Thailand: Will the Yingluck government face a public debt crisis?
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Thailand: Will the Yingluck government face a public debt crisis?

This is part 4 – and the final part* – of a series of posts on public debt in Thailand. The first post was on whether Thailand’s state-enterprise debt should be counted as part of public debt. The second post was comparing Thailand’s public debt to other countries. The third post was looking at predictions and forecasts on Thailand’s public debt.

Government gross public debt as a % of GDP at the end of February 2013 (the latest figure) is 44.05%. This post will at possible political problems the government may face and particularly at what thresholds problems will likely arise in regards to gross government debt.

The Nation from October 2012 quoting Finance Minister Kittirat on last year’s (October 2012-September 2013) budget:

The new debts will increase public debt to 47.5 per cent of gross domestic product from the current 44.19 per cent. 

“It’s a high amount but it is still below the sustainable level of public debt, set at 60 per cent of GDP. We are committed to fiscal discipline,” Kittiratt said.

BP: For a while Kittirat, constantly referred to public debt not exceeding 60% of GDP, but as far as BP can tell in early January 2013, Yingluck stated debt should not exceed 50% of GDP. NNT from January 27, 2013:

The Prime Minister has assured that the Pheu Thai-led government will strictly adhere to financial disciplines in outlining the borrowing plan for the country’s basic infrastructure projects.

Speaking on “The Yingluck Government Meets the People” weekly TV program, Prime Minister Yingluck Shinawatra reiterated the government’s plan to implement a set of national strategic policies for the 2014 fiscal year to move Thailand forward.

PM Yingluck affirmed that the government’s borrowing plan for more than 2.2 trillion baht would adhere to strict fiscal disciplines while affirming to keep the level of public debt below 50% of GDP.

Yingluck at the FCCT essentially repeating this:

Thailand’s strong fiscal position allows us to finance these projects through various sources, including government borrowings, and some projects we will encourage private sector participation.

(Impact on GDP and Jobs) Throughout the investment period over the next 7 years, it is expected that investments will not only increase the level of GDP on average by around 1 percent each year but also create around 500,000 jobs.

(Public Debt / GDP no more than 50%) More importantly, Public Debt to GDP is expected to rise but once the returns from investments are realized public to GDP will begin to fall. We expect that throughout investment period it will not increase to more than 50 percent.

Asia News from March 2013 showing that Kittirat is starting to fall in line in regards to using the 50% level:

Mr Kittiratt rebutted claims that heavy borrowing to fund the megaprojects would sharply increase public debt, saying the borrowing would be phased so that debt remained below 50% of gross domestic product.

Public debt is currently around 45% of GDP and policymakers for years have set a ceiling of 60%. Debt levels in some of the troubled countries in Europe are well above 100% of GDP.

A debt ratio of 50% of GDP is not high and the government would be able to repay the money within a few decades, said Mr Kittiratt.

NNT from April 2013:

Secretary General to the Prime Minister, Suranand Vejjajiva, has ensured the transparency of the government’s 2.2 trillion baht infrastructure overhauling projects, while pointing out that the government will be able to keep public debt ceiling lower than 50% of the GDP.

BP: While the 2.2 trillion infrastructure project is a lot of money, only around 30-40 billion baht will be spent this year. It will be spent over several years, and possibly much longer.

The previous post looked at forecasts for public debt with the government having it remain just below 50% over the next five years whereas others think it may hit 80% by 2019.  Forecasts are relevant to political perception, but the greater issue is the actual public debt. The level of public debt is likely to be something that the government will very closely monitor over the next seven years and will have to adjust spending accordingly to avoid serious political problems. You have to remember despite the complaints over the spending of Thaksin, public debt as % of GDP declined significantly under Thaksin between 2001-2006 (from 58% at the end of 2000 to 41.2% in September 2006).  Things will likely be different for Yingluck as it is difficult to see public debt falling below 44%. In contrast, Thaksin attacked the Democrats prior to the 2000 election over the debt they have incurred post-1997 albeit the attack was more aimed at foreign debt, but the shoe will be on the other foot now.

The higher the level of debt the more attention to government spending. The government has been freely spending/forgoing income on various ongoing stimulative projects such as rice pledging scheme and continuing the diesel tax waiver. Both will likely have to be curtailed once infrastructure spending starts to seriously increase (within the next two years?).

Below are four scenarios:

1. Below 50%: By the next election (which will be held by July 2015), the government will not want debt to exceed 50% of GDP. Why 50% you ask? Simple, it is a round number. It is a threshold at which point you are likely to see more news stories and more concern about public debt. Yes, 50.1% is not that different from 49.9%, but psychologically it will seem less. The government seems to have recognized this as you can see by statements by members of the government this year.

Simply put, BP doesn’t see that public debt will be a big issue if public debt as  remains below 50%. The government will still be able to borrow money quite easily and the interest rate won’t be that high. Yes, there will likely be articles saying debts are becoming too high, but they will be mainly preaching to the converted. We will still be below a level of debt that even the Democrats previously argued was manageable (for example, Korn argued in 2007 that the government should spend to push debt up to 55-60% by 2012, but this didn’t happen).

Not to look too far in the future, but for the election after the next election, which would be held no later than July 2019, the government would like public debt to be below 50% although BP doesn’t think it is as crucial by then.

2. 50-54.9%: Obviously, it does depend on how much higher than 50%, but as noted above, the 50% threshold is when BP believes the Yingluck government will start to face problems. At this point, you will start to get increasing criticism. Obviously, if for one month it hits 50% and then falls and remains under 50% it will be less of an issue, but once the threshold has been breached it will have already become a public issue even if public debt went below the 50% threshold later. The government may actually delay some infrastructure spending to ensure the 50% threshold is not breached before the next/2015 election.

After the 2015 election, breaching the 50% threshold becomes less of a political problem if the government can keep debt below 55% by the 2019 election and debt has stabilized and is trending downwards.

3. 55-59.9%: If public debt as % of GDP was to hit 55% before the 2015 election, it would seriously hurt the government. 55% is not a magic threshold like 50%, but if we went from 44.05% public debt in February 2013 to above 55% in just over two years then people will start to question a wide range of government programs including the infrastructure spending. It is hard to estimate how many voters would switch away from the government and there is of course the government’s actions regarding other policies and the opposition’s performance as well, but such a dramatic rise in debt would very likely result in the government in not winning a majority (this doesn’t mean they wouldn’t be able to form a government though).

For the 2019 election, the government could survive if public debt exceeds 55% (say up to 57%, but debt would need to be trending down). The closer that public debt is to 60%, the bigger the impact will be on the government.

4. Above 60%: We don’t even need to think about the worse case scenario of 80%. Sixty percent is when the government will start to face legal problems under the Public Debt Management Office Act of 2005 – see here for some basics. Can’t see the government surviving beyond the current term if the 60% threshold is breached before the 2015 election. The government could change the regulations,** but having to do so will focus even greater attention on the debt. Yes, even at 60%, public debt would be significantly lower than many western countries, but for Thailand and particularly for this government, a different level of high debt will apply.

NOTE: There are a few caveats to the above. The above assumes a generally weak but slowly improving world economy. If there is some natural disaster or another severe financial crisis in Europe or the US then it does change the above somewhat although any need for stimulus spending would have to mean that the government will almost certainly have to delay infrastructure spending. The government would get some leeway as long as it can keep debt below 60%.

NOTE: It is hard to calculate, but public opinion on the various infrastructure projects will matter as well. BP is assuming “somewhat satisfied” will be the outcome, but obviously if any of the projects turns out to be like Hopewell (or the transport infrastructure projects in Spain – see here and here) then well this changes things….

* Actually, started doing thinking about doing this series of posts a few months ago, but it was not until April 27 and 28 that really started to write the posts. Was not really expecting there to be much news last week so was caught out. Will try to post something soon about Yingluck’s speech and the lawsuit (as well as Anudith’s comments) as soon as time permits…

** Reading the Act, BP can’t find reference to the 60% figure so it seems to have have been a regulation issued (which corresponds with this article which refers to “… 60% target set by the Finance Ministry itself”). Now, the regulation could be changed to 65%, but the basic point is that any change will also attract attention.