Making sense of performance figures

I have the duty of reviewing quarterly economic performances and making economic growth projections for a private research firm.
These reviews and projections are carried out four times a year. The latest has just been completed. Because they are done for a private research firm and are not for public release, the analyses are usually bold and to the point.
I trust that many readers will find the highlights of the recent review interesting.
There are five things to go over: (1) GDP growth projection, (2) The NESDC’s Dubious GDP Compilation, (3) Thai Banking Sector Rest in Peace, (4) How Did Thailand Get to This Point? and (5) Solutions for Thailand.
In the review, I maintain and confirm 2024 GDP growth projections with the same numbers as my previous projections in July. They are 1.5% growth for Q1, 1.0% growth for Q2, 0.0% growth for Q3, and -1.5% growth for Q4. Therefore, the average annual GDP growth rate for 2024 is 0.25%.
Wacky economist? Finish reading this article and readers might think that I am the only sane economist in the country.
The National Economic and Social Development Council (NESDC) released its GDP growth figure for Q2/2024 on Aug 19. The figure was 2.3%, an improvement on Q1 with growth rate of 1.6%. Why does a certain brainless economist talk about 1.0% growth for the quarter? Does he not trust the official figures? Yes. I do not trust the official figures.
The problem is in the wholesale and retail trade sector which suddenly grew 36.0% in Q2/24 compared to normal growth rates of 4.4% in Q1/24, 3.8% in 2023, and 3.7% in 2022. The 36% rise in sales is obviously problematic compared to a 4% rise in private consumption in the same quarter. How could wholesalers and retailers sell more products than consumers consumed?
Those who want to check the figures can upload the GDP file from the NESDC’s website. The table in question is Table 6. Wholesale and retail trade is the biggest sector in the economy as it accounts for 21.4% of GDP. So, 36% sectoral growth would add 7.7% to overall GDP growth. If one reduces this exploding growth rate to a normal rate of 4.0%, overall GDP growth for Q2/24 would be -4.54%, not +2.3%.
There is more than one way to check the direction of Q2 GDP growth figures. Another way is to look at the real estate and automobile sectors. These two sectors combined account for 20% of GDP and their sales plummeted by 20%, owing to financing problems. Therefore, GDP growth was reduced by 4.0% just from the sales drops in these two sectors alone.
I wonder which economic sector(s) might replace the shrinking housing and automobile sectors. Maybe the “wholesale and retail” sector where Thai consumers would buy invisible products with invisible cash.
Thank heavens. I am not wacky after all.
Let’s move on to a more serious issue — the health of the banking sector. The sector is dead as a doornail. The reason is grossly inadequate loan loss reserve provisioning. In a Bank of Thailand (BoT) report, the banking system has a total of 857 billion baht of loan loss reserves which is more than enough to cover 511 billion baht of outstanding NPLs.
Like the NESDC’s GDP figure, is 511 billion baht in NPLs the “real” NPL figure? The BoT’s figures seem to be very different from the National Credit Bureau’s. According to the bureau, NPLs for consumer loans, as of August 2024, was 1.18 trillion baht as opposed to 171 billion baht in the same loan category reported by the BoT.
Please do not ask me how the Credit Bureau’s 1.18 trillion baht of NPLs can be translated into 171 billion baht of NPLs at the BoT. That is beyond me. The same pool of debtors that provides different figures.
May I calculate the “real” bad debt level for readers. Start with 1.18 trillion baht of NPLs from consumption loans, add 660 billion baht of Special Mentioned consumption loans, plus 340 billion baht of NPLs from corporate loans. The total NPLs is 2.18 trillion which makes the current loan loss reserve of 857 billion baht able to cover just 39.4% of problematic loans.
With grossly inadequate loan loss reserve coverage, Thai banks are extremely cautious about issuing new loans. The results are 46.9 billion baht in loan contraction in Q2/24 and 88.7 billion baht of loan contraction for the first two months of Q3/24. The fact that car sales dropped 37.1% in September indicates that banks are increasingly more conservative in issuing loans.
It is easy to point out nasty issues like low or negative GDP growth, a dying banking sector, and heaps of NPLs. Finger pointing is for politicians not for economists. It is better to find out the culprit, eradicate it, and restore economic health.
The culprit in the Thai economy is receding economic potential. The targeted economic potential is 7.2%. Believe it or not, before and after the financial crisis of 1997, economic potential was 7.2%. Before the crisis, the government aggressively pushed economic growth to 8.9% and 8.7%. An overheated economy led to the meltdown in 1997. After restoring the banking sector, the full potential of 7.2% economic growth was achieved again in 2003.
The great flood of 2011 halved the potential to 3.6%. The flood sent a strong signal to investors to diversify their production bases as a natural disaster can happen without warning. Investment plummeted after that and GDP growth hovered around 3.6%. Moreover, money that should have been spent to repair and upgrade production facilities damaged by the flooding was diverted to the rice pledging and first car schemes.
The economy potential was raised to 4.0% after the boom in the tourism industry in 2017. Unfortunately, the 4.0% growth potential was halved again by the Covid outbreak in 2020. We are now living in the 2.0% growth era. No matter how many stimulus packages are issued and how low domestic interest rates are pushed, the economy will expand no further than 2% per annum. The only way to achieve GDP growth beyond the 2.0% potential is to “massage” GDP numbers.
To increase economic potential from 2% to 4% as in 2017, two things must be done. The first is to restructure household debt to a sustainable level to resurrect the banking sector. But do not make mistakes like in 1997 where a good bank/bad bank approach was adopted. The massive haircut on a bad bank is too costly and the good bank is unfairly punished. This time all debts must be considered “good”.
After the banking sector is cleared and ready to release loans to the economy, labour productivity needs to be raised from the current level of 1.8% to more than 5% like before the Covid outbreak. This can be done by promoting automation and computerisation of production process so as to make output per worker rise by 20%.
After the 4% growth potential is restored, the next step is to push the potential further to 8%. This will take bold and innovative planning. I am keeping my old and tried fingers crossed.