestyle - the buying demands of modern living with the influence of social media - and the changing behaviours of younger generations who no longer live at home until they are married like in the past.

“It seems like the older generation were paying off their loans easier than us. It feels like a really long journey for us,” Mali said.

Jack the teacher also flagged the difficulties of living in rural areas, with fewer public resources.

“Living in the countryside, there is no public transport that reaches right to your doorstep. That is why a motorbike is necessary. And the older generation can maybe live without a phone or computer but our generation cannot,” she said. 

Jack’s situation is what is playing out all over the country, Pavida said, and evidence of the structural issues that exist beyond the obvious symptoms of overspending. 

Do not just blame those in debt, she said, but rather investigate the “fundamental issues with the Thai economy” for both individuals and small business owners.

“It is a financial illness. But if you ask yourself why people want to buy a car, one of the problems is that they don't have an alternative,” she said.

“And I think the kind of monopolistic dominance of big business is one thing that has taken the oxygen out for smaller entrepreneurs.”

There could be pain ahead for the Thai economy depending on the next moves by both the government and the Bank of Thailand. 

Nonarit expects both to move cautiously, forecasting the government to try and raise public debt to GDP towards the ceiling limit of 70 per cent - above where it currently sits at about 64 per cent - to keep the money flowing through the economy over the next five years.

“But then we will have higher and higher debt. And this is the way they try to push the problem into the future,”  he said.

The alternative would be to let people “feel the crisis and learn the pain” of bad borrowing. 

“That's the hard way. But I don't think the Bank of Thailand will choose to let this happen”.

Additional reporting by Grissarin Chungsiriwat.