Debt levels high among low income earners

According to research undertaken by the Siam Commercial Bank (SCB) the debt service ratio for people earning less than 10,000 baht a month had risen from 46 percent in 2009 to a whopping 52 percent by 2011. This figure may be even higher today, but research figures for the present period are not yet finalized.

The debt service ratio is the proportion of debt payment to disposable income: in simple terms, a worker earning 10,000 baht a month now needs to allocate 5,200 baht of that to service his or her debts. Given the rising cost of living the debt burden is such that many low income earners are simply facing financial oblivion.

The debt ratio for those earning above 10,000 baht a month was 25 percent in 2011, a figure that I also likely to be higher now. Even so, that is a significant difference compared to the low income strata of society.

Significantly, the rising debt burden in general and in particular in the lower income strata has led to a slowdown in domestic consumption. Notably, there has been a slowdown in motorcycle sales, the vehicle of choice of course for those on lower incomes.

The potential for a rise in interest rates, although on hold at present, would also likely have an adverse impact on low income earners. The Monetary Policy Committee (MCP) of the Bank of Thailand left the benchmark interest rate of 2.5 percent unchanged at its meeting in mid July.

Thailand’s household debt is currently at 80 percent of gross domestic product (GDP) and expected to rise to 82 percent in the next couple of years, and it has been growing quite substantially in recent years, from 63 percent in 2010 to 70 percent in 2011 and 77 percent in 2012.

As the SCB economists noted, the 80 percent figure takes no account of the so-called informal lending market, or loan sharks. Anecdotal evidence would suggest this area of household debt would also be heaviest among low income earners, although the actual amounts per person would likely be small (from a few hundred to a couple of thousand baht per person).

Although the household debt figure is quite high, a spokesperson for the SCB was quoted as saying, “Some 22 percent of the 80 percent household debt comes from consumer finance in the commercial banking system, but this is not a concern due to the low level and high potential of debt payment.”

Given the tepid nature of domestic consumption at present, the SCB is predicting a 25-basis point rate cut by the Bank of Thailand later this year, although this contradicts a belief that interest rates are set to march towards four percent in coming years.