Today's article is about a type of "Helicopter Money" policy to boost domestic demand which could be suitable for the Thai economy, at least for the time being.
We all know that despite the political propaganda and confusing economic figures, the Thai economy is certainly not in good shape. Even the government has been forced to come up with stimulus measures, such as tax deductions for holiday spending and shopping for certain products -- albeit things you never wanted to buy, and holidays in places you never wished to visit.
In many developed economies, governments and central banks have opted for a much stronger stimulus measure dubbed "Helicopter Money". Basically, this involves central banks pumping huge amounts of money through the banking system in the hope that the money will in turn, be passed on to consumers. A by-product of Helicopter Money is super-low interest rates, which theoretically should persuade people to spend more than they save.
While this type of stimulus has shown some success -- it did save several economies from entering recession -- it is an ad hoc kind of stimulus that does not promote sustainable growth.
This kind of economic stimulus cannot be applied in Thailand for three reasons. First, Thai consumers are plagued with high levels of household debt, which makes it difficult for banks to pass on the money to consumers because of a high risk of default. As such, the money is just held by the banks and consequently drives interest rates down -- ultimately hurting Thai savers.
Second, Thai banks already have ample amount of liquid capital, and therefore wouldn't be too enthused by an influx of more money. Why? Liquid capital injections come at a price in the form of interest, and financial institutions see this as an additional burden to bear.
Third, there is no easy way for the Bank of Thailand (BoT) to minimise the cost of injecting additional liquidity into the market via the banking system. This policy is costly -- in fact, it had bankrupted the Bank of Japan.
That said, there is a similar stimulus dubbed the "Debt Jubilee" programme. As the name suggests, instead of injecting money into banks, the extra cash is used to retire household debt. As such, theoretically, the stimulus should immediately restore consumers' purchasing power.
However, the measure is just as controversial for several reasons. First, it rewards "bad guys" who lack financial discipline, while the "good guys" who scrimp and save, get nothing in return. Second, it creates a vicious debt cycle. The policy allows the "bad guys" to accumulate more debt, and the government -- which needs all the votes it can get -- will be forced to come to their rescue yet again. Moreover, by rewarding people without financial disciplines, the "good guys" have no incentive to save -- so it is a hazard in the making.
If you are concerned about the cost of bailing out the "bad guys", remember that the cost of bailing them out is no less than bailing out banks. Ask any central bank in the world, and they will say that cost isn't the issue here. As such, let's focus on the hazards that this type of stimulus may create.
First of all, no debt should be forgiven. Instead, repayment terms should be extended and the size of the obligation must be reduced. Household debts are usually short-term in nature, and come with high interest rates. The deadline for repaying short-term debts that are due in one to five years, for example, should be extended to three to 10 years. Of course, interest rates would have to be reduced to between 1-5%. If necessary, more conditions could be added -- for example, banks could waive principal repayments to quickly restore consumers' purchasing power. However, not a single baht of debt must be forgiven, and interest -- although reduced -- must be paid in full.
Second, all debt-ridden consumers who wants to be a part of the Debt Jubilee programme must be placed on a "Grey List". Those on the list would still be allowed to get more loans, but if they default, creditors should not take their debtors to court. Banks must be responsible for their own actions.
Of course, once a Grey List debtor defaults, it is next to impossible for them to get new loans, but non-performing loans lock in capital that can be loaned to others. At this point, special financial institutions financed by the government should step in and assist creditworthy borrowers.
What about the cost to the government? Well, there should be none. Right now, the yield on a 10-year Thai government bond is 2.4%. If the average interest payment on the extended loans is 2.4% or higher, interest cost subsidies would not be necessary.
However, the government should expect defaults as not everyone will be able to service extended debts. Let's say if 20% of a debt is defaulted on, under the assumption that 2 trillion baht of debts is transferred to the programme, the government would bear a 400-billion-baht loss.
By amortising this amount over a 20-year period, the state would only incur an annual loss of 20 billion baht. Either way, if we let this 2 trillion baht in debt rot in commercial banks, then the central bank would have to bail them out anyway.
The "good guys" would be rewarded under this scheme too. As all the "bad guys" are placed in the Grey List, banks will instantly know who, creditwise, is "good" and who is "bad". Therefore, it would be easy for the "good guys" to get new loans.
No policy is a magic wand. The Debt Jubilee programme, which rightfully should be termed "Household Debt Restructuring", is only a stop-gap, one-time measure. It will not solve the Thai economy's real problem -- that is, its declining competitiveness.
Chartchai Parasuk, PhD, is a freelance economist.
