ECONOMY-THAILAND: Credit Card Boom Revives Fears of 1997 Crisis

By Marwaan Macan-Markar Reprint | | Print |

Marwaan Macan-Markar

BANGKOK, Jun 20 2002 (IPS) - An explosion in the number of credit card users often means robust consumer demand, but in Thailand it is being greeted by alarm bells.

The first-quarter boom is sparking concerns that six years after the Asian financial crisis, Thailand is setting itself up for another economic fall — as the government encourages Thais to lavish themselves with consumer goods using plastic money.

“You cannot hope for a sustainable economic recovery based on retail consumption like this,” says Thitinan Pongsudhirak, a political-economy specialist at Bangkok’s Chulalongkorn University. “It is okay for the short term, but not in the long run.”

The local media, too, are reflecting wariness among those who say that Thailand should have learned by now the lessons of the past crisis, caused in no small part by over-indulgence in unproductive investments.

“Domestic consumption through easy credit at low interest rates is now driving economic recovery. But it is also causing a painful reminder of the era of the economic bubble,” the English-language daily ‘The Nation’ began in an in-depth report on Thursday.

Another daily, the ‘Bangkok Post’, drew attention to the warning issued by the National Economic and Social Development Board (NESDB) on reliance on consumer lending to boost the Thai economy, which posted 3.9 percent growth in the first quarter of the year.

Economic growth was 2.1 percent in the last quarter of 2002 and 1.7 percent in the first quarter last year.

“The Board said the rapid growth in consumer lending, particularly through the use of credit cards, could jeopardise our future economic stability,” the ‘Post’ commented in a Thursday editorial.

Some concern is also growing about Thailand’s property sector, which collapsed in the wake of the 1997 Asian economic crisis. Stock prices of real estate companies have more than doubled since the start of 2002, fueling worries that it is headed toward a speculative bubble.

Foreign funds, buoyed by hopes of economic recovery, have started to buy up prime properties in Bangkok.

Thailand is still recovering from the financial crisis that hit it in 1997, triggering an economic meltdown in the region. The country’s financial institutions, lacking in discipline, were held accountable for that meltdown, since they had extended credit and encouraged overspending in non-productive sectors.

The NESDB was the first to sound the alarm of the credit card trend this week. It expressed worry after statistics showed a 42 percent leap in the number of credit cards issued by local banks and non-financial institutions, like major department stores, in the first quarter of this year.

The sharp rise is the result of a new policy by local banks that came into effect on Jan. 1 — reducing the minimum income requirement to apply for a card to 7,500 baht (178.5 U.S. dollars) a month.

The figure of the 2.68 million new cards issued from January through March is a little over 700,000 more than the number issued last year, which was 1.94 million cards, states the Bank of Thailand (BOT).

In 1997, local banks had 1.48 million users, according to the BOT. Cardholders spent 138.5 million baht (3.3 million dollars) on domestic credit card purchases that year.

The bank, however, sees no reason for undue worry. While current consumer spending patterns reflect “more materialism” in the country, “the data so far does not indicate any immediate danger,” a senior BOT official was quoted as saying in Thursday’s ‘Nation’.

Supote Chunanuntathum, an economist at Thammasat University in the Thai capital, agrees: “You cannot look at this trend in a vacuum. The card provides some kind of liquidity to the consumer, which if spent boosts demand and production.”

That, precisely, is what the government of Prime Minister Thaksin Shinawatra has in mind as it pursues a range of initiatives to increase domestic consumption as a way to boost economic growth.

The BOT declares that Thais are responding to this stimulus, juding by the surge in credit card purchases from the same period last year.

Thanks to such numbers, the finance ministry is offering an optimistic forecast of the Thai economy this year and expects 3.6 percent economic growth.

The Thaksin administration also hopes that Thailand will gain the way South Korea has in its economic performance after the 1997 crisis – through the pursuit of domestic consumption-led growth to boost the economy.

Thaksin has said, “It does not matter how deep a person is in debt, as long as he spends his money productively.”

But the ‘Post’ argues that the government already bears a heavy debt burden of over 2.3 trillion baht (54.68 billion dollars), “and now low-income people are being encouraged to borrow as if there were no tomorrow. How can a country survive when the majority of its people are awash in debt?”

Chulalongkorn’s Thitinan is critical of the government’s economic vision, even arguing that “the government is misleading people into believing this form of growth is sustainable, making it very easy to spend on credit”.

For one, he points to the danger of encouraging widespread credit card usage in an environment that still lacks rigorous credit risk assessment. “We have no sound risk assessment in the local financial sector,” he says.

Likewise, he adds, Thailand has been reluctant to pursue some of the financial reforms that South Korea has undertaken, which helped it achieve a robust economy. South Korea’s projected economic growth is expected to touch 4.8 percent this year.

South Korea’s efforts to clean up its non-performing loans (NPLs) resulted in the sharp reduction of the radio of its bad loans to 6 percent by September 2001.

Thailand’s ratio, however, remained at 12.9 percent by the same month, an indication Bangkok’s reluctance in taking action to clean these NPLs through bold measures.

For Thitinan and economist Supote, the government should concentrate on boosting growth through traditional engines like exports and private investments. “It will help in the long term,” says Supote, who acknowledges that it will be a challenge in the current environment.

Not least, exports have not performed as well as economic planners had hoped. Last year, exports from Thailand contracted 6.9 percent due to the global economic downturn.