BANGKOK - A growing mountain of debt owed by Thailand's households has sparked a tussle between the country's central bank and finance minister on the best way to steer Southeast Asia's second-largest economy through a period of slowing growth.
The central bank is warning about a possible credit bubble, implying higher interest rates are coming. But the finance minister, who lobbied hard for a recent rate cut, demands another one to counter the slowdown.
Faced with risks to both financial stability and growth, the central bank will probably opt to leave its policy rate where it is for many months, tackling the credit problem with targeted measures designed to avoid hurting the whole economy, economists say.
Government stimulus measures and easy monetary policy have driven household debt to a record high as consumers splurged on everything from cars and houses to electronic goods. Now, as the economy slows, more may face problems repaying their loans.
Household debt is equivalent to nearly 80 per cent of gross domestic product, central bank governor Prasarn Trairatvorakul said last month, up from 77.5 per cent in March and among the highest in Asia. A decade ago, it was 45 per cent.
At 8.97 trillion baht (S$365 billion) as of March, outstanding household debt was up 78 per cent from 2008. It rose an average 13.6 per cent a year between 2008 and 2012, twice the pace at which incomes grew.
The ratio of debt payments to monthly income for Thai households was 33.8 per cent in the first quarter, up from 29.6 per cent in 2011, central bank data showed.
DAMPENING A BOOM
Neighbors Malaysia and Indonesia have moved recently to dampen a boom in credit rooted in money inflows due to easy US monetary policy plus the demands of a growing middle class.
Since last year, Prasarn has signaled periodically that interest rates should eventually trend up.
But after disappointing first-quarter GDP data and intense political pressure to ease, the central bank in May lowered its policy rate by 25 basis points to 2.50 per cent.
The governor has cited the household debt level as a reason not to cut rates further. "It's on the high side and is what we are keeping an eye on," he said.
But Finance Minister Kittirat Na Ranong maintained such debt was "not too high" and anyway had been pushed up partly by purchases of property, which he called "good assets".
"Our household debt is still under control," he said. "If banks are worried about it, they should be careful about lending. So there won't be any problem."
The jump in debt levels stems partly from government stimulus policies, particularly a subsidy in 2012 for first-time car buyers. Populist policies helped put Prime Minister Yingluck Shinawatra in power in 2011 and she is under pressure to continue them.
So far, bad loans remain small. Bangkok Bank BBL.BK, the biggest lender, said 2.4 per cent of its loans were non-performing as of June 30, from 2.3 per cent at the end of 2012.
For the whole banking sector, the June 30 level was 2.2 per cent, compared with 2.3 per cent in December and 11 per cent in 2004.
Prasarn says debt levels should recede as banks become more cautious about their loan books.
They have not followed the last official rate cut, seeing no need to stimulate further borrowing interest. And many have increased loan-loss provisions while tightening lending rules to avoid bad loans.
"It's not something to panic about as yet. But one should expect some tightening, especially on household debt including mortgages, to prevent a further spike in household leverage," said Gundy Cahyadi, an economist at OCBC Bank in Singapore.
Possible options include a lowering in loan-to-value (LTV) ratios for second or third mortgages, or a maximum credit limit or repayment period on some personal loans.
Currently, the LTV is set by the central bank generally at 90 per cent for apartments costing less than 10 million baht (S$406,000) and 95 per cent for houses.
"The central bank may not rush to introduce any measure as it will hurt the economy further. It will wait until it sees alarming signs before taking action," said Pimonwan Mahujchariyawong, an economist at Kasikorn Research Center.
GROWTH PROJECTION CUT
Consumption is already falling, exports are sluggish and huge infrastructure projects seem unlikely to start this year as planned. In July, the central bank cut its projection for GDP growth this year to 4.2 per cent from 5.1 per cent. The finance ministry recently said it could be around 4 per cent.
The slowing economy has added to the worries of consumers, especially those with low wages. Consumers face lofty interest rates of 20 per cent on credit cards and 28 per cent on personal loans, and loan sharks charge even more.
Wilaiporn Chomrung, who is 34 and has temporary work for the government, said her monthly pay of US$290 (S$369) was not enough as 80 per cent went to pay home and car loans. "It's tough. I have to do a part-time job and spend less. It will be tougher if the economy gets worse."
High debt burdens are a worry as they leave individuals a thin margin for error if income falls or costs go up. Among the most vulnerable are farmers who tap rubber, whose price has been falling.
"Our fear is that household leverage has risen to a level where the debt-servicing burden would leave households with little cushion to absorb income shocks unless they reduce consumption expenditure," said Santitarn Sathirathai, an economist at Credit Suisse in Singapore.
One source of worry is the car subsidy programme, which accounted for about 1.25 million of the record 1.43 million vehicles sold last year. The programme ended in December, but cars are still being delivered, and some buyers are paying for them at a time their incomes could fall.
Since May, the central bank has kept its key interest rate at 2.50 per cent. The minutes of the policy committee's July meeting said "credit growth remained high. In particular, the rising trend of household debt burden, if it continues, could add to overall financial imbalances."
Finance Minister Kittirat wants a cut nonetheless, but economists doubt he will get his way this time: the consensus is that the next move will not be until the third quarter of 2014 - and then it will be an increase.