Thailand's national debt is at risk of exploding - action is needed now!

Thailand's national debt is at risk of exploding - action is needed now!

The financial situation in Thailand is becoming increasingly tense. According to KKP Research's latest analysis examining the country's economic and financial challenges, several alarming trends are emerging. One of the main factors pointing to an urgent need for action is the rising national debt, which could reach 70 percent of gross domestic product (GDP) by 2027. Moody's and Fitch Ratings have downgraded Thailand's credit rating to negative from stable, underscoring the need for a sound fiscal strategy. The last negative assessment in 2008 during the global financial crisis is further cause for concern.

The government has in the past increased deficits to stimulate the economy, but this has led to further increases in debt. What is striking is that tax revenues have continuously fallen. The tax rate has fallen from 16-17 percent to less than 15 percent since 2003-2015, severely limiting the government's financial flexibility. The analysis by KKP Research therefore suggests four measures: investment in infrastructure, expansion of the tax base, reforms to reduce inefficiencies and the creation of a credible budget framework through multi-year planning.

Growth and challenges

Despite the financial uncertainties, the Thai economy is remarkably resilient. According to the World Bank The economy grew by 4.5 percent in the third quarter of 2023, supported by private consumption and strong tourism. Interestingly, tourist arrivals in September exceeded those of Indonesia and the Philippines, reaching 45 percent of pre-pandemic levels. However, these positive developments are accompanied by other challenges. Price pressure remains high, overall inflation is at 6 percent and has an impact on the cost of living.

The government is pursuing a proactive fiscal policy to support the economic recovery. Public spending was around 23.4 percent of GDP in fiscal 2022, mainly due to COVID-19 relief measures and energy subsidies. A fundamental challenge remains the high current account deficit, which has risen to 5.7 percent of GDP due to high net oil imports and a cyclical deterioration in the trade balance.

Measures to calm the debt situation

To avoid exceeding the statutory national debt limit of 70 percent of GDP, the Thai government plans to reduce public debt by around 8 percent from October. This has been underpinned by a comprehensive plan aimed at fiscal discipline. Currently, the national debt stands at about 992 billion baht, which corresponds to 42 percent of the planned loans of 2.37 trillion baht. These loans will be used primarily to cover the budget deficit and restructure existing debt.

Finance Minister Patchara Anuntasilpa announced about 1.3 trillion baht worth of government bonds will be issued in the next fiscal year. However, with government debt rising, confidence in Thai bonds remains high as they have returned 18 percent in dollar terms this year. The Thai baht has gained over 7 percent against the US dollar during this period, which can be interpreted as a sign of the stability of the Thai economy.

With all these factors in mind, it remains to be seen how the Thai government will implement its measures to both stabilize the economy and maintain fiscal discipline. The next few months could be crucial in ensuring a sustainable economic recovery while overcoming the challenges posed by the debt situation.